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Business and Policy Areas
Business and Policy Areas
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IRS Guidance on Upcoming Changes to Flexible Spending Plans

September 21, 2010

The Patient Protection and Affordable Care Act (Affordable Care Act) provides that, beginning after December 31, 2010, expenses incurred for a medicine or a drug shall be treated as a reimbursement for medical expenses only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin.

According to IRS Notice 2010-59, expenses incurred for medicines or drugs may be paid or reimbursed by an employer-provided plan, including a health Flexible Spending Account (FSA) or Health Reimbursement Arrangements (HRA), only if:

  • the medicine or drug requires a prescription,
  • is available without a prescription (an over-the-counter medicine or drug) and the individual obtains a prescription, or
  • is insulin.

Expenses incurred for over-the-counter medicines or drugs purchased without a prescription before January 1, 2011 may be reimbursed tax-free at any time, in accordance with the terms of the employer's plan.

Because current debit card systems are not capable of substantiating compliance with the statutory changes to these definitions, health FSA and HRA debit cards may generally not be used to purchase over-the-counter medicines or drugs beginning January 1, 2011. With the proper substantiation, debit cards may continue to be used for medical expenses other than over-the-counter medicines or drugs.

Your institution's cafeteria plans may need to be amended to conform to the new over-the-counter drug requirements. Note that cafeteria plans may be amended only prospectively, but the notice specifies that an amendment to conform that is adopted no later than June 30, 2011 may be made effective retroactively for expenses incurred after December 31, 2010 (or after January 15, 2011 for health FSA and HRA debit card purchases).

Contact

Mary Bachinger
Director, Tax Policy
202.861.2581
E-mail