Human Resources News & Insights

Feds clear up 4 tricky points of new FSA, HRA regs

Confused (or have employees that are confused) about the changes the health reform law made to how — and what — drug purchases can be reimbursed through pre-tax health savings plans? Well, help has finally arrived.

Background

Through Dec. 31, 2010 health savings plans — including flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs) and Archer medical savings accounts (MSAs) — are generally permitted to pay for, or reimburse, all over-the-counter (OTC) medicines and drugs on a tax-free basis.

But thanks to healthcare reform, all of that will change on Jan. 1, 2011. On that date employer-sponsored health plans will no longer be able to reimburse expenses for OTC meds — unless they’re insulin, or prescribed by a doctor.

Important clarifications

And just recently the IRS issued the following guidance to help clarify four of the most perplexing parts of the new reimbursement restrictions.

  1. The prohibition applies to all OTC expenses incurred on or after Jan. 1, 2011 — no matter when the funds were set aside. So even if funds are set aside prior to 2011, they may not be used to pay for non-prescription OTC meds incurred after Dec. 31, 2010.
  2. Jan. 1, 2011 is the effective date for the new regs, regardless of whether a plan is a calendar year or fiscal year plan. However, OTC expenses may be reimbursed on or after Jan. 1, 2011, as long as the expenses subject to reimbursement were incurred prior to that date.
  3. The prohibition does not apply to items that are not medicines or drugs. For example, crutches, bandages and diagnostic devises (like blood sugar testing kits) will still be reimbursable.
  4. Follow state laws for the definition of “prescription.” For the purposes of the new regs only, a “prescription” is defined as “a written or electronic order for a medicine or drug 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 legally authorized to issue a prescription in that state.”
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