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Health FSA and HRA Reimbursements

Smart first steps


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The provision

Health Flexible Spending Arrangements (Health FSAs) and Health Reimbursement Arrangements (HRAs) will not be permitted to reimburse participants for the cost of a medicine or drug, unless the medicine or drug:

  • Can be obtained only with a prescription
  • Is available without a prescription (i.e., over-the-counter) but the • individual obtains it with a prescription, or
  • Is insulin

Participants will not be able to use Health FSA and HRA debit cards to purchase over-the-counter medicines or drugs, even if they have a prescription.

The preceding rules will apply only to medicines and drugs. They will not apply with respect to medical equipment (e.g., crutches), supplies (e.g., bandages), or diagnostic tests (e.g., blood sugar test kits) that can be purchased without a prescription.

Any expense paid by a Health FSA or HRA, whether via a debit card at the point of purchase or through reimbursement, will continue to be permitted only if the expense is for “medical care” as defined in the Internal Revenue Code.

Health FSAs and HRAs do not have to reimburse all “medical care” expenses. Plans can be designed to reimburse fewer expenses than the law allows. For example, a Health FSA or HRA is not required to reimburse prescription drug expenses.

Effective date: Expenses incurred after December 31, 2010, regardless of when they are reimbursed. Under a special transition rule debit cards can be used to purchase over-the-counter medicines and drugs through January 15, 2011.

What is a “medical care” expense?

Under the Internal Revenue Code, “medical care” expenses generally must be incurred for the diagnosis, cure, mitigation, or treatment of disease, or for the purpose of affecting any structure or function of the body. Examples include payments for medical services, equipment, supplies, and diagnostic devices. Items that are merely beneficial to the individual’s general health or wellbeing, such as a vacation, are not medical care.

What is a “prescription”?

The new rules define a “prescription” as a written or electronic order for a medicine or drug that meets the legal requirements of a prescription in the state in which the medical expense is incurred, issued by someone legally authorized to issue prescriptions in that state.

Key implication: Plan design

Health FSA and HRA plan documents may need to be amended to reflect the new rules. If required, amendments generally should be completed by December 31, 2010, and be effective for expenses incurred after that date, regardless of whether the Health FSA or HRA operates on a calendar year or fiscal year basis. A retroactive amendment to health FSAs may be adopted as late as June 30, 2011, but the effective date still must be for expenses incurred after December 31, 2010 (January 15, 2011, for Health FSA or HRA debit card purchases).

Key implication: Administration

Health FSA and HRA debit card systems may need to be updated to ensure they no longer can be used to purchase over-the-counter medicines or drugs after January 15, 2011. This new limit on flexibility may cause Health FSA and HRA plan sponsors and participants to reassess the value of debit cards.

Additionally, Health FSAs and HRAs that will reimburse over-the-counter drugs obtained with a prescription may need to put the appropriate substantiation procedures in place. Examples of appropriate substantiation might include a receipt that identifies the purchaser and prescription number, or a receipt that identifies the purchaser, plus a copy of the prescription.

Smart first steps for employers to consider

Plan design and administration: Identify and adopt necessary plan amendments, and identify and implement necessary changes to debit card systems and substantiation procedures.

Communications: Develop and implement a communications strategy for explaining the new reimbursement rules to Health FSA and HRA participants. It is especially important for Health FSA participants to know how these rules are changing before they make salary reduction elections for 2011.

As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

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