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September 7, 2010

HRB 19 - Over-the-Counter Medication Prohibition Clarified

Released September 7, 2010I Download as a PDF

September 7, 2010 --  Currently, health plans, including medical flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs), and Archer medical savings accounts (Archer MSAs), may provide reimbursement for non-prescribed over-the-counter (“OTC”) drugs.  One of the many things that the health care reform law accomplished was to add a new section to Internal Revenue Code, specifically, IRC Section 106(f).  This new Code section states that reimbursement of expenses by these types of health plans for OTC medications is only permissible if the OTC drug is prescribed, or is insulin.  This change in the law does not affect the purchase of OTC items not considered medications, such as crutches, bandages, or blood sugar test kits.

On September 3, 2010, the IRS released guidance (Notice 2010-59) clarifying several points with regard to how this provision should be implemented.  Most important, the guidance states that this provision is effective January 1, 2011, without regard to the underlying plan year.  Individuals participating in a medical FSA will have to be advised that, effective January 1, 2011, non-prescribed OTC medication expenses can no longer be reimbursed.  OTC drugs purchased prior to January 1, 2011 can be reimbursed, in accordance with plan terms. 

This is also true for HSAs and Archer MSAs.  If the OTC medication was purchased prior to January 1, 2011, the accountholder can reimburse him/herself after that date; but purchases made from January 1, 2011 forward, cannot be reimbursed. 

Debit Cards Require Rx Substantiation

The Notice also clarifies issues relating to stored value cards, such as health FSA or HRA debit cards.  Due to the prescription requirement for OTC drugs, and given that the debit card process currently cannot recognize whether a particular medication purchased includes a prescription, expenses for OTC drugs can only be reimbursed, once appropriate substantiation is provided.  The Notice provides transition relief through January 15, 2011, allowing debit cards to be used for prescribed OTC medications, as long as current debit card rules are followed.  On or after January 16, 2011, a prescription substantiating the expense must be provided.

Transition rule for Cafeteria Plan Amendments

If an employer’s cafeteria plan provides for reimbursement of OTC medications, it may need to be amended to conform to the new OTC drug requirements.  The Notice provides a transition period for amending a cafeteria plan.  Generally, cafeteria plans can only be amended prospectively; however, as long as the amendment is adopted by June 30, 2011, retroactive to January 1, 2011, then the amendment would be permissible.

At the same time the Notice was published, Revenue Ruling 2010-23 was issued.  All this Ruling does is obsolete the Ruling that initially authorized OTC drugs as permissible expenses. 

What Should An Employer or Plan Sponsor Do?

  • Plan sponsors should review their definitions of medical expenses, specifically in FSA and HRA plans, and prepare to amend them accordingly; then, communicate relevant changes to plan participants. 
  • HSA accountholders should be advised that a distribution for non-qualifying expenses, including OTC medications purchased without a prescription, will result in 20% penalty, beginning January 1, 2011.

 

About the Author:  Karen R. McLeese is Vice President of Employee Benefit Regulatory Affairs for CBIZ Benefits & Insurance Services, Inc., a division of CBIZ, Inc.  She serves as in-house counsel, with particular emphasis on monitoring and interpreting state and federal employee benefits law.  Ms. McLeese is based in the CBIZ Leawood, Kansas office.

 

The information contained herein is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations. The information contained herein is provided as general guidance and may be affected by changes in law or regulation. This information is not intended to replace or substitute for accounting or other professional advice. You must consult your own attorney or tax advisor for assistance in specific situations.

This information is provided as-is, with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.

As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained herein is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

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