IRS Issues New guidance on OTC Medicines and Drugs

Last week, the IRS issued additional guidance related to the new health care reform law and its impact on over-the-counter (OTC) medicines and drugs.

Summary of the new OTC law: The Patient Protection and Affordable Care Act (PPACA), mandates that expenses incurred for OTC medicines and drugs (with the exception of insulin) will not be eligible for reimbursement under a health FSA or HRA unless you have a prescription.

The new OTC law will apply to all purchases made on or after January 1, 2011. The new law will apply to the tax year, not the plan year. This means that even if your plan year starts in November 2010, the rule will still apply to you (and everyone else) beginning January 1 2011. 

Effective January 1, you will no longer be able to use your FSA/HRA debit card to pay for over-the-counter medicines and drugs, and you will need to obtain a prescription in order to receive reimbursement from your HSA/HRA for these items. That means that you will have to pay for these items out-of-pocket, and then file a manual claim along with a prescription in order to be reimbursed from your FSA or HRA.

What is considered an OTC “medicine or drug”? 

The IRS did not provide specific guidance regarding what is to be considered a medicine or drug under this new law. Nevertheless, at this time we can be reasonably certain that certain categories of items will be considered medicines/drugs and therefore will require a prescription effective January 1, 2011 in order to receive reimbursement from an FSA or HRA. These include: allergy and sinus medications; cough, cold and flu medications; digestive aids; pain relievers; sleep aids; and stomach remedies. Please contact your FSA/HRA administrator for a more detailed list. 

The good news is, you will still be able to use your FSA/HRA debit card for many common health care expenses that are not considered OTC medicines and drugs under the new law. These include: Band Aids; diabetic testing and aids; eye care and contact lens supplies; first aid supplies; insulin and diabetic supplies; reading glasses; and thermometers. And remember, regular prescriptions will not be subject to this rule, so you will still be able to pay for your prescription drugs with your FSA/HRA debit card just as you have in the past. You will also be able to use your FSA/HRA debit card for doctor and hospital visits, as well as dental and vision care, provided such items are covered under your plan(s).

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Health Care Reform Law Update

I have attached several documents that allow for you to understand in greater detail the major provisions of the law President Obama has signed as well as an overview of the changes that will occur when the Senate and House agree on provisions of the Reconciliation bill.

NEW HEALTH CARE LAW BASICS

SENATE BILL AND RECONCILIATION SUMMARY

Health Care Reform Passes Congress

On Sunday, March 21, 2010, the House of Representatives approved H.R. 3590, the Patient Protection and Affordable Care Act by a vote of 219 to 212. Following that vote, the House adopted H.R. 4782, the reconciliation package, which makes a number of changes to H.R. 3590, by a vote of 220 to 211. H.R. 3590 will now go to President Obama for his signature and enactment into law. H.R. 4782 will be sent to the Senate.

The rules of reconciliation require there to be twenty hours of Senate debate as well as consideration of amendments. Although the Senate Democratic Leadership and President Obama would like the Senate to complete action on the reconciliation package by the end of the week. Senate Majority Whip Richard Durbin (IL) has suggested that, although they have the 51 votes necessary to approve the bill, the Senate may not meet the weeks-end objective.

Senate Minority Leader Mitch McConnell (KY) has stated that Republicans plan to offer amendments on substance, with expected topics including medical liability, the individual mandate and the Medicare payment reductions. Republicans also will raise points of order against various provisions in the bill that may violate reconciliation rules. If the Senate adopts any changes to the reconciliation package, the measure will go back to the House for consideration, as such the Democratic Leadership is hoping to keep the bill “clean.”

Although the Senate expects to adopt the Reconciliation Bill, President Obama will first sign into law H.R. 3950, which includes the following provisions;

  • FSA Cap of $2,500 effective January 2011 and indexed to CPI
  • OTC limitation of medicines and drugs (i.e., to require a physician recommendation) effective January 2011
  • High-Cost Plan Excise Tax with thresholds set at $8,500 for individuals and $23,000 for families effective January 2013 and indexed to CPI+1 percentage point

Upon adoption of the Reconciliation Bill, the effective date of the required changes above will be extended.

Other provisions of the legislation include:

  • it bars health insurance companies from denying coverage to individuals with pre-existing conditions — the ban takes effect for children six months after enactment, and for all others starting in 2014
  • within six months after enactment, it will prohibit health insurance companies from dropping people from coverage when they get sick;
  • it bans health insurance companies, within six months after enactment, from placing lifetime caps on coverage
  • it begins to close the Medicare Part D coverage gap for Medicare beneficiaries who have surpassed their prescription drug coverage limit
  • it requires individuals to carry insurance or pay a penalty that would be the greater of $750 or 2 percent of income by 2016
  • companies with 50 or more employees will be required to help offset the cost of insurance for their employees if taxpayers are footing the bill for those workers’ insurance;
  • it establishes 50 state-administered insurance marketplaces to allow small businesses and people without employer sponsored coverage to buy insurance that meets new federal standards; and
  • it expands Medicaid to cover everyone earning less than 133 percent of the federal poverty level, or $29,327 for a family of four

Stay tuned for changes as they happen over the next 4 years………….

Flexible Spending Account Substantiation Mandate

Beginning July 1, 2009, IRS Notice 2008-104 mandated the auto-substantiation of Medical FSA and Health Reimbursements Accounts debit card transactions at pharmacies. 

Auto substantiation refers to the use of an Inventory Information Approval System (IIAS) to isolate eligible healthcare expenses. Eligible healthcare items purchased at a pharmacy that have implemented an IIAS will be substantiated at the point-of-service expenses. The IRS did give merchants a grace period thru December 31, 2009 to comply with the Inventory Information Approval System (IIAS).

This requirement may feel burdensome for employees using the debit cards at pharmacies that haven’t implemented the IIAS system, but will in the long run reduced the dreaded “pay and chase” events for third party administrators, will decrease participant fraud in your programs and reduce financial risk.

Two Levels of IIAS Auto-Substantiation

Healthcare Eligible Total (HET) Each card terminal at an IIAS merchant will “break down” the items purchased and categorize the expense as either healthcare eligible or non-healthcare.  The Healthcare Total is defined as all IRS Section 213(d) expenses (all Medical FSA eligible items).  All non-healthcare products will be declined at the point of sale and will require the customer to use a different form of payment other than the Flex debit card.

Prescription Subtotal (Rx-Only) many pharmacies will implement a higher level of IIAS that will separate the HET into two categories: Medical Over-the-Counter (OTC) and Prescription Rx. Even though this higher-level IIAS system is not mandated, it will facilitate administration for many prescription-only HRA plans.

If your pharmacy is hasn’t implemented the IIAS system your debit card will not be accepted.  A special interest group has been formed for IIAS Standard.  I have attached a list of Compliant IIAS Merchants click here.

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