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IRS Releases Guidance on Reimbursement of Over-the-Counter Medicine and Drug Expenses

    Client Alerts
  • September 10, 2010

Last week the IRS released Notice 2010-59 and Revenue Ruling 2010-23 (collectively, the "Guidance") setting forth new rules for the reimbursement of over-the-counter ("OTC") medicines and drugs, including a prohibition on the reimbursement of OTC medicine and drug expenses without a prescription. Under the Patient Protection and Affordable Care Act of 2010, as amended ("PPACA"), effective January 1, 2011, all employer-sponsored health plans, including flexible spending arrangements, health reimbursement arrangements, health savings accounts and Archer medical savings accounts, may no longer reimburse expenses incurred for OTC medicines or drugs unless the item is prescribed or is insulin. The Guidance clarifies the requirements for complying with the changes mandated by PPACA.

The Guidance makes clear that expenses for medicines and drugs may be paid or reimbursed by an employer-sponsored plan only if the medicine or drug meets one of the following three requirements: 1) the medicine or drug requires a prescription, 2) the medicine or drug is available without a prescription (i.e., OTC) and the individual obtains a prescription for the medicine or drug, or 3) the item is insulin. Penalties may apply to reimbursements for expenses that do not meet these requirements. Additionally, the Guidance clarifies that a prescription is not required for reimbursement of expenses for medical supplies and equipment, such as crutches, bandages and blood sugar testing kits.

Plans must comply with the January 1, 2011 effective date regardless of the plan year or the applicability of a flexible spending arrangement 2 ½ month grace period. This means that the prohibition on the reimbursement of OTC medicine and drugs applies to all OTC medicine and drug expenses incurred on or after January 1, 2011, even if the funds for reimbursement were set aside in 2010. However, OTC expenses incurred prior to January 1, 2011 may still be reimbursed on or after January 1, 2011.

The Guidance also states that debit cards used by flexible spending arrangements and health reimbursement arrangements may not be used to purchase OTC medicines and drugs. A brief transitional relief period is provided under which the IRS will not challenge the use of debit cards for expenses incurred through January 15, 2011 as long as the requirements of prior debit card guidance are met. However, as of January 16, 2011, OTC medicine and drug purchases must be substantiated before reimbursement is made.
Finally, although the IRS is allowing plan sponsors until June 30, 2011 to adopt plan amendments required by the new Guidance, other required cafeteria plan changes, such as coverage of dependents until age 26, should be made before 2011. As a result, it may be more efficient for plan sponsors to make all amendments before 2011. Further, plan sponsors should update their plan enrollment materials and summary plan descriptions to reflect these changes.