Congress has reversed course and amended the Internal Revenue Code (“Code”) to provide that a health flexible spending account (“health FSA”), health savings account (“HSA”) and health reimbursement account (“HRA”) may reimburse employees for over-the-counter medications, effective January 1, 2020.
For many years, health FSAs, HSAs and HRAs did not consider a non-prescription drug as a reimbursable expense, as Code Section 213(b) provides that a “medical expense” does not include a non-prescription drug other than insulin for purposes of an individual’s deduction for medical expenses. In 2003, the IRS ruled that a health FSA, HSA and HRA could reimburse for over-the-counter medications. Later, the Code was amended by the Affordable Care Act (“ACA”) to provide specifically that a reimbursable medical expense meant only a prescription drug or insulin, effective January 1, 2011. Even under the ACA’s restrictions, a health FSA, HSA and HRA was still permitted to reimburse employees for over-the-counter supplies and equipment, such as crutches, bandages and blood sugar test kits, as long as the item met the general definition of medical care in Code Section 213(d)(1).
In the CARES Act, Congress repealed the ACA’s exclusion for non-prescription drugs. Therefore, health FSAs, HSAs and HRAs can now reimburse employees for expenses incurred for over-the-counter medications, effective January 1, 2020. Code Section 106(f) was further amended to provide that menstrual care products are eligible reimbursable expenses. Under the amended rule, a health FSA, HSA or HRA may reimburse such items as non-prescription antacids, allergy medicines, pain relievers and cold medicines. However, items that are merely beneficial to general health, such as vitamins, are not reimbursable.
An employer is not required to allow participants to be reimbursed for over-the-counter medications from its health FSA or HRA. However, due to the popularity of this category of reimbursable expenses prior to the ACA exclusion, particularly in health FSAs, we anticipate that many employers will permit the reimbursement of over-the-counter medications.
Most cafeteria plans/health FSAs were amended in 2010 or 2011 to specifically state that the plan would only reimburse for prescription drugs and medicines, as was required by the ACA exclusion. Thus, a health FSA or HRA will likely need to be amended to allow for the reimbursement of non-prescription drugs, and participants should be given notice of the change in a summary of material modifications. Although a cafeteria plan/health FSA is not generally allowed to be retroactively amended, we expect that the IRS will give employers a grace period in which the plan can be amended retroactively to January 1, 2020, as the CARES Act amendment was adopted with a retroactive effective date.
An HSA does not need to be amended, as employees are required to self-police their reimbursable medical expenses. However, an employer could provide notice of this change to employees so they are aware of the additional items that can be reimbursed on a pre-tax basis from an HSA.
This post is a part of the All Things HR Blog’s multi-part series on frequent issues and questions faced by employers during the COVID-19 crisis.
About the Author
Cynthia A. Moore is a Member in Dickinson Wright’s Troy office where she assists clients in all areas of employee benefits law, including qualified retirement plans, welfare plans, and non-qualified compensation programs. Cyndi can be reached at 248-433-7295 or firstname.lastname@example.org and you can visit her bio here.