While the focus on health care reform has been primarily major medical plans, there is no question that the new laws have a considerable impact on cafeteria plans. The IRS has recently issued guidance that allows retroactive amendments to cafeteria plans to comply with health care reform. Additionally, employers must revise their cafeteria plans for changes taking effect during and after 2011. Plan sponsors and employers need to be familiar with these changes now in order to communicate them during the next open enrollment period and also to properly administer them.

1. Change to Eliminate OTC Reimbursements

Effective for expenses incurred on or after 1/1/2011, FSAs (health flexible spending accounts) in cafeteria plans may no longer provide for reimbursement for over-the-counter (OTC) drugs unless they are prescribed. Unfortunately, the exact definition of the terms “drugs” and “prescribed” is unclear, and we will need future guidance to be sure. We do know that the effective date is Jan. 1 even for non calendar-year plans. The same rule will apply to health reimbursement arrangements (HRAs) and health savings accounts (HSAs).) So every cafeteria plan with an FSA must be amended by Dec. 31, 2010, to exclude payment for OTC drugs, and this change must be communicated to plan participants so that they can adjust the amount they elect to contribute.

Although not required, plan sponsors may also want to take the opportunity to amend cafeteria plans at the same time to adopt the new $2,500 limit on health FSAs, which takes effect Jan. 1, 2013.

2. Address Changes to Benefit Elections

Remember that under health care reform, the age-26 dependent extension of coverage means that an employee’s child is covered under the health plan tax-free through the end of the calendar year in which the child turns 26. That means that the value of health coverage for adult children should not be included as gross income for the employee. Participants with covered “adult” children need to change their cafeteria plan elections to provide for payment of the premiums for such coverage on a pretax basis. This may also give rise to a mid-year change in the health FSA accounts because medical expenses of adult children are now reimbursable tax-free.

Be aware that the the IRS has identified two problems for cafeteria plans designed to allow such mid-year changes for adult children:

  1. Under the existing cafeteria plan regulations, adding an adult child to the plan would not seem to fit the definition of “change of status” that would justify changes outside of open enrollment..
  2. IRS regulations generally require cafeteria plans to be amended on a going-forward basis, not retroactively.

Fortunately, the IRS has given some relief in Notice 2010-38, which provides that the IRS has determined that it will amend the change-of-election regulations to allow changes in elections for events affecting adult children’s eligibility, whether or not they are tax dependents. The IRS will also allow amendments to cafeteria plans to allow such changes of election, retroactive to when the plan started allowing such changes as long as the amendment is adopted by 12/31/10.

So remember, not only does health care reform require an adjustment of treatment of over-the-counter reimbursements. You also have to attend to the changes in elections and make sure your plan is properly amended to account for the intended benefits. Plus there should be some opportunity to participants to change elections if they are adding adult children. So don't assume that the major medical plan is all you have to look at. Pay attention to your cafeteria plan, too.