IRS Backs Off Flex Account Debit Card Ban for Over-The-Counter Drugs

The IRS last week backed off an earlier rule for next year that prohibits flexible spending and health reimbursement account holders from using debit cards to pay for over-the-counter drugs that now need a prescription.

To be sure, patients who use FSA and HRAs still need to get a prescription to purchase everything from Tylenol to cold medicine with those accounts. But the IRS said in an announcement issued Thursday that that debit cards can be used if the prescription is in hand.

The IRS did not provide an explanation for the reversal.

The change comes after the IRS originally reasoned that there was no way for customers using the debit cards to prove whether the drugs they were purchasing were prescribed. Had the IRS gone through with its original plan, account holders would have had to front the money for over-the-counter drug purchases and then try to get reimbursed. They could have still used the debit cards for other medical expenses, but not over-the-counter drugs.

Mike Tuffin, a spokesman with industry lobby America's Health Insurance Plans, called the reversal "welcome news." He said in an e-mail that it would "help ensure that patients can afford the medicines they need." Still, he said Congress should step in and change the rules so that account holders can buy over-the-counter drugs next year without a prescription.

Under the new policy, anybody who tries to use their pre-tax accounts without a proper prescription would have to use post-tax income and be charged an additional 20 percent tax.

Millions of Americans use the pre-tax accounts. According to an analysis by benefits administrator Aon Hewitt of more than 220 employers covering more than 6 million workers, 20 percent of employees contributed to an FSA in 2010. Of those workers, the average annual contribution was $1,441.

FSAs allow workers to set aside pre-tax dollars to pay for qualified health care or child care expenses not covered by their health plans.

FSAs, which were first authorized by Congress in 1978, are only available through employers who offer the plans. But FSAs face another new rule under the health care overhaul -- a limit on the pre-tax contributions to $2,500 starting Jan. 1, 2013. There is currently no limit on how much an employee can contribute to FSAs, though employers can impose one.

Lawmakers imposed the cap to help pay for provisions that will expand coverage starting in 2014.