By James Bruinsma of Miller Johnson
Health care reform revised the definition of “medical expenses” as it relates to over-the-counter (OTC) drugs. Effective Jan. 1, 2011, an OTC drug is reimbursable as a medical expense only if the drug is obtained with a prescription—even though a prescription is not required to obtain the drug.
Prior law allowed the cost of OTC drugs to be reimbursed as medical expenses by medical flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs) and Archer medical savings accounts (Archer MSAs). Health care reform permits the cost of a drug or medicine to be reimbursed as a medical expense only if it is a prescribed drug or insulin.
The IRS recently published Notice 2010-59, which discusses the impact of health care reform on OTC drugs. Here are some of the implications of the rule:
• The cost of an OTC drug may be reimbursed from an FSA, HRA, HSA or Archer MSA only if the participant obtains a prescription for the OTC drug. For this purpose, a prescription is any written or electronic order that meets the legal requirements for a prescription in the state in which the OTC drug is purchased.
• OTC expenses other than drugs may continue to be reimbursed without a prescription. This may include items such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits. The pre-health care reform rules apply to these OTC expenses.
• The new rule applies to expenses incurred after Dec. 31, 2010, regardless of the plan year of the plan under which the participant otherwise would obtain reimbursement. It applies regardless of any 2½-month grace period for an FSA.
Plan sponsors should inform participants of the rule as soon as possible, for two reasons:
1. Many participants will be going through open enrollment for FSAs. If a participant is more limited in the opportunity to be reimbursed for OTC drugs, it might affect how much the participant chooses to contribute to the participant’s FSA for the next plan year.
2. Participants might be able to control the timing of their purchases of OTC drugs. A participant will want to make those purchases no later than Dec. 31, 2010, if the participant wants to be reimbursed for the cost as a medical expense.
Some plan sponsors use debit cards to administer FSA and HRA programs. According to the IRS, current debit card systems are not capable of substantiating whether an OTC drug has been prescribed. Therefore, as a general rule, FSA and HRA debit cards may not be used to purchase OTC drugs after Dec. 31, 2010. However, the IRS said it would not challenge the use of an FSA and HRA debit card for expenses incurred through Jan. 15, 2011, if the pre-health care reform requirements for these debit cards are otherwise satisfied. Debit cards may continue to be used in FSA and HRA programs for eligible medical expenses other than OTC drugs.
Cafeteria plans must be amended to comply with the new rules regarding the reimbursement of OTC drugs. The amendment must be adopted no later than June 30, 2011, retroactive to Jan. 1, 2011, (or Jan. 16, 2011, for FSA and HRA debit card purchases).
James Bruinsma is the chair of the Employee Benefits and Executive Compensation Practice Group at Miller Johnson law firm as well as an integral member of the firm’s Health Care Reform Team. He is in the Grand Rapids office and can be reached at firstname.lastname@example.org or (616) 831-1708.
© 2010 Miller Johnson, all rights reserved. Reposted with permission.
Incorporating OTC Drugs into Benefit Plans Can Lower Rx Costs, SHRM Online Benefits Discipline, October 2010
Flexible Spending Accounts: IRS Issues Rules on Over-the-Counter Purchases, SHRM Online Benefits Discipline, September 2010
Health Care Reform’s Impact on Flexible Benefits, SHRM Online Legal Affairs, May 2010
FSA Changes Bring Communications Challenges, HR News, April 2010
SHRM Online Benefits Discipline
SHRM Online Health Care Reform web page