Public sector employers who reimburse employees for medical expenses through a flexible spending account (FSA), health reimbursement account (HRA), health savings account (HSA) or Archer medical savings account (Archer MSA) should be aware of an important upcoming IRS plan amendment deadline.

Beginning January 1, 2011, expenses incurred for medicines or drugs may be paid by or reimbursed on a pre-tax basis 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.

Cafeteria plan documents must conform to the new over-the-counter drug requirements. Generally, cafeteria plan amendments should be executed prior to their effective date, but the IRS has provided a grace period for the over-the-counter change, as long as employers amend retroactively to conform to the requirements. Retroactive amendments must be adopted no later than June 30, 2011 and may be retroactive for expenses incurred after December 31, 2010. Failure to timely amend plan documents could result in the cafeteria plan losing tax-qualified status (or, for HSAs, could result in a 20% excise tax on nonqualified distributions).

As a general reminder, employee benefit laws and regulations change frequently, so you should review your plan documents at least annually to ensure they are in compliance with the latest requirements.

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.