What you need to know

As discussed in our previous alert, the new healthcare reform law changes the rules for health flexible spending arrangements in two ways.  First, the law limits employee medicine and drug cost reimbursement by a health FSA to medicines and drugs that are prescribed by a physician.  Second, the law limits the amount employees may contribute annually to a health FSA to $2,500.

What you need to do

Employers must amend their health FSAs to meet impending deadlines.  First, they must amend their plans by June 30, retroactive to January 1, 2011, to only allow reimbursement for medicines and drugs if the medicine or drug is prescribed by a physician or is insulin.

Second, beginning January 1, 2013, employers must limit employee contributions to health FSAs to $2,500.  Employers should consider the administrative, technical and employee communication requirements of implementing this change and begin taking action early in 2012.  For practical reasons, employers that maintain a health flexible spending arrangement with a non-calendar plan year may need to begin limiting contributions prior to January 1, 2013.

Reimbursement Only for Prescribed Medicines or Drugs

The Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act of 2010, limits the items that may be reimbursed from a health flexible spending arrangement (this limitation also applies to health reimbursement arrangements, health savings accounts and Archer medical savings accounts).  Many health FSAs began reimbursing the cost of over-the-counter drugs and medications after the release of IRS Revenue

Ruling 2003-102.  As of January 1, 2011, however, the Act prohibits health FSAs from reimbursing expenses for drugs and medications that are not prescribed by a physician.  Insulin is exempt, and therefore may continue to be reimbursed without a prescription.

Employers have until June 30 to amend their health FSAs, retroactive to January 1, 2011, to reflect this new rule.  In connection with this amendment, employers should ensure that summary plan descriptions, claim and enrollment forms, and explanatory materials given to plan participants accurately and consistently describe the new rules.

The January 1, 2011 effective date applies regardless of plan year, coverage period or health FSA grace period.  The January 1 effective date was, however, delayed to January 16 for health FSA debit-card transactions to mitigate the difficulty of compliance with new debit-card vendor and substantiation rules.  Cafeteria plan amendments should therefore permit tax-free reimbursements for purchases through January 15 for medicines or drugs purchased without a prescription using health FSA debit cards.

Annual Contributions to an FSA Limited to $2,500

Limitations on employee contributions to an employer’s health FSA are currently determined by employers, with no limit imposed by law.  Beginning January 1, 2013, the Act limits health FSA contributions to no more than $2,500 per year.  This limit will be adjusted annually starting in 2014 based on changes in the Consumer Price Index.  It is important to note that the annual limit applies to the participant’s taxable year (almost always the calendar year), not the plan’s fiscal year.  Health FSAs that use a non-calendar plan year will therefore need to either begin restricting plan contributions to $2,500 starting with the plan year that begins in 2012 or track calendar-year contributions and limit the amount contributed after December 31, 2012 to no more than $2,500.  All employers who maintain FSAs that allow employee contributions in excess of $2,500, even those with calendar-year plans, will need to take action in 2012 to communicate this new lower limit to employees.  Employers should review and, if necessary, modify enrollment materials, summary plan descriptions, benefits summaries, and information posted on an employer’s intranet prior to the 2012 open-enrollment period.