PPACA: OTC Rules Bitter Pill for Card Firms

Health account debit card providers will have to scramble to get their systems in compliance with new federal reimbursement regulations by Jan. 16, 2011.

The Internal Revenue Service has spelled out the new rules in IRS Notice 2010-59, which implements Section 9003 of the Patient Protection and Affordable Care Act (PPACA).

PPACA Section 9003 creates Internal Revenue Code Section 106(f). The new section will require users of health flexible spending arrangements (FSAs) and health reimbursement arrangements (HRAs) to get prescriptions before using health account funds to pay for over-the-counter (OTC) drugs other than insulin.

Section 9003 also will require holders of health savings accounts (HSAs) and Archer Medical Savings Accounts (Archer MSAs) to get prescriptions if they want to use account funds to buy OTC drugs. HSA and MSA holders who use account funds to buy OTC drugs without a prescription will have to include the expenditures in gross income and pay an additional 20% tax, officials say.

Health account holders can still use account funds to buy crutches, bandages, diagnostic devices and insulin without a prescription, officials say.

The new rules are set to take effect Jan. 1, 2011.

Holders of HSAs and Archer MSAs are responsible for substantiating use of account assets themselves, but employers and card providers are supposed to help

FSA and HRA holders prove whether they used account funds to pay for the right kinds of items.

FSA and HRA card system providers must update their systems to substantiate whether a card user has a prescription for an OTC drug by Jan. 16, 2011, officials say.