This is the eighteenth issue in our series of alerts for employers on selected topics in health care reform. (Click here to access our general summary of health care reform and other issues in this series.) This supplements Issue 13 of our Health Care Reform Management Alert Series, which addressed Notice 2010-59 issued on September 3, 2010 regarding reimbursement for over-the-counter drugs and medications under the Patient Protection and Affordable Care Act (PPACA).

As previously stated, beginning January 1, 2011, expenses incurred for medicines or drugs may be paid by or reimbursed from a health care flexible spending arrangement (FSA), health reimbursement arrangement (HRA) or employer-provided plan only if the medicine or drug requires a prescription, the drug is available over-the-counter but the individual obtains a prescription, or the drug is insulin. Similarly, a distribution from a health savings account (HSA) or an Archer medical savings account (Archer MSA) for a medicine or drug is a tax-free qualified medical expense only if it requires a prescription, the drug is available over-the-counter but the individual obtains a prescription, or the drug is insulin. Amounts distributed for nonqualified medical expenses are includable in gross income and are generally subject to a 20% additional tax.

Cafeteria plan documents must conform to the new over-the-counter drug requirements. Although the regulations provide that cafeteria plan amendments may be effective only prospectively, the Notice permits employers to amend retroactively to conform a plan to the requirements set forth in the Notice. Retroactive amendments must be adopted no later than June 30, 2011 and may be retroactive for expenses incurred after December 31, 2010 (or after January 15, 2011 for debit card purchases under a health flexible spending arrangements or health reimbursement arrangement).

Next Steps

If you haven’t already amended your cafeteria or wraparound plan document to reflect the changes in over-the-counter drug requirements, you should review your plan documents and be sure to adopt necessary amendments by June 30, 2011.