November 2, 2010 – The “A” Accounts (FSA, HRA, HSA, MSA) – Reimbursing Over-the-Counter Medicine or Drugs on and after January 1, 2011
Observation: We continue to see and hear about misstatements and out-dated descriptions of what the new requirement actually involves.
As you consider the various items to highlight in enrollment materials and reflect in plan amendments for 2011, remember the new over-the-counter (“OTC”) medicine and drug reimbursement requirements. As part of federal Health Care Reform, Congress added Section 106(f) to the Internal Revenue Code of 1985, as amended, (“Code”) and modified Sections 223 and 220 of the Code to limit the reimbursement of over-the-counter (“OTC”) medicines and drugs (other than insulin). Reimbursement of this type of expense incurred on or after January 1, 2011, requires a prescription. Other OTC expenses (e.g., bandages, non-medicines, non-drugs, insulin, etc.) remain reimbursable on the same basis as before; no prescription is required.
Meaning of “Prescription.” Initially, there was a lot of speculation whether a “note from the doctor” would be enough, or whether an actual prescription on a prescription pad would be required. Pursuant to IRS Notice 2010-59 (Sept. 3, 2010), a “prescription” means (1) a written or electronic order for a medicine or drug, (2) that meets the legal requirements of a prescription in the state in which the medical expense is incurred, and (3) that is issued by an individual who is legally authorized to issue a prescription in that state.
Application to Health FSAs and HRAs.
In General. As part of federal Health Care Reform, Congress added Section 106(f) to the Code. That section provides that for purposes of Section 106 and 105 of the Code, OTC medicines and drugs (other than insulin) are reimbursable expenses only if prescribed. Benefit plans addressed under Sections 105 and 106 of the Code include health flexible spending accounts (“Health FSAs”) and health reimbursement arrangements (“HRAs”).
Note: Health Savings Accounts (“HSAs”) and Archer Medical Savings Accounts (“MSAs”) are not governed by Sections 105 and 106 of the Code. They are discussed separately below.
Effective Date. The new reimbursement requirements are effective for expenses incurred on and after January 1, 2011. For calendar plan years, the effective date coincides with the 2011 plan year. But, it is not tied to the start of a plan year.
Grace Periods. Plans with grace periods, including calendar year plans, must be careful to apply the reimbursement requirements based on the date the expense is incurred, not the plan year from which the reimbursement is made. If the expense is incurred on or after January 1, 2011, the new reimbursement requirements apply – even if the expense is reimbursed from 2010 plan year monies.
Non-Calendar Plan Years. The new reimbursement requirement applies on January 1, 2011, during an ongoing plan year. This means the reimbursement requirements change part way through a plan year.
Debit Cards and OTC Medicine and Drugs (other than Insulin). In general, most debit cards are not equipped to handle substantiation requirements, including a prescription requirement. For expenses incurred on or after January 1, 2011, these health FSA and HRA debit cards technically should not be used to purchase OTC medicines or drugs (other than insulin). In recognition of systems capabilities, the IRS has granted a 15-day transitional period during which reimbursements will not be challenged provided the debit card otherwise complies with applicable law.
On or after January 16, 2011, OTC medicine or drug purchases (other than insulin) must be substantiated before reimbursement may be made even where debit cards are involved. Substantiation is accomplished by submitting a prescription (or a copy of the prescription or other documentation that a prescription has been issued) for the OTC medicine or drug, and other information from an independent third party. For debit card vendors not equipped to handle the prescription substantiation requirement, OTC medicines and drugs (other than insulin) will no longer be reimbursable through use of the debit card.
Note: This does not mean OTC medicines and drugs (other than insulin) are no longer reimbursable expenses. It means that in most cases those expenses cannot be reimbursed using a debit card. Claims for these expenses will have to be filed the old fashioned way with the additional substantiation requirement of a prescription.
HSAs and Archer MSA.
Also as part of federal Health Care Reform, Congress amended Section 223(d)(2)(A) of the Code with respect to HSAs and Section 220(d)(2)(A) of the Code with respect to Archer MSAs. Expenses incurred on or after January 1, 2011, for an OTC medicine or drug (other than insulin) shall be reimbursable as a medical expense only if prescribed. If amounts are distributed from an HSA or Archer MSA for any OTC medicine or drug (other than insulin) not satisfying this new requirement, it will be considered a distribution for a non-medical expense. The amount is included in the HSA holder’s taxable income and generally subject to the 20% additional tax for non-medical expenses distributions.
Action Items
- Identify the employer plans or programs impacted by the new OTC claims substantiation rule.
- Communicate the changes to employees and participations in the plans or programs.
- Amend (or prepare to amend) the underlying plan documentation.
Note: The IRS is allowing an amendment to a cafeteria plan, pursuant to Prop. Treas. Reg. § 1.125-1(c), to reflect the new OTC requirements to be effective retroactively, but must be adopted no later than June 30, 2011.
Please contact us if you have any questions regarding the contents of this Alert or would like assistance with your plan document amendments.