Updated IRS Guidance: OTC Changes Effective January 1, 2011

On Friday, September 3, 2010, the IRS issued Notice 2010-59 and Revenue Ruling 2010-23 which provided initial guidance with respect to the new rule included in the Affordable Care Act that requires a doctor's prescription for the reimbursement of over-the-counter (OTC) drugs and medicines from Health FSA accounts and other tax-advantaged health care accounts.

In summary, the guidance confirms the following:

• Participants will still be able to use their tax advantaged health care accounts for purchases of ALL OTC drugs and medicines, as long as they have a doctor's prescription.
• The rule applies to all tax-advantaged health care accounts, including Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs) and Archer Medical Savings Accounts (Archer MSAs).
• The rule takes effect January 1, 2011 and applies to purchases on or after January 1, 2011, regardless of plan year. This includes 2010 plan year grace period expenses for OTC drugs/medicines purchased on or after January 1, 2011. The only acceptable form of documentation for reimbursement for OTC drugs and medicines is a doctor's prescription, as regulated by state law.
• Insulin, medical devices (crutches, blood sugar monitors, etc.) and items such as bandages, contact lens solution, denture bond, etc. remain eligible and will not require a prescription. See attached list for additional examples.

BPC Flex Benefit Cards will be affected when using it for OTC medicine/drug purchases on or after January 1, 2011. Most retailers will update their Inventory Information Approval Systems (IIAS) with the new eligible products list as soon as possible on or after January 1 to reflect movement of OTC drugs or medicines from the "Eligible" to "Dual Purpose" category. The new guidance allows for a 15-day enforcement delay until January 16, 2011 for card transactions. This is to allow merchants time to implement the new eligible product list. Eligible items will continue to be approved at the point-of-sale. Dual Purpose items, however, such as aspirin and cough medicine, will require a doctor's prescription. Dual Purpose items will no longer be eligible for BPC Flex Benefit Card purchase at the point of sale so you will need another form of payment. You can submit a claim with a detailed receipt and a doctor's prescription for the OTC drug/medicine purchased to BPC for reimbursement.

You can find additional information on the BPC website at www.bpcinc.com or the IRS has posted additional details, including a helpful FAQ, about the OTC rule change on its Affordable Care Act website and includes links to the following:

• IR-2010-95
• Rev. Rul. 2010-23
• Notice 2010-59

BPC will be sending the necessary amendments regarding this OTC change for your plan documents before the end of the year. Standard amendment fees will apply.

If you have any questions or need additional information, please contact BPC at 217-355-2300 or 800-355-2350.