IRS Pushes Back PPACA Nondiscrimination Compliance Date

Last week, the Internal Revenue Service (IRS) issued Notice 2011-1, which delays until at least 2012 the effective date of nondiscrimination rules made applicable to fully insured non-grandfathered health plans under the Patient Protection and Affordable Care Act (PPACA). On the same day, the Departments of Health and Human Services, Labor and Treasury also released new guidance on the PPACA and the Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA). The most important features of these releases are summarized below.

IRS Notice 2011-1 essentially provides an enforcement safe harbor in that there will be no enforcement of the new nondiscrimination rules for non-grandfathered insured plans until the first plan year after regulations are issued. Since guidance will not be issued prior to 2011, the earliest these provisions could become effective would be January 1, 2012. This also means that employers will not be required to file IRS Form 8928 with respect to excise taxes prior to the date required for compliance with the new nondiscrimination rules.

Note that the IRC’s nondiscrimination rules under 105(h) will continue to apply to self-insured group health plans including grandfathered plans.  The regulatory relief announced in the Notice only affects insured group health plans.

The issuance of Notice 2011-1 means that for health plan provisions, as well as provisions touching on healthcare in employment contracts and separation agreements that extend into 2011, employers will not have to worry about the new nondiscrimination rules. This does not, however, impact plans, employment contracts and separation agreements with insured plan subsidies extending into 2012, nor does this Notice provide any relief from current nondiscrimination rules under self-insured medical benefit plans

Last week, the DOL and HHS also issued Part V of FAQs regarding implementation of the PPACA. The FAQs provide the following guidance:

  • A plan may charge a higher copay for a service provided in an in-network hospital than for the same service provided in an in-network ambulatory center;
  • A plan may make distinctions in coverage based on age without violating the rules on providing dependent coverage to age 26 as long as the distinction applies to all coverage under the plan;
  • In certain cases, an insurer may screen applicants for eligibility for alternative coverage options before offering a child-only policy;
  • Grandfathered health plans that determine cost-sharing based on a percentage-of-compensation formula will not lose grandfathered status if the formula is unchanged even though this may lead to cost increases in excess of the cost increase thresholds in the regulations; and
  • In line with other agency extensions of compliance deadlines due to a lack of regulatory guidance, the FAQs addressed two areas where employers will be provided with some relief. First, the Employee Benefits Security Administration (EBSA) has responsibility for rulemaking for a new requirement that large employers automatically enroll new full-time employees in the employer’s health plan. Until EBSA issues regulations under this new section of the Fair Labor Standards Act, however, employers will not be required to comply with this rule. Second, group health plans will not be required to comply with the 60-day notice requirement for material plan modifications under section 2715 of the Public Health Service Act until the federal agencies provide standards on benefits and coverage explanations.
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IRS Issues Rule Change on Using Debit Cards for OTC Drugs

Effective January 1, 2011, the Affordable Care Act requires that individuals obtain a prescription for over-the-counter (OTC) medicines and drugs (other than insulin) in order to receive reimbursement for the cost of the medicine from a health plan. The Internal Revenue Service (IRS) issued Notice 2010-59 in November 2010, which prohibited plans from allowing a health Flexible Spending Arrangement (FSA) or Health Reimbursement Arrangement (HRA) debit card to pay for OTC medicines and drugs, even if the individual has obtained a prescription for the drug. The IRS allowed for a two-week transition period (from January 1-15, 2011) during which debit cards could be used to purchase OTC drugs, in order to allow debit-card systems to be re-programmed.

On December 23, 2010, the IRS issued Notice 2011-5 and accompanying answers to frequently asked questions (FAQs), which reversed its position on the use of debit cards to purchase OTC medicines and drugs for which the individual has a prescription. Effective  January 16, 2011, under certain conditions, health FSA and HRA debit cards may continue to be used to purchase OTC medicines or drugs at the following businesses: pharmacies, drug stores and grocery stores if those stores have pharmacies, and mail-order and Web-based vendors that sell prescription drugs.

Conditions for Using Debit Cards to Purchase OTC Medicines or Drugs

  • The prescription must be presented to the pharmacist at or before the time of purchase,
  • The OTC medicine or drug must be dispensed by a pharmacist under applicable law;
  • A prescription number must be assigned;
  • The pharmacy or other entity must retain records of the prescription number, purchaser, amount, and date of sale;
  • The pharmacy or other entity must make these records available to the employer on request;
  • The debit card system must be designed so that it will not accept a charge for OTC medicines or drugs unless a prescription number is assigned; and
  • Other existing rules for the use of debit cards are satisfied.

When the OTC medicine or drug order is sold by a vendor that uses health-related Merchant Codes, all of the following conditions must be satisfied:

  • The vendor must retain records of the purchaser, amount, and date of sale;
  • The vendor must make these records available to the employer on request; and
  • Other existing rules for the use of debit cards are satisfied.

When the OTC medicine or drug order is sold by a “90% pharmacy,” the following condition must be satisfied:

  • Substantiation (including a copy of the prescription or other documentation that a prescription has been issued) must be properly submitted in accordance with the terms of the plan with other information from an independent third party that satisfies the requirements of the proposed cafeteria plan regulations.

Note: A pharmacy is a “90% pharmacy” if (i) it maintains no inventory information approval system, and (ii) 90% of the store’s gross receipts in its prior taxable year met the definition of medical care expenses under section 213(d) of the Internal Revenue Code.

When the OTC medicine or drug order is filled by a vendor that is not described above:

  • The vendor may not accept FSA and HRA debit cards to pay for OTC medicines and drugs after January 15, 2011.

The Latest Healthcare Reform Update

IRS Delays W-2 Health Cost Reporting Requirement

The Internal Revenue Service announced Tuesday that it will waive for one year a health care reform law requirement that employers report the cost of coverage on employees’ W-2 wage and income statements. Under the relief, health care cost information will have to be reported on the 2012 W-2s, which are issued in 2013.  

The IRS also confirmed that the W-2 reporting requirement is only for informational purposes and the amounts that are reported will not be taxable

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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