The Boston Business Journal has an article discussing practical aspects of changing FSAs to permit coverage of over-the-counter (“OTC”) drugs (as is now permitted by IRS rules): “HIPAA raises administrative concerns surrounding FSAs: Legal compliance is an issue under new law governing portability.” The article notes how adding the OTC benefit can lead to HIPAA compliance issues:
For instance, IRS requirements dictate that employees must provide a written statement or receipt from the drug store, pharmacy or other retailer that states, among other things, that a medical expense was incurred and identifies the drug purchased.In contrast, if the FSA limits drug coverage to prescription drugs, the employer must do little more than ensure that the employee has been billed for a prescription drug; only in rare instances would the employer need to know the name of the prescription.
This last point illustrates the likelihood that the employer will require confidential medical information to decide a claim for OTC drug benefits and, therefore, be subject to the HIPAA privacy rules.
You can access previous posts on IRS Revenue Ruling 2003-102 and FSA coverage of OTC drugs here.