IRS Guidance on OTC Meds for FSA's in 2011
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IRS Guidance on OTC Meds for FSAs in 2011

The IRS has issued official guidance on the ability to purchase over-the-counter (OTC) medicine with an FSA or HSA. To summarize the basics of the rules that will be changing next year, as of January 1, 2011, OTC medicine can only be purchased using an FSA or HSA with a prescription.  This change is part of the healthcare reform laws.

The IRS has issued Questions and Answers on Over-The-Counter Medicines.  These Q&A’s clarify a few items:

Non-drug Purchases
The IRS clarifies that this change will only apply to OTC medicine, and not supplies.  So you can continue to purchase items such as crutches, bandages, and blood sugar test kits with your FSA or HSA without a prescription.

Copays and Deductibles
The IRS has confirmed that FSA’s and HSA’s can still be used to pay for out-of-pocket medical insurance expenses, such as co-pays and deductibles.

Plans With Grace Periods
Some FSA plans have chosen to offer a 2.5 month grace period at the end of each plan year, to allow employees to use up any leftover money in the first 2.5 months of the following plan year.  The IRS has clarified that even though a plan may have this grace period, OTC medicine costs cannot be reimbursed during this grace period, as the rule starts on January 1, 2011.

If the plan’s grace period only allows employees to submit expenses in the first months of the following plan year that happened in 2010, then the OTC medicine still qualifies for reimbursement as long as it was purchased on 12/31/10 or before.

Debit Cards
Any plan that offers a debit card must have their cards reprogrammed by 1/15/11 so that the cards will not work for OTC medicines.

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