On September 3, 2010, the Internal Revenue Service (IRS) and the Office of Consumer Information and Insurance Oversight (OCIIO) independently announced the release of additional Affordable Care Act guidance. The IRS set forth additional rules in Notice 2010-59 regarding the reimbursement for over-the-counter (OTC) medicines and drugs with a prescription, while the OCIIO announced the process for obtaining waivers for the new annual limit restrictions on essential health benefits (also sometimes referred to as mini-med waivers). (Prior Affordable Care Act guidance and our related Legal Alerts may be accessed from our Emerging Issues webpage at www.kilpatrickstockton.com.)
OTC Medicines and Drugs (Notice 2010-59)
Requirements: New Code Section 106(f) added by the Affordable Care Act provides that expenses incurred for medicines and drugs may be paid or reimbursed by an employer-provided plan, including a health flexible spending arrangement or a health reimbursement arrangement, only if the medicine or drug (1) requires a prescription, (2) is available without a prescription (i.e., OTC) but the individual otherwise obtains a prescription, or (3) is insulin. The same rules apply to health savings accounts and Archer medical savings accounts. Employees will have to choose between taking the time to obtain a prescription for OTC medicines and drugs (collectively referred to here as OTC drugs) or paying for these expenses with after-tax dollars.
For purposes of OTC drugs, the IRS provides that a prescription is any written or electronic order that meets the legal requirements of a prescription in the state in which the medical expense is incurred and that is issued by an individual who is legally authorized to issue a prescription in that state. The IRS clarifies that the need for a prescription only applies to OTC drugs. Equipment, medical supplies (e.g., bandages), and devices are not subject to the prescription requirements. However, the guidance does not discuss quasi-medicines or drugs, such as antibiotic creams or similar items that have drug-like characteristics. Plan sponsors and third party administrators will need to determine how to administer such items, as well as the prescription requirement itself.
Effective Dates: The new prescription rule applies to OTC drugs purchased on or after January 1, 2011. For purposes of HSAs and Archer MSAs, the change does not affect distributions from the account made before January 1, 2011, nor does it affect distributions made after December 31, 2010, for OTC drugs purchased on or before that date. For spending accounts with a grace period, expenses for OTC drugs incurred in 2011 can be reimbursed from 2010 account balances only if the participant obtains a prescription for those items. No prescription is required for OTC drugs purchased in 2010 but submitted for reimbursement in 2011.
Debit Cards: The IRS notes that current debit card systems are not capable of substantiating compliance with the new requirements. Thus, for expenses incurred on and after January 1, 2011, health FSA and HRA debit cards may not be used to purchase OTC drugs (except at certain pharmacies as noted below). However, to facilitate the significant changes to existing systems, the Notice provides that the IRS will not challenge the use of debit cards for expenses incurred through January 15, 2011. On and after January 16, 2011, OTC drug purchases must be substantiated before reimbursement is made based on the existing guidelines for written substantiation. The 15-day period is apparently for third-party administrators to institute additional procedures to substantiate OTC drugs, as well as to accommodate any run-out for debit card processing. Given the short “transitional relief” in the Notice, one wonders why the IRS even bothered to provide the extension in the first place. Notwithstanding the above, however, the Notice does allow health FSA and HRA debit cards to continue to be used to purchase OTC drugs at pharmacies who meet the 90 percent test in the existing proposed cafeteria plan regulations, provided that the written substantiation requirements are satisfied with respect to the prescription. Some employers may simply decide to exclude OTC drugs (and perhaps all other OTC items) from the definition of an expense eligible for reimbursement to avoid the added complexity in administering these changes.
Plan Amendments: The Notice allows plan sponsors until June 30, 2011, to make any plan document amendments required by these new rules. However, if a plan will not reimburse OTC drugs, even if a prescription is obtained, we recommend that the plan amendment be adopted prior to the beginning of the plan year (that is, before January 1, 2011, for a calendar year plan). In addition, enrollment materials and SPDs should clearly explain the requirements that will be applied for OTC drugs and other expenses to be reimbursable in 2011.
Annual Limit Waivers
Background: Section 2711 of the Public Health IRS Act requires the Department of Health and Human Services (HHS) to impose restrictions on the imposition of annual limits on the dollar value of “essential health benefits” for any participant or beneficiary in a new or existing group health plan for plan years beginning on or after September 23, 2010, and prior to January 1, 2014. The interim final regulations, published on June 28, 2010, provided that annual limits on the dollar value of essential health benefits cannot be lower than:
- For plan or policy years beginning on or after September 23, 2010 but before September 23, 2011, $750,000;
- For plan or policy years beginning on or after September 23, 2011 but before September 23, 2012, $1.25 million; and
- For plan or policy years beginning on or after September 23, 2012, but before January 1, 2014, $2 million.
The interim final regulations also provided that these restricted annual limits may be waived by the Secretary of HHS, if compliance with the interim final regulations would result in a significant decrease in access to benefits or a significant increase in premiums.
Waiver Process: A group health plan may apply for a waiver from the annual limit set forth above by filing an application with the OCIIO. The application must include the following:
- The terms of the plan or policy for which a waiver is sought;
- The number of individuals covered by the plan or policy submitted;
- The annual limits and rates applicable to the plan or policy submitted;
- A brief description of why compliance with the interim final regulations would result in a significant decrease in access to benefits for those currently covered by such plans or policies, or significant increase in premiums paid by those covered by such plans or policies, along with any supporting documentation; and
- An attestation, signed by the plan administrator or Chief Executive Officer of the issuer of the coverage, certifying that the plan was in force prior to September 23, 2010, and that the application of restricted annual limits to such plans or policies would result in a significant decrease in access to benefits for those currently covered by such plans or policies, or a significant increase in premiums paid by those covered by such plans or policies.
If approved, the waiver is only applicable to the plan or policy year beginning between September 23, 2010, and September 23, 2011. Plans would need to reapply each year for a new waiver.
Timing: The guidance provides that applications must be submitted not less than 30 days before the beginning of the applicable plan or policy year, or in the case of a plan or policy year that begins before November 2, 2010, not less than 10 days before the beginning of the plan or policy year. This means that calendar year plans would need to submit an application by December 1, 2010. However, plan sponsors who need to have certainty during the upcoming annual enrollment process so they can make decisions and describe the available benefit options should submit applications as soon as possible. OCIIO indicates that waiver applications will be processed within 30 days of receipt, except that complete applications submitted for plan or policy years beginning before November 2, 2010, will be processed no later than five days in advance of the plan or policy year. With employers making design and communication decisions now for the 2011 annual enrollment period, it is unclear whether these timeframes will encourage employers to maintain their mini-med plans for 2011 with the expectation that they will receive a waiver, to terminate these plans, leaving employees without a mini-med option, or to delay the enrollment process for these plans until they know if the waiver will be granted.