IRS Issues New Guidance on PPACA Changes to OTC Medical Expenses

On September 3, 2010, the Internal Revenue Service (IRS) issued Notice 2010-59, a guidance reflecting statutory changes related to the use of health reimbursement arrangements (HRA) and health flexible spending accounts (FSA) for payment of over-the-counter drugs and medications.

Related to accident and health plans that are provided by employers, including FSAs and HRAs, The Patient Protection and Affordable Care Act (PPACA) revised the definition of medical expenses. The definition of qualified medical expenses for Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA) were also revised by PPACA. This will involve several changes for over-the-counter drug reimbursement, cafeteria plans, HRA and FSA debit card usage, etc..

Incurred expenses for non-prescription over-the-counter medications and drugs bought on or before December 31, 2010 can be reimbursed without taxes in accordance with the employee plan. However, as of January 1, 2011, an employer-provided health plan, such as an FSA or HRA, can only pay or reimburse the cost of drugs and medications under the following circumstances:

  • The medication is insulin
  • A prescription is required for the medication
  • The individual acquires a prescription for a medication available without a prescription (over-the-counter medication.)

Note that a prescription is defined as a hand written or electronic medication order for a particular individual to have a particular medication or drug. It must abide state legal requirements and be composed by a healthcare professional that is legally authorized to issue prescriptions for the state it was written in.

Health Reimbursement Arrangements and Flexible Spending Accounts with Debit Cards

HRAs and FSAs that use a debit card will also have new special rules. The IRS notice purports that current debit card systems are not capable of recognizing and maintaining that over-the-counter medications were in fact prescribed by a healthcare professional – as in compliance with the new definition of payable/reimbursable over-the-counter medication medical expenses. As a result, health HRA and FSA debit cards should not be used to buy over-the-counter drugs or medications after December 31, 2010. In an effort to smooth and facilitate the transition, the IRS will not be challenging FSA and HRA debit card usage for incurred expenses through the 15th of January in 2011. Thereafter, plans are required to ensure cards have been reprogrammed so that they can not be used in the purchase of over-the-counter drugs or medications. Click here for a list of eligible items as of January 1, 2011.

Those with a health FSA should be careful, as some FSAs contain a grace period provision to allow use of unused funds not spent by December 31 of a given year to reimburse incurred expenses for the initial 2 ½ months of the subsequent year. Even if an individuals’ existing FSA includes this grace period provision, over-the-counter medications bought without a prescription (after the deadline) will not be eligible for reimbursement under the new rules outlined in the IRS notice.

Finally, cafeteria plans may also need revising to adhere to the new over-the-counter medication requirements. Despite the tenet against retroactive amendments, this notice allows an amendment to conform cafeteria plans to requirements adopted by June 30, 2011. For incurred expenses after January 1, 2011 or HRA and FSA debit purchases after January 15, 2011, the amendment may be retroactively effective.

 

Originally published December 12, 2010.

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