Health plans must be amended by June 30, 2011 to reflect the new rule that health flexible spending accounts may not reimburse the costs of over-the-counter drugs that are purchased without a prescription. The new rule was enacted by the Patient Protection and Affordable Care Act of 2010 (PPACA) and was effective January 1, 2011, but plan sponsors have until June 30, 2011 to amend their plans.

Background. PPACA amended the Internal Revenue Code to provide that, beginning after December 31, 2010, expenses incurred for a medicine or drug may be reimbursed as a medical expense only if the medicine or drug is prescribed (determined without regard to whether such medicine or drug is available without a prescription) or is insulin. Therefore, expenses incurred for medicines or drugs may be paid or reimbursed by an employer-provided plan, including a health flexible spending account (FSA) or health reimbursement account (HRA), only if the medicine or drug:

  1. requires a prescription,
  2. is available without a prescription (an over-the-counter medicine or drug) and the individual obtains a prescription, or
  3. is insulin.

PPACA also made a similar change that applies to health savings accounts (HSAs) and Archer Medical Savings Accounts (MSAs). A distribution from an HSA or an Archer MSA for a medicine or drug is a tax-free qualified medical expense only if the medicine or drug satisfies the requirements listed above. If amounts are distributed from an HSA or Archer MSA for any medicine or drug that does not satisfy those requirements, the distributed amount will be considered nonqualified medical expenses. As a result, those amounts will be includable in gross income and generally subject to a 20% additional tax.

Effective Date and Plan Amendment. For expenses incurred after December 31, 2010, payments or reimbursements for medicines or drugs from an employer-provided accident and health plan, including a health FSA or an HRA, are restricted to prescribed drugs, insulin, and over-the-counter drugs that are prescribed. This effective date applies regardless of the employer’s plan year.

Generally, cafeteria plan amendments must be effective prospectively. In other words, retroactive amendments are not permitted. However, in Notice 2010-59, the IRS has permitted plan sponsors to adopt an amendment to conform a cafeteria plan to the new over-the-counter rules no later than June 30, 2011, effective retroactively for expenses incurred after December 31, 2010.

Plan administrators should review their plan documents to determine if amendments are necessary. Plan administrators also should determine whether such plan amendments can be adopted by an officer of the plan sponsor or whether approval by a board or administrative committee will be required.