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IRS limits FSA reimbursements of OTC medications

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WASHINGTON—Over-the-counter medications will require a prescription to buy them with flexible spending account funds next year under new health care reform regulations, while guidance gives sponsors an opportunity to offer “mini-med” plans for another three years.

Internal Revenue Service rules, released earlier this month, are the latest in implementing the Patient Protection and Affordable Care Act.

The IRS rules say that employees who want to pay for OTC medications using their health care FSA will need a prescription to do so effective Jan. 1, 2011. The health care reform law sharply restricts FSA reimbursements for OTC purchases such as nonprescription pain relievers, cold medicines, antacids and allergy medications.

What was not previously clear, however, was whether a doctor's note was enough or whether a formal prescription was required for an FSA to reimburse OTC purchases, said Sharon Cohen, an attorney with Towers Watson & Co. in Arlington, Va.

In the notice, the IRS says OTC reimbursements require a prescription, which it defines as a “written or electronic order for a medicine or drug that meets the legal requirements of a prescription in the state in which a medical expense is incurred and that is issued by an individual who is legally authorized to issue a prescription in that state.”

The IRS also resolved uncertainty about the new OTC restriction on what are known as “grace period” FSAs. Under rules the IRS issued in 2005, unused contributions made to FSAs could be rolled over to pay expenses incurred during the first 21/2 months in the next year. However, the new rules ban OTC reimbursements for all FSAs, including those with grace periods, effective Jan. 1, 2011, said Mark Berggren, benefits outsourcing counsel with Hewitt Associates Inc. in Lincolnshire, Ill.

It isn't known how much current FSA spending is for OTC medications.

In 2010, an average of 20% of eligible employees made FSA contributions, according to Hewitt Associates. In 2009, FSA contributions averaged $1,535 per employee among employers with at least 500 workers, according to Mercer L.L.C.

The health care law's restriction on OTC expenses is the first of two major provisions affecting FSAs. The other will cap pretax contributions to FSAs at $2,500 effective Jan. 1, 2013.

Under prior law, there was no annual limit on FSA contributions, though employers typically imposed annual limits ranging from $4,000 to $5,000.

Congress imposed the $2,500 limit to raise revenue to help pay for reform law provisions that will expand coverage, such as new federal insurance premium subsidies for the lower-income uninsured, beginning in 2014.

Meanwhile, a Department of Health and Human Services bulletin tells plan sponsors how they can continue using what are known as mini-med plans for the next three years.

Such plans provide limited benefits—such as a $25,000 or $50,000 annual limit on covered expenses. Only a small percentage of large employers offer them. They also are found in the academic community where colleges and universities provide them to students.

The plans, though, run afoul of previous federal rules that set a minimum annual dollar limit on essential benefits that health care plans must provide between 2011 through 2013. The minimum limit is $750,000 in 2011, $1.25 million in 2012 and $2 million in 2013. Starting in 2014, plans may not have annual limits for essential benefits.

In the case of mini-med plans, the HHS bulletin says plan sponsors can seek a waiver from those limits for 2011 through 2013.

In applying for a waiver, a plan sponsor must detail terms of the plan, the number of covered individuals and the plan's annual limits.

Also required is a statement by the plan administrator or CEO of the issuer of the coverage that says the plan existed prior to Sept. 23, 2010, and that meeting the minimum annual limits would result in a significant decrease in access or a significant increase in premiums for the plan.

HHS says it will act on waiver requests within 30 days of receipt.

Waiver requests can be mailed to the Department of Health and Human Services, Office of Consumer Information and Insurance Oversight, Office of Oversight, Attention James Mayhew, Room 737-F-04, 200 Independence Ave., S.W. Washington, D.C. 20201. Waiver requests also can be e-mailed to healthinsurance@hhs.gov, with the word “waiver” in the subject line.