Specifically, Section 9003 of the Patient Protection and Affordable Care Act (“PPACA”) changes the definition of medical expenses as it relates to the reimbursement of over-the-counter (OTC) medicines and drugs by employer-sponsored health plans. Those changes are effective for expenses incurred after December 31, 2010.
On September 3, 2010, the Internal Revenue Service (“IRS”) issued guidance (Notice 2010-59, Revenue Ruling 2010-23, and Qs and As on the IRS website) on the reimbursement of over-the-counter (OTC) medicines and drugs by employer-sponsored health plans, including health flexible spending arrangements (“FSAs”), health reimbursement arrangements (“HRAs”), health savings accounts (“HSAs”), and Archer medical savings accounts (“Archer MSAs”) (see IRS Publishes New Health Care Reimbursement Guidance).
This week’s column focuses on some of the key questions and answers regarding the OTC guidance:
What changes does PPACA make regarding the reimbursement of OTC medicines and drugs?
In general, as a result of the changes in PPACA, expenses incurred for medicines and drugs may only be reimbursed from an employer-sponsored health plan (including FSAs and HRAs) if: (1) the medicine or drug requires a prescription, (2) the medicine or drug is an OTC medicine or drug and the participant obtains a prescription, or (3) the medicine or drug is insulin. Similarly, distributions from an HSA or MSA for a medicine or drug is treated as a tax-free “qualified medical expense” only if one of these three requirements is satisfied.
What does it mean to have a prescription for a medicine or drug that is available OTC?
The guidance provides that a prescription for purposes of these rules means “a written or electronic order for a medicine or drug that meets the legal requirements of a prescription in the state in which the medical expense is incurred and that is issued by an individual who is legally authorized to issue a prescription in that state.” Since the laws regarding the form of prescriptions and who has authority to write or order prescriptions vary from state to state, this definition could cause administrative headaches for employers and plan service providers seeking to substantiate whether a participant has a valid prescription.
Do the new rules apply to all medical items that are available OTC?
The new requirements apply only to OTC medicines and drugs, and do not apply to other OTC items that are not medicines or drugs. The new rules do not apply to medical equipment (e.g., crutches), medical supplies (e.g., bandages), or diagnostic devices (e.g., blood sugar test kits). These items will continue to be treated as medical expenses if they satisfy the definition of medical care in Code section 213(d).
How will the new rules affect the use of FSA and HRA debit cards to purchase OTC medicines and drugs?
The guidance provides that effective for expenses incurred on or after January 1, 2011, FSA and HRA debit cards generally may not be used to purchase OTC medicines and drugs. According to the guidance, this is because current debit card systems are not capable of substantiating compliance with the new requirements. The guidance does, however, provide limited transition relief "to facilitate the significant changes to existing systems necessary to reflect the statutory change." Under this transition relief, the IRS will not challenge the use of FSA and HRA debit cards for purchases of OTC medicines and drugs through January 15, 2011, as long as the use of the debit cards complies with existing IRS rules on debit cards. Beginning January 16, 2011, purchases of prescribed OTC medicines and drugs generally must be substantiated before reimbursement may be made.
How are purchases of prescribed OTC medicines and drugs substantiated?
The guidance provides generally that substantiation is accomplished through submission of the prescription (or a copy of the prescription or other documentation that a prescription has been issued) along with other information showing the date and amount of the purchase. This may be accomplished, for example, through submission of the customer receipt showing the date and amount of the purchase and an Rx number, or through submission of a receipt without the Rx number but with a copy of the prescription.
What steps should employers take in light of these changes?
Employers will first need to determine whether their plans, FSAs and/or HRAs will continue to reimburse for OTC medicines and drugs. If so, employers should discuss with their third-party-administrators and other service providers the steps and systems changes that will be necessary to handle the additional substantiation requirements under the new rules. Employers also will need to review and update plan documents, including cafeteria plan documents, and summary plan descriptions to reflect the change in the reimbursement rules. (The guidance provides certain relief with respect to the timing of cafeteria plan amendments, so long as the amendments are adopted by June 30, 2011.) In addition, employers will need to communicate these important changes to their employees.
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You can find a handy list of Key Provisions of the Patient Protection and Affordable Care Act and their effective dates at http://www.groom.com/HCR-Chart.html
Contributors:
Christy Tinnes is a Principal in the Health & Welfare Group of Groom Law Group in Washington, D.C. She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare. She represents employers designing health plans as well as insurers designing new products. Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.
Brigen Winters is a Principal at Groom Law Group, Chartered, where he co-chairs the firm's Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.
PLEASE NOTE: This feature is intended to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.