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PPACA is a massive overhaul to health benefits in the United States and TRI-AD is reviewing the provisions of the bill to determine how it impacts our clients, participants and our administrative services. One provision that is effective fairly quickly is the change to the over-the-counter drugs/medicines rules in Flexible Spending Accounts (FSA), Health Reimbursement Arrangements (HRA) and Health Savings Accounts (HSA).

Flexible Spending Accounts

PPACA amended the law to only allow reimbursements for “prescribed” medicines, drugs or insulin. Over-the-counter (OTC) drugs or medicines will only be reimbursable under the FSA plan if they are prescribed.

The health benefit debit cards will no longer be allowed to purchase OTC drugs or medicines. The employees will need to purchase them with their own money and submit the receipt and a copy of the prescription to their flexible spending account administrator. If they do not have a prescription, they will not be reimbursed.

This new rule takes effect for tax years beginning on or after January 1, 2011. This means that individuals will no longer be able to purchase and be reimbursed for over-the-counter drugs or medications that are not prescribed starting January 1, 2011.

The debit card may continue to allow purchases for non-medicine or non-drug OTC items such as bandages and blood sugar test kits and test strips. According to the Special Interest Group for IIAS Standards (SIGIS – an organization that was formed to provide the eligible OTC listing to stores and pharmacies so they could inventory OTC products to be eligible or ineligible expenses when participants use their debit cards), OTC drugs and medicines and biological treatments only comprise about 35% of the current eligible OTC listing. An estimated 65% of the OTC items will continue to be eligible for purchase with the health benefit debit card. SIGIS will be updating their eligible OTC listing based on the new rules and providing that information to stores/pharmacies. According to SIGIS, effective January 1, 2011, the items that will not be reimbursable through a debit card include:

Acid Controllers

Allergy & Sinus

Antibiotic Products

Anti-Diarrheals

Anti-Gas

Anti-Itch & Insect Bite

Antiparasitic Treatments

Baby Rash

Cold Sore Remedies

Cough, Cold & Flu

Creams/Ointments

Digestive Aids

Feminine Anti-Fungal/Anti-Itch

Hemorrhoidal Preps

Laxatives

Motion Sickness

Pain Relief

Respiratory Treatments

Sleep Aids & Sedatives

Stomach Remedies

Beginning January 1, 2011 these administration changes should take place:

OTC drugs and medicines must be submitted manually with a prescription.

Other non-drug or non-medicine OTC items can continue to be purchased through the health benefit debit card or manually without a prescription.

Participants who pay out of pocket for drug or medicine OTC expenses in 2010 and submit a claim for reimbursement during 2011, are not required to have a prescription to be reimbursed.

Employee Annual Health Flexible Spending Account (HFSA) Elections

When employees decide their annual HFSA election, they need to understand the change in the OTC rules and determine whether they can obtain a prescription for these OTC items. Plans can continue to allow participants to purchase OTC drugs/medicines with a debit card through December 31, 2010 and implement the change January 1, 2011.

For cafeteria plans that operate on a non-calendar year plan year, January 1, 2011 occurs during the plan year. Will published IRS regulations allow employees to change their annual HFSA amounts during the plan year due to this change in the law? According to the existing rules, only limited circumstances will allow an employee to change their annual HFSA election. According to the FSA Regulations, 1.125-4, changes are allowed for:

HIPAA special enrollment rights;

Changes in status such as marriage status, adding dependents through adoption or birth, loss of dependent status, changes in employment status, change in residence, the commencement or termination of an adoption proceeding;

A judgment, decree or order resulting from a divorce, legal separation, annulment or change in legal custody;

Entitlement to Medicare or Medicaid;

Leave under the Family Medical Leave Act; or

Significant cost or coverage changes

Under the existing guidance, the change that make sense in this situation is a significant coverage change. The regulations are clear that employees cannot change their HFSA annual elections under normal benefit changes. Based on this existing guidance, a participant would not be able to change their HFSA annual election during the plan year because of the change in legislation.

For plan years beginning in 2010 and before the enactment of the legislation on March 23, 2010, employees did not know when they made their annual election that the law would change with respect to OTC drugs and medicines. Will the IRS allow those employees in these plans the ability to change elections before the end of the plan year? For those plan years that begin after March 23, 2010, will a change in election be allowed since there was time to communicate the law change prior to the employee’s annual election? Further guidance on this issue would be welcome.

Employees will need to understand the OTC drugs and medicines change and be informed their health benefit debit cards will not work on January 1, 2011 when purchasing these items. They must consider this new law when determining their annual elections for the next plan year. TRI-AD will help our clients comply with these new rules and provide HFSA participants information about the new OTC rules.

Health Reimbursement Arrangements (HRA)

HRA’s will have the same rules apply to OTC drugs/medicines effective January 1, 2011. These types of plans are somewhat similar to HFSA’s except the employer funds the money into the plan, not the employee. Often HRA’s allow employees to be reimbursed for OTC items so the same rules that apply to HFSA’s apply to HRA’s.

Health Savings Accounts (HSA)

These new OTC rules apply to HSA’s as well, although there is no third party administrator reimbursing employees for their expenses. HSA participants either use a health benefit debit card or reimburse themselves for out of pocket expenses and typically, no adjudication (auditing of the expense) is performed on these accounts by a third party. There is one distinguishing factor on the timing of when a distribution must occur out of an HSA for an OTC drug or medicine. Distributions from an HSA for over-the-counter drugs or medicines must occur prior to January 1, 2011.

Penalty Increased for Non-Medical Expenses Withdrawals from an HSA

Currently there is a 10% penalty imposed on non-medical expenses paid from an HSA. This penalty will increase to 20% beginning January 1, 2011. The HSA participant is responsible to report these non-medical expenses and pay the penalty.

As always, TRI-AD will assist our clients with communicating these rules to their employees and will apprise our clients of further guidance when published.

Please contact your Client Service Manager or Client Service Associate if you have any questions about this information.

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This entry was posted by Adam V. Russo on Monday, June 21st, 2010 at 10:57 am and is filed under Flexible Spending Accounts, Health Care Legislation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.