The IRS is backtracking on a rule that would have banned health account holders from using debit cards to purchase over-the-counter medication that now needs a prescription.
In late December, the IRS announced health reimbursement arrangement and flexible spending arrangement debit cards will be allowed to purchase OTC drugs after Jan. 15, as long as the account holder has a prescription in hand at the pharmacy, or a prescription is given to a Web-based or mail-order vendor.
The IRS says the use of debit cards must comply with procedures reflecting those that pharmacies currently follow when selling prescribed medicines or drugs.
Without the change of policy, account holders would have had to pay for the OTC drugs up front, and try for reimbursement later with the proper prescription documentation and a receipt.
Other purchases - like crutches and first-aid supplies - that don't need a prescription but are considered eligible medical expenses are still allowed as a debit card purchase, and insulin purchases can still be made with or without a prescription.
The prescription requirement applies to purchases made on or after Jan. 1, 2011, and not to purchases made in 2010 even if reimbursed after Dec. 31, 2010.
Those who try to use account funds to pay for an OTC drug without a prescription will have to use post-tax money and pay an additional 20 percent tax.
Several groups in opposition of the new restrictions on tax-advantaged accounts have been urging the new Congress to push back the effective date, if not repeal the provision on prescription OTC medication altogether. There has also been backlash against another health reform law that will put a cap on pre-tax contributions to $2,500 starting Jan. 1, 2013.