Health reform impacts OTC drug rules

October 4, 2010
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Health care reform revised the definition of “medical expenses” as it relates to over-the-counter 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, health reimbursement arrangements, health savings accounts and Archer medical savings accounts. 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 this new 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 would otherwise obtain reimbursement. It also applies regardless of any 2½-month grace period for an FSA.

Plan sponsors should inform participants of this new rule as soon as possible for two reasons.

First, many participants are currently or soon will be going through open enrollment for FSAs. If a participant is more limited in the opportunity to be reimbursed for OTC drugs, it may affect how much the participant chooses to contribute to the participant’s FSA for the next plan year.

Second, participants may 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 C. Bruinsma is an attorney at Miller Johnson in Grand Rapids.  He is the chair of the firm’s employee benefits and executive compensation practice and a member of the health care reform team.

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