September 2010

Reimbursement of Over-the-Counter Drugs: A Prescribed Solution?

A Polsinelli Shughart Employee Benefits Update

On September 3, 2010, the Internal Revenue Service released Notice 2010-59 regarding the reimbursement of over-the-counter medicines and drugs from health flexible spending arrangements (health FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs) effective January 1, 2011.

The IRS Notice further explains, and provides guidance regarding, certain legal mandates set forth under the Patient Protection and Affordable Care Act (the Act), which added a new section to the Internal Revenue Code (the Code) and revised the definition of “medical expenses” for employer-provided accident and health plans, including health FSAs, HRAs, HSAs, and Archer MSAs. Under the Code’s new section and most recent IRS Notice, effective January 1, 2011, distributions from health FSAs, HRAs, HSAs, and Archer MSAs will not be able to reimburse the cost of over-the-counter medicines or drugs unless they are prescribed by a physician. Following are key points to consider:

• The new rules are effective January 1, 2011, even if a plan is not on a calendar year plan year

• Insulin and items for medical care that are not medicines or drugs, such as bandages, crutches, and diagnostic devices such as blood sugar test kits, are not affected by the new rules

• Under the new rules, an individual may be reimbursed for any prescribed over-the-counter drug costs if the individual provides the prescription (or a copy of the prescription or other documentation that a prescription has been issued) and the customer receipt to substantiate the purchase

• The new rules do not affect the reimbursement of over-the-counter drugs purchased in 2010, even if the drugs are not reimbursed until 2011 (so amounts paid during an existing “grace period” after the end of 2010 will still be allowed if incurred during 2010). However, over-the-counter drug expenses incurred and paid for in 2011 (even if the employer’s plan has a “grace period”) may no longer be reimbursed on or after January 1, 2011 unless they meet the physician prescription exception described above.

• Although many employers allow the use of debit card systems in conjunction with their health FSAs, HSAs or HRAs, because current debit card systems are not capable of recognizing or substantiating that over-the-counter drugs were prescribed by a physician at the point of purchase, most debit cards will no longer accept over-the-counter medicines or drugs as a reimbursable expenditure on or after January 1, 2011. As we have seen before, the debit card industry will likely develop an acceptable solution for this issue that meets applicable IRS guidelines, but until then, the ability to utilize FSA, HSA or HRA debit cards to purchase over-the-counter drugs will be limited.

What You Need To Do Now

1. Any cafeteria plan that allows reimbursement of over-the-counter drug costs must be amended no later than June 30, 2011 to bring the plan into compliance with the new rules

2. As part of the plan amendment analysis process, employers may also want to evaluate whether existing “grace period” provisions may also need to be amended to ensure compliance with the over-the-counter drug limitations, including the impact of any claims incurred and paid in 2011 under the employer’s “grace period” extension

3. Debit card and other claim substantiation rules may also need to be revised to ensure compliance with short-term and long-term impact of physician prescription standards for over-the-counter medications

For More Information

For further guidance on health reform, or for assistance with any cafeteria plan amendments, please contact:

• Brian M. Johnston (Kansas City) at 816-360-4319 or bjohnston@polsinelli.com
• Jamie Zveitel Kwiatek (St. Louis) at 314-889-7088 or jkwiatek@polsinelli.com
• Courtney M. Brunsfeld (St. Louis) at 314-889-7025 or cbrunsfeld@polsinelli.com
• William P. (Bill) Sweeney (Chicago) at 312- 873-3664 or wsweeney@polsinelli.com

About Polsinelli Shughart PC

With more than 500 attorneys, Polsinelli Shughart PC is a national law firm that is a recognized leader in the areas of business litigation, financial services, bankruptcy, real estate, business law, construction, life sciences, environmental and natural resources, health care, insurance coverage/bad faith, and labor and employment. Serving corporate, institutional and individual clients regionally, nationally and worldwide, Polsinelli Shughart is known for successfully applying forward-thinking strategies for both straightforward and complex legal matters. The firm can be found online at www.polsinelli.com.