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Over-the-Counter Drugs Need a Prescription for Favorable Tax Treatment

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Lauren B. Dunn
Foster Swift Employment, Labor & Benefits E-News
September 21, 2010

The IRS recently issued IRS Notice 2010-59 clarifying the definition of a qualified "medical expense" under the Patient Protection and Affordable Care Act ("PPACA"). Over-the-counter ("OTC") drugs purchased after December 31, 2010 will no longer receive favorable tax treatment under a health care flexible spending account, health savings account, health reimbursement arrangement or an Archer medical savings account absent a prescription. Reimbursable claims for OTC drugs may be submitted to the claims administrator after December 31, 2010 (subject to the plan's claims submission deadline) if the expense was incurred before January 1, 2011. This rule also applies to purchases of OTC drugs using a debit card system, although there is a transition period for such purchases made through January 15, 2011. Cafeteria plan amendments to conform to the requirements of the Notice must be adopted no later than June 30, 2011, and must be effective retroactive to January 1, 2011, even if the plan has a non-calendar plan year or a post-plan year "grace period."

The purchase of OTC drugs must be substantiated by a pharmacy receipt identifying the patient, date, amount of purchase and prescription number if the patient wants reimbursement for a medical expense incurred after December 31, 2010. This rule does not apply to insulin, which will continue to be a qualified medical expense whether or not it was purchased with a prescription. The new change does not apply to medical supplies, equipment and diagnostic devices such as crutches, bandages or blood sugar test kits, although these items must still meet the definition of "medical care" under Internal Revenue Code Section 213(d)(1) to qualify for reimbursement.

Please contact your Foster Swift employee benefits professional if you have any questions regarding the foregoing.