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Flexible Spending Accounts

Affordable Care Act Changes Rules for FSAs, HRAs, and HSAs


Updated December 03, 2010

Flexible Spending Accounts

Flexible Spending Accounts - New IRS rules will require a prescription for over-the-counter drugs to get reimbursed from your FSA.

Jeffrey Coolidge/Getty Images

It’s important to understand the changes made to flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), and health savings accounts (HSAs) because of the new health reform law. The following are some FAQs with answers picked up from the IRS.

How have the rules changed for reimbursing the cost of over-the-counter medications from health flexible spending arrangements (health FSAs) and health reimbursement arrangements (HRAs)?

The Affordable Care Act, passed in March 2010, established a new standard for what qualifies as a medical expense. Effective January 1, 2011, your health FSA or HRA will be allowed to reimburse the cost of your over-the-counter medication only if you purchased it with a prescription.

This new rule does not apply to reimbursements for the cost of insulin, which will continue to be permitted, even if you purchased it without a prescription.

Have the rules also changed for distributions from health savings accounts (HSAs) that are used to reimburse the cost of my over-the-counter drugs?

According to the Affordable Care Act, only prescribed medications (including over-the-counter medicines and drugs that are prescribed) and insulin (even if purchased without a prescription) will be considered qualifying medical expenses and subject to preferred tax treatment.

When did these changes become effective?

The changes became effective for your purchases of over-the-counter drugs without a prescription after December 31, 2010. The changes do not affect any purchases of over-the-counter medications in 2010, even if you are reimbursed after December 31, 2010.

How do I prove that I bought an over-the-counter medication with a prescription so that I can get reimbursed from my employer's health FSA or an HRA?

If you have used a health FSA, you should have some experience providing your employer a receipt of your expenses. After December 31, 2010, along with your receipt, you will also need to provide a copy of your prescription or another item showing that a prescription for your medication has been issued.

Most pharmacies provide a receipt at the time you purchase a medication that shows the date the prescription was filled, your name, the name of the medication, the prescription number, and the amount you paid. This type of receipt should be adequate.

How does the change in rules affect over-the-counter medical devices and supplies?

The change in the rules does not apply to any items for medical care you need that are not medications or drugs. Accordingly, equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits will still qualify for reimbursement by a health FSA or HRA.

Also, you will not need a prescription to get reimbursed for eyeglasses, contact-lens solution, or dental care.

Additionally, your distribution from an HSA for the cost of such items will still be tax-free, whether or not the items are purchased using a prescription.

I have diabetes. Will I need a prescription to use funds from my health FSA, HRA, or HSA to pay for insulin after December 31, 2010?

No! You can continue to use funds from your health FSA, HRA, or HSA to purchase insulin without a prescription after December 31, 2010.

I use health FSA funds for my out-of-pocket expenses such as copayments and deductibles. Will I still be able to reimburse those expenses with funds from my health FSA after December 31, 2010?

Yes! Your copayments and deductibles will continue to be reimbursable from your health FSA after December, 31, 2010. Similarly, funds from your HRA can continue to be used for these expenses and your distribution from an HSA for these out-of-pocket expenses will continue to be tax-free.

My company gives me two extra months beyond the end of the year to submit claims for health FSA expenses incurred during the year. What happens if I purchase an over-the-counter medication without a prescription in 2010 but do not submit the claim for the expense of that drug until January 2011? Will I still be able to get reimbursed?

Yes! The rule only applies to a medication that you purchased after 2010. Your health FSA will cover the cost of any OTC medication you purchased in 2010 even if you submit your claim for reimbursement in 2011.

My health FSA includes a provision for a grace period. If I don’t spend all of the money in my health FSA by December 31 in a given year, I can still use the amount left at the end of the year to reimburse expenses I incur during the first 2.5 months of the following year. If I buy an OTC drug without a prescription during the 2.5-month grace period of 2011, can I still use the amount left in my health FSA at the end of 2010 to reimburse those expenses?

No! The change in the rule applies to all OTC drug purchases you make on or after January 1, 2011. Therefore, even if your employer’s health FSA plan includes a 2.5-month grace period, the cost of OTC medications you purchased without a prescription during the first 2.5 months of 2011 will not be eligible to be reimbursed by your health FSA.

I use a debit card issued by my plan to pay for over-the-counter medications. Will I still be able to use the card to purchase OTC drugs after December 31, 2010?

Generally, no! Your plan must guarantee that the card you are using is reprogrammed no later than Jan. 15, 2011, so that the card can no longer be used to purchase over-the-counter medications.

However, you may continue to use your debit card for medical expenses other than over-the-counter medications.

Why did Congress make this OTC drug change?

Money! By reducing contributions to a FSA or similar arrangment, the IRS can collect more taxes on your income

What additional changes are being made to health FSA plans after 2011?

Currently you are allowed to contribute up to $5000 of your income. Starting in 2013 your FSA contributions will be limited to $2500 each year.

Although the IRS does not know how many people have flexible spending arrangements, some experts estimate the number at about 30 million. It will be interesting to see if the changes made to these arrangements change their popularity.

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