President Obama signed the Patient Protection and Affordable Care Act, which was subsequently amended by the Health Care and Education Reconciliation Act of 2010, on March 23, 2010. While making sweeping changes in the area of health care, these two acts, collectively referred to as "PPACA," make two notable changes affecting medical reimbursement account arrangements.

First, for taxable years beginning after December 31, 2010, reimbursements for medical expenses under Archer MSAs, HSAs, HRAs and health-FSAs are only permitted if the medicine or drug is a prescribed drug or insulin. The IRS issued Notice 2010-59 on September 3, 2010, which provides further guidance regarding the limitation on reimbursements for over-the-counter drugs. Specifically, the notice provides that over-the-counter drugs are only reimbursable if the individual obtains a prescription. This guidance also explains that health-FSA and HRA debit cards may not be used to purchase over-the-counter medicines after December 31, 2010.

Sponsors of these medical reimbursement account arrangements, including sponsors of cafeteria plans, should note that these new rules apply for taxable years beginning after December 31, 2010, regardless of the employer's fiscal year or applicable plan year. Sponsors should consider a legal review of these arrangements to verify that the governing plan documents comply with the new reimbursement limitations before the quick approaching effective date of January 1, 2011. This new rule must be complied with in practice on January 1, 2011, and conforming amendments to cafeteria plans must be adopted no later than June 30, 2011.

Second, for taxable years beginning after December 31, 2012, health-FSA benefits offered under a cafeteria plan will not be treated as qualified cafeteria plan benefits unless the cafeteria plan provides that an employee may not elect more than $2500 in salary reduction contributions to a health-FSA. Accordingly, sponsors of cafeteria plans offering health-FSA benefits need to amend their plans for the 2013 tax year.

For plans subject to ERISA, these amendments constitute material modifications to the plan documents for which a summary of material modifications is required.