The determination as to whether a particular OTC item is a medicine or drug is important because the new rules only apply to such items. Unfortunately, the IRS OTC Notice does not provide further guidance as to what is a "medicine or drug" and existing IRS guidance is circular, providing that the term "medicine or drug" includes any items that are "generally accepted as falling within the category of medicine and drugs." However, insulin is not a medicine or drug for purposes of this rule.

The SIGIS List Committee has already reviewed the current list and published the categories that will need to be removed. In reviewing the list, it is important to consider "primary use" and/or "active method" when evaluating certain products. Examples are:

• Band-Aids with an antibiotic cream remain eligible because primary use is for wound cover and are considered a "medical supply".
• Heating patches that contain menthol or eucalyptus are ineligible because a medicine or drug is used to create the pain relief and are considered a "medicine or drug".
• Heating patches that are self contained that transfer just heat remain eligible as there is no "medicine or drug"
• There are many more examples.

In addition, on December 15, 2010, SIGIS published the fully updated Eligible Products List reflecting the changes required by the new guidance via the online portal. Members using FTP download will find changes available since December 31, 2010.

PPACA provides that expenses for OTC drugs or medicines (other than insulin) incurred on or after January 1, 2011 will only be considered eligible for reimbursement under a Health Flexible Spending Account, Health Reimbursement Arrangement or Health Savings Account for IRS purposes if they are "prescribed." OTC medical supplies and equipment such as contact lens solutions, bandages, crutches, durable medical equipment or diagnostic devices, such as blood sugar test kits may continue to be purchased with the current SIGIS IIAS process.

The SIGIS Eligible Product List has been updated to remove most OTC medicines and drugs.

The IRS OTC Notice clarifies that an OTC drug is considered prescribed for purposes of the new rule if the individual obtains a "prescription" for such medicine or drug (even though a prescription is not legally required to obtain the medicine or drug). A prescription is defined as an electronic or written order for a medicine or drug that meets the legal requirements of a prescription in the state in which the medical expense is incurred and that is issued by an individual authorized to issue a prescription in that state. Stated differently, the exact same requirements should apply for OTC prescriptions as apply for any other prescribed drug for reimbursement under an FSA, HRA or HSA account.

The IRS clarified that this includes drugs that are prescribed verbally (doctor to pharmacist) and/or prescribed by the pharmacist as allowed by certain state prescribing laws.

There are no impacts to 90% Rule merchants. Cards can continue to be used at drug stores and pharmacies that qualify as 90% Rule Merchants since such stores are not currently required to substantiate medical items at the point of sale. Moreover, in determining whether a store is 90% eligible, merchants may continue to count OTC medicines and drugs as eligible medical expenses regardless of whether a prescription has been issued.

The IRS guidance provides for two methods for consumers to access FSA Funds:

• Consumers can use another form of payment for purchase then submit the items for manual reimbursement with their plan administrator.  Consumers will need to submit either a) receipt showing the date with amount of purchase and a copy of the prescription or b) a receipt that includes prescription number, patient name, date and amount.
• Consumers can use their FSA/HRA card for payment at an IIAS merchant that supports IRS Notices 2010-59 and 2011-05 regulatory requirements by presenting the prescription to the pharmacist and having the pharmacist dispense the OTC drug or medicine in accordance with applicable law and regulations by which an Rx Number in generated and processed.

Consumers should check with their plan administrator and merchant to find out what options are supported.

IIAS merchants and/or their POS service providers should apply the list updates between January 1st and January 15th, 2011. Applying changes earlier will cause consumer confusion and later would violate IRS rules.

Earlier this year, SIGIS formally requested of the IRS a 'grace period' to give merchants time AFTER the holiday technical freeze period to make updates to the Eligible Products. The SIGIS' request was granted. The OTC Notice indicates that the IRS will not challenge the use of FSA/HRA debit cards for OTC drugs and medicines through January 15, 2011 provided existing (pre-2011) requirements are satisfied.

Prenatal vitamins are classified as nutritional supplements and not regulated as a drug or medicine by the Food and Drug Administration. Thus, until further clarification regarding the treatment of this item as a drug or medicine is obtained, this nutritional supplement will remain on the SIGIS List as an eligible expense.

These items are supplies for corrective lenses, and thus are not drugs or medicines, but rather needed to maintain contact lenses.

These items are regulated by the Food and Drug Administration as drugs, and thus require a prescription to be treated as an eligible expense.

These items are classified as drugs by the Food and Drug Administration, and thus require a prescription to be treated as an eligible expense.

Glucosamine chondroitin is classified as a nutritional supplement and not regulated as a drug or medicine by the Food and Drug Administration. Thus, until further clarification regarding the treatment of this item as a drug or medicine is obtained, this nutritional supplement will remain on the SIGIS List as an eligible expense.