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December 28, 2010 at 07:00 PM
Personal health account debit card users can still use the cards to buy doctor-prescribed over-the-counter (OTC) drugs at a wide range of stores after Jan. 15, 2011, the Internal Revenue Service (IRS) says.
A few weeks ago, the IRS announced tough new rules for users of flexible spending account (FSA) and health reimbursement arrangement (HRA) debit cards in IRS Notice 2010-59. The IRS was set to let consumers use the cards to buy OTC drugs without submitting receipts to their plans only at retailers that had installed high-tech “inventory information approval systems” (IIAS). The IIAS were supposed to be able to distinguish between over-the-counter drugs, such as aspirin, and other types of merchandise, such as bubble gum and playing cards.
Now, in IRS Notice 2011-5, has backtracked. The IRS will be letting consumers use FSA and HRA cards to buy OTC drugs without submitting receipts at many retailers that simply save information about the transactions, officials say.
One new set of rules will apply to ordinary drug stores, other types of retailers that have pharmacies, and mail-order and Web-based vendors that sell prescription drugs.
A second, looser set of rules will apply to retailers that have health care merchant cards built into their debit card systems but have no pharmacy operations.
The IRS says it wants to apply still another set of rules — the rules given in the Notice 2010-59 — 
to “90% pharmacies,” or pharmacies that get 90% of gross receipts from the sale of items that the IRS classifies as medical items.
IRC SECTION 106(F)
The IRS has developed the new rules to implement Section 9003 of the Patient Protection and Affordable Care Act (PPACA), a part of the new Affordable Care Act package.
PPACA Section 9003 has created Internal Revenue Code (IRC) Section 106(f), a law that is supposed to raise tax revenue by reducing the number of occasions when consumers can use health account funds to buy OTC drugs.
Starting in 2011, IRC Section 106(f) will let consumers use health account funds to buy OTC drugs only if the drugs have been prescribed by a doctor.
The IRC Section 106(f) requirement will apply to holders of health savings accounts (HSAs) as well as FSA and HRA holders, but, due to a quirk in the HSA laws, HSA holders only have to substantiate that they have made proper use of account funds when they are audited by IRS auditors. HSA holders do not have submit receipts, prescription copies or other documentation to employers, insurers or plan administrators, and the new IRS card use rules do not apply to HSA holders.
