Beginning January 1, 2011, OTC drugs and medications will require a prescription to qualify for tax-free reimbursement from an FSA, HRA, or HSA. The IRS recently issued guidance regarding the use of debit cards to purchase OTC items following this change. Notice 2010-59 provides, among other things, that debit cards may not be used to purchase OTC drugs and medicines after year-end, even if the drug or medicine is processed as a prescription.
We believe that the IRS did not fully understand the capabilities of the SIGIS standard and retail technology when issuing this guidance. SIGIS has written a comment letter to IRS/Treasury and asked for a meeting to discuss this issue. We seek to have the IRS issue supplemental guidance clarifying that health benefit cards may be used. In the wake of the passage of the health care reform bill, however, the IRS staff has numerous demands on its time and attention and may not be able to address our request formally before the end of the year.
Notice 2010-59 has important implications that we want you to be aware of:
- Under the current guidance, OTC drugs and medicines processed as prescriptions may not be purchased using a health benefit debit card
- The SIGIS standard and merchant POS technology are currently incapable of excluding OTCs processed as Rx from the health care eligible and optional prescription drug amounts, and any change would take a long time to implement throughout the industry
- This means that health benefit debit card purchases of OTC drugs processed as prescriptions could be approved at time of sale; such transactions would be technically non-compliant with the provision of the Notice that prohibits card use for such transactions.
In its comment letter to the IRS, SIGIS has pointed out that our standard in fact does enable compliance with the IRS prescription requirements for OTC drugs and medicines, and we are hopeful that they will remove the blanket prohibition on health benefit debit card use for such items. We will continue to approach the IRS and Treasury on this issue and will update you as we know more.
The letter to the IRS is attached below for your reference.
If you have any questions, you may contact the SIGIS Help Desk at email@example.com
### About SIGIS:
It is critical that you assess how Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 may impact your business. Although SIGIS will work diligently to modify the Eligible Products List, IIAS Certification program and 90% Registration service, you should keep in mind SIGIS's role.
SIGIS was organized to develop an industry based solution to IRS guidelines for the acceptance of FSA, HRA and HSA spending account cards. SIGIS develops standards and provide member education; this includes an IIAS certification program and 90% Registration to assist our members. SIGIS does not process card transactions or research card declines. Those are the responsibilities of our merchant, acquirer, card network, card issuer and third party administrator members. SIGIS has no control over plan administrators. The decision on where cards can be used is between a program sponsoring employer and the plan administrator.
This material is designed and intended for general informational purposes only and is not intended to address the circumstances of any particular individual or entity. This material is not intended, nor should it be construed or relied upon, as legal advice. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< Begin Letter to the IRS <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
ALSTON & BIRD LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, GA 30309-3424
Direct Dial: 404-881-7885
September 30, 2010
CC:PA:LPD:PR (Notice 2010-59)
Internal Revenue Service
1111 Constitution Avenue, NW.
Washington, DC 20044
Delivered via Courier and Electronically via firstname.lastname@example.org
Re: Notice 2010-59
Ladies and Gentlemen:
We are writing to comment on Notice 2010-59 on behalf of the Special Interest
Group for IIAS Standards ("SIGIS"). SIGIS has nearly 12,000 members approximately
7,500 members of which are IIAS merchants and 3,900 "90% rule" merchants. SIGIS
members and their customers will be affected by the guidance contained in Notice 2010-
59 relating to the change for over-the-counter (OTC) drugs and medicines brought about
by the Patient Protection and Affordable Care Act (ACA) (referred to herein as the "New
SIGIS appreciates the efforts that IRS and Treasury have made to provide
guidance in advance of the January 1, 2011 effective date of the New OTC Rule. The
transition period that continues to allow the use of debit cards for purchases of OTC
medicines and drugs with an IIAS through January 15, 2011 and the guidance with
respect to calculation of the 90% test will be particularly helpful in implementing the
New OTC Rule.
At the outset, SIGIS recognizes that the current system of substantiating OTC
medicines and drugs which operates without verification of a prescription will not be
permitted after the close of the January 15, 2011 transition period. SIGIS has already
reviewed its current list of OTC items and identified medicines and drugs that would no
longer qualify for substantiation without a prescription. In December, SIGIS will publish
its detailed list so that merchants can update their inventory systems.
It does need to be noted however, that SIGIS currently has an alternate IIAS approval
process in place, that allows prescribed drugs (including OTCs) to be auto-substantiated
only after a prescription is verified. SIGIS is concerned that the language in Notice
2010-59 relating to the use of debit cards is overly broad and could be read to prohibit the
use of debit cards for purchases of OTC drugs even though the drugs are prescribed in
accordance with Notice 2010-59 and adequate independent substantiation is provided in
accordance with that Notice and other existing guidance. In particular, for the following
reasons, we request that Notice 2010-59 be clarified to provide that the use of debit cards
for purchases of OTC drugs and medicines is permitted when a prescription for the OTC
medicine or drug is verified at the point of sale by the pharmacist or a pharmacist
- Existing IRS guidance recognizes that debit card purchases can be effectively and
reliably substantiated at the point of sale provided any IRS substantiation
requirements are satisfied;
- Current systems accurately provide electronic substantiation of the existence of a
prescription for all prescribed medicines and drugs, whether OTC or prescription
only, through the use of methods consistent with the requirements of Notice 2006-
- In verifying an Rx, current IIAS systems cannot distinguish between OTC
medicines dispensed with an Rx and all other medicines and drugs for which a
prescription is legally required. Thus, as broadly written, Notice 2010-59
negatively impacts IIAS systems ability to auto-substantiate debit card
transactions for all prescriptions (and potentially any otherwise permissible IIAS
- Without a clarification to Notice 2010-59, the SIGIS IIAS standard specification
would require sizeable changes and merchants’ pharmacy operations systems and
point of sale systems would require significant changes and investment that could
not be fully deployed for at least 18-24 months. As noted above, this could result
in the loss of all IIAS capability (not just OTC prescription processing) beginning
January 1, 2011.
Further detail on this issue is provided below. We also request a meeting as soon
as possible to discuss this issue and how the current electronic debit card process works
for prescribed drugs. As this is a significant change that would impact millions of health
debit card cardholders, this issue is very time sensitive.
Existing IRS Rules Recognize that Debit Card Purchases Can Be Effectively
Substantiated Electronically At the Point of Sale
The IRS initially provided guidance relating to the use of debit cards in
connection with health FSAs and HRAs in Revenue Ruling 2003-43. That ruling was
limited to cards that can only be used at merchants and service providers that have
merchant category codes related to health care. Notice 2006-69 expanded the
circumstances in which debit cards could be used in connection with health FSAs and
HRAs. In particular, Notice 2006-69 allowed the use of debit cards at merchants that are
not health care providers if the merchant uses an inventory information approval system
(IIAS) or there is direct third-party substantiation (such as an explanation of benefits
(EOB) rollover procedure).2 Notice 2007-2 further expanded the permitted use of debit
cards by allowing the use of such cards at certain pharmacies and drug stores without an
IIAS system if 90% of the store’s gross receipts in the prior taxable year are for eligible
medical care expenses (the "90% rule").
This series of guidance recognizes that electronic means of merchant
substantiation are both effective in ensuring that applicable legal requirements are met
and are cost efficient. Notice 2010-59 indicates continuing interest in the use of
electronic verification, and specifically requests comments on new designs for debit card
systems that could provide substantiation that an OTC was prescribed as required under
the New OTC Rule. As described in the remainder of this letter, SIGIS respectfully
submits that no new designs for debit cards are required as the current IIAS system can
verify that an OTC was prescribed in accordance with the New OTC Rule.
Current Systems Accurately Substantiate Electronically the Existence of a Prescription
for All Prescribed Medicines Through the Use of Methods Consistent with Notice
SIGIS recognizes that, as a result of the New OTC Rule, current IIAS processes
that allow OTC purchases without verification that a prescription has been provided (in
accordance with state law) will no longer be compliant. As noted above, in response,
SIGIS has revised its list of approved products accordingly (i.e., to exclude OTC
medicines and drugs SKUs so they can not be purchased with a health debit card without
a prescription). SIGIS is concerned, however, that the literal language of Notice 2010-59
goes beyond the requirements of the New OTC Rule. In particular, the Notice includes
broad language indicating that health benefit debit cards may never be utilized to
substantiate prescribed OTC medicine at the point of sale of IIAS merchants, even though
current IIAS systems have substantiation mechanisms in place to verify the prescription
that otherwise meet the requirements of Notice 2010-59 and Notice 2006-69.
In particular, Notice 2010-59 provides that "[E]xcept as provided below [relating
to a transition period and merchants that use the 90% rule] for expenses incurred on and
after January 1, 2011, health FSA and HRA debit cards may not be used to purchase
over-the-counter medicines or drugs." This language is overly broad, and does not take
into consideration the fact that IIAS systems currently, in accordance with Notice 2006-
69, allow for charges for prescribed drugs to be substantiated once the prescription is
dispensed by the pharmacist and then purchased with a health debit card. The pharmacist
notes on the electronic cash register system that the purchase is for a prescribed drug.
This same process is currently used for any prescribed drug (whether OTC or available
by prescription only), and is consistent with the requirements of the New OTC Rule.
Under this process, a pharmacist would process and handle a purchase of an OTC
with a prescription just as the pharmacist would process and handle a prescription for a
drug that can only be purchased with a prescription. Substantiating information which
would enable the third party administrator (or IRS agent) to look back to confirm that the
actual item was dispensed pursuant to a valid prescription will be retained in accordance
with the requirements of Notice 2006-69. Such a process would provide the
substantiation that is required under Notice 2010-59. The data retention requirements and
retrieval procedures are also required to be supported as a part of SIGIS merchant
Notice 2010-59 provides that OTC purchases must be substantiated before
reimbursement may be made and that substantiation is accomplished "by submitting the
prescription (or a copy of the prescription or other documentation that a prescription has
been issued) for the over-the-counter medicine or drug, and other information from an
independent third party that satisfies the requirements under Prop. Treas. Reg. § 1.125-
6(b)(3)(i). Thus, for example, a customer receipt issued by a pharmacy which identifies
the name of the purchaser (or the name of the person for whom the prescription applies),
the date and amount of the purchase and an Rx number satisfies the substantiation
requirement for over-the-counter medicines or drugs, as does a receipt without an Rx
number accompanied by a copy of the related prescription."
The current substantiation process that SIGIS uses is consistent with these
requirements. In particular:
- The substantiation would be provided by the pharmacist or pharmacist
technician before payment is made, i.e., reimbursement through use of the
card is not made until after the pharmacist verifies that a valid prescription
has been issued; and
- The substantiation would be accomplished by the submission of a
prescription to a third party -- the pharmacist or pharmacist technician
subject to regulation under state law – for verification and dispensing.
The substantiation process that SIGIS uses today is also consistent with Notice
2006-69, as modified to take into account the New OTC Rule. That is, consistent with
Notice 2006-69, the pharmacist, at the time and point of sale, provides information that
verifies that the expense qualifies as a valid medical expense after dispensing the drug
pursuant to a prescription (taking into account the New OTC Rule). Once the
prescription is processed by the pharmacist, the card transaction is initiated and sent to
the FSA processer who then allows payment through the card. The process with respect
to OTC medicines is similar – if there is an Rx provided for the OTC medicine, it is
processed for payment as an Rx. If there is no Rx provided, the item is run against the
list of eligible items maintained by SIGIS, from which OTC drugs and medicines are
being removed in accordance with the New OTC Rule. Thus, if the item is a medicine or
drug, and is not accompanied by an Rx, no payment with a health debit card can be made.
The electronic substantiation process is at least as effective in ensuring that an Rx
actually exists as manual, after the fact substantiation that is permitted under Notice
2010-59. Current pharmacy business processes and, in many states, pharmacy regulation,
requires strict protocols for the treatment and handling of an Rx, including the dispensing
of the drug and issuance of a prescription number. Further, the paper receipt including
the Rx number that is permitted under Notice 2010-59 for manual substantiation, will
generally be processed by the same persons that would process the electronic verification
under the current IIAS system. Thus, there does not appear to be a reason to distinguish
between the different methods of verification.
Failure to Allow Use of Debit Cards for Prescribed OTC Medicines Will Adversely
Impact the Ability of Plan Participants to Use Debit Cards for Medicines that Can Only
Be Dispensed by Prescription
Notice 2010-59 preserves the ability to use debit cards for medicines for which a
prescription is legally required. However, as discussed above, current systems for Rx
verification process all prescriptions similarly, whether for OTC medicines or medicines
for which a prescription is legally required. Due to the interaction of dispensing systems
in place at pharmacies today with an IIAS system, merchants cannot distinguish between
a medicine for which a prescription is required and an OTC that is prescribed as required
under the New OTC Rule. In fact, many state laws require that identical processes apply
to process any prescription (whether OTC or not). There is no easy technical solution
that could be put in place to resolve this issue in a timely manner.
Thus, as a practical matter, failure to allow the use of debit cards for prescribed
OTC medicines will have the effect that debit cards will not be able to be used for
prescribed medicines at all. It is likely that this will cause all IIAS based health debit
card processes to be shut down while technical changes are made to accommodate a
process that differentiates between OTC and other prescription items. As a result, plan
participants would be required to return to manual claims processing for all medicines
(OTC or otherwise). This may result in delays for plan participants in obtaining
reimbursement for their prescription medicines and in some cases could impose financial
hardships on them, as well as risk medical issues if they delay filling the prescription as a
result. Altering these systems to differentiate between types of prescribed drugs could
take years, and involve yet again significant investment on the part of pharmacies,
retailers and dispensing systems, as well as card networks, card processors and TPAs,
even though current systems provide accurate, reliable verification.
Without modification, Notice 2010-59 will impact the use of FSAs and HRAs
(and traditional health plans) well beyond the changes imposed by the New OTC Rule,
and will significantly increase costs to plan participants due to the additional
administrative burdens, all without need and without increasing substantiation efficiency.
Such a result should clearly be avoided.
Summary of Comments: Use of Debit Cards to Purchase OTC Drugs Should be
Permitted Where the Pharmacist or Pharmacist Technician Verifies that A
Prescription Has Been Provided
SIGIS understands that the IRS needs to be concerned that substantiation is
properly supplied. The clarifications proposed by SIGIS assures proper substantiation
with appropriate safeguards, because it uses processes that have already been approved
for this purpose by the IRS and simply extends them to apply to prescribed OTC
medicines and drugs. The proposed changes also ensure that plan participants will not
experience delays with respect to their medicines that must be provided by prescription.
SIGIS requests that Notice 2010-59 be clarified to allow the continued use of debit cards
for OTC purchases where the pharmacist or pharmacist technician validates the existence
of a prescription at the point of sale.
We appreciate this opportunity to comment on Notice 2010-59 and look forward
to discussing these issues further.
| ||Sincerely, |
John R. Hickman
J. Mark Iwry |
Senior Advisor to the Secretary and Deputy Assistant
Secretary for Retirement and Health Policy
United States Department of Treasury
George H. Bostick
Benefits Tax Counsel
Office of Tax Policy
United States Department of Treasury
Helen H. Morrison
Deputy Benefits Tax Counsel
Office of the Benefits Tax Counsel
Office of Tax Policy
United States Department of Treasury
1 New Code §106(f).
2 The Notice also expanded the copayment match substantiation method described in Revenue Ruling 2003-43.
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