McGuireWoods Healthcare Reform Guide: Installment No. 21 – Amendment Deadline for Cafeteria Plans and HRAs!

McGuireWoods Healthcare Reform Guide: Installment No. 21

June 14, 2011

This is the 21st in a series of WorkCite articles concerning the Patient Protection and Affordable Care Act and its companion bill, the Health Care and Education Reconciliation Act of 2010 (referred to collectively as the Act). This WorkCite deals specifically with the need to amend most health flexible spending arrangements (health FSAs) and health reimbursement arrangements (HRAs) by June 30, 2011, with respect to reimbursements for the purchase of over-the-counter (OTC) medicine and drugs.


Prior to 2011, the cost of OTC medicines and drugs were medical expenses that were eligible for reimbursement from group health plans. The Act, however, amended the definition of “medical expenses” in the Code for these purposes to permit the reimbursement of funds used to purchase OTC medicine and drugs only where the individual has a prescription or is purchasing insulin.

Comment: The IRS has issued Notice 2010-59 and IRS Notice 2011-5 providing guidance on the implementation of the new rule. See “McGuireWoods Healthcare Reform Guide: Installment No. 12” and “McGuireWoods Healthcare Reform Guide: Installment No. 16” for our detailed reports on these Notices.

Therefore, if plan documents for a health FSA or HRA permit reimbursement of expenses for OTC medicine and drugs without a prescription, the documents must be amended. The general effective date for this change was January 1, 2011 and January 16, 2011 for health FSA or HRA debit card transactions.


Employer Choice

As we noted in our previous WorkCite installments on this issue, employers must make a choice on how to comply with the new rule.

  • Permitting Reimbursement. The employer may simply amend the plan document and employee communications to provide that all expenses for medicine and drugs (with the exception of insulin) will not be reimbursed without a prescription.
  • Not Permitting Reimbursement. In the alternative, the employer may amend those documents to provide that no expenses for OTC medicine and drugs will be reimbursed, even if the participant obtains a prescription.

Comment: Employers should consider that, in many instances, the overall cost of acquiring a prescription for an OTC medicine or drug may be far greater than the participant’s savings from using his or her health FSA or HRA. Many physicians now charge for providing prescriptions based on telephone calls or email. In addition, some states require physicians to consult with the patient in person before issuing a prescription. In either case, the cost of these additional services to the employer and its plan may be considerably more than the participant’s savings on a $4 bottle of aspirin.

If you would like assistance in analyzing and amending your employer’s health FSA or HRA this month, please contact the authors or any member of the McGuireWoods Employee Benefits Team as soon as possible.