IRS issues new guidance on FSA and HRA debit cards

If you issue employees debit cards in conjunction with your company’s flexible spending arrangement (FSA) or health reimbursement arrangement (HRA), you’ll want to be sure to check out recent guidance issued by the IRS regarding use of debit cards to purchase over-the-counter (OTC) drugs and medications (IRS Notice 2011-5).The new guidance modifies previous IRS guidance and allows FSA and HRA debit cards to be used to purchase OTC medicines or drugs at non-health care merchants that have pharmacies, and at mail order and web-based vendors that sell prescription drugs, as long as certain conditions are met. Debit cards may also be used to purchase OTC medicines and drugs at other types of vendors if they have healthcare-related merchant codes and meet certain conditions. They may also be used at “90 percent pharmacies” (stores in which 90 percent of gross receipts are Section 213-qualifying medical expenses under IRS rules) as provided in previous IRS guidance, Notice 2010-59. For all other providers and merchants, debit cards may not be used to purchase OTC medicines and drugs as of January 15, 2011. The rules for use of debit cards with an FSA or HRA are complex and detailed. Consult your plan adviser with questions.