Archive for August, 2011

OTC Restrictions

Over the Counter Drugs

Health care reform establishes new restrictions on the reimbursement of over-the-counter (OTC) medicines and drugs purchased after December 31, 2010. Under these restrictions, employer-provided accident and health plans (including health FSAs and HRAs) can only reimburse medicines and drugs other than insulin if the medicine or drug is prescribed.Similarly, distributions from HSAs and Archer MSAs for medicines and drugs other than insulin is tax-free only if the medicine or drug is prescribed. The IRS has now issued guidance on the new restrictions.

Here are the Highlights:

    • Health FSAs, HRAs, and Other Employer Plans
      • These plans cannot reimburse expenses incurred after December 31, 2010 for medicines or drugs unless the medicine or drug (1) requires a prescription, (2) is available without a prescription (i.e., an OTC drug) and the individual obtains a prescription, or (3) is insulin. OTC drugs purchased without a prescription before 2011 can be reimbursed at any time to the extent allowed under then-applicable law and permitted under the plan’s terms. For purposes of the new restrictions, a prescription for a medicine or drug must be a written or electronic order that satisfies the legal requirements for a prescription in that state (including that it be issued by someone authorized to issue prescriptions in that state). To show that an OTC drug has been prescribed, employees must submit the prescription or other documentation, along with the other independent third-party substantiation required under IRS rules. According to the guidance, a receipt identifying the purchaser (or the patient), the date and amount of the purchase, and an Rx number would meet these requirements, as would a receipt without an Rx number along with a copy of the prescription. The effective date of the restrictions is the same for all plans, regardless of plan year and regardless of any grace period provide under a health FSA.
    • HSAs and Archer MSAs
      • Similar rules apply to HSAs and Archer MSAs for medicines and drugs purchased after December 31, 2010. Distributions that do not satisfy the rules are considered to be for nonqualified medical expenses, are includible in gross income, and generally are subject to a 20% additional tax. However, the restrictions do not affect distributions made in 2011 or later for medicines or drugs purchased before 2011.
    • Debit Card Programs
      • Recognizing that significant changes will be needed to existing debit card systems as a result of the new restrictions, the guidance provides that “the IRS will not challenge the use of health FSA and HRA debit cards for expenses incurred through January 15, 2011,” so long as the existing IRS debit card rules are met. Cards generally must be reprogrammed to decline OTC drug purchases beginning January 16, 2011. However, cards may be used to purchase prescribed OTC drugs at a 90% pharmacy (i.e., a pharmacy where 90% of the store’s gross receipts during the prior taxable year, determined on a store-location-by-store-location basis, consisted of items that qualify as medical care expenses under Code Section 213(d)), if proper substantiation is submitted. When determining whether the 90% test is met, sales of otherwise-eligible OTC drugs may continue to be taken into account after December 31, 2010.
    • Items Other Than Medicines and Drugs
      • The restrictions do not apply to OTC items other than medicines and drugs (e.g., equipment, supplies, and medical devices). The rules for reimbursing these items remain unchanged (e.g., they must be for medical care and not merely beneficial to an individual’s general health). Items such as crutches, bandages, blood sugar test kits, and eyeglasses are not subject to the new restrictions, and debit cards may continue to be used for these items.
    • Cafeteria Plan Amendments
      • Cafeteria plan sponsors have until June 30, 2011 to amend their plans to conform to the new restrictions, so long as the amendment is effective retroactively for expenses incurred after December 31, 2010 (or after January 15, 2011 for health FSA and HRA debit card purchases).



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