03.31.2011 Health Care Reform Update

Employers Must Amend Plans Now to Comply with new Over-the-Counter Rule

Health plans must be amended by June 30, 2011 to reflect the new rule that health flexible spending accounts may not reimburse the costs of over-the-counter drugs that are purchased without a prescription. The new rule was enacted by the Patient Protection and Affordable Care Act of 2010 (PPACA) and was effective January 1, 2011, but plan sponsors have until June 30, 2011 to amend their plans.

Background. PPACA amended the Internal Revenue Code to provide that, beginning after December 31, 2010, expenses incurred for a medicine or drug may be reimbursed as a medical expense only if the medicine or drug is prescribed (determined without regard to whether such medicine or drug is available without a prescription) or is insulin. Therefore, 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 account (HRA), only if the medicine or drug:

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

PPACA also made a similar change that applies to health savings accounts (HSAs) and Archer Medical Savings Accounts (MSAs). A distribution from an HSA or an Archer MSA for a medicine or drug is a tax-free qualified medical expense only if the medicine or drug satisfies the requirements listed above. If amounts are distributed from an HSA or Archer MSA for any medicine or drug that does not satisfy those requirements, the distributed amount will be considered nonqualified medical expenses. As a result, those amounts will be includable in gross income and generally subject to a 20% additional tax.

Effective Date and Plan Amendment. For expenses incurred after December 31, 2010, payments or reimbursements for medicines or drugs from an employer-provided accident and health plan, including a health FSA or an HRA, are restricted to prescribed drugs, insulin, and over-the-counter drugs that are prescribed. This effective date applies regardless of the employer’s plan year.

Generally, cafeteria plan amendments must be effective prospectively. In other words, retroactive amendments are not permitted. However, in Notice 2010-59, the IRS has permitted plan sponsors to adopt an amendment to conform a cafeteria plan to the new over-the-counter rules no later than June 30, 2011, effective retroactively for expenses incurred after December 31, 2010.

Plan administrators should review their plan documents to determine if amendments are necessary. Plan administrators also should determine whether such plan amendments can be adopted by an officer of the plan sponsor or whether approval by a board or administrative committee will be required.

DOL Delays Claims and Appeals Enforcement

PPACA requires employers to revise their internal group health plan claims procedures and to adopt external review procedures. Employers have been granted an additional enforcement grace period to bring nongrandfathered health plans into compliance with internal claims and appeals rules under PPACA. Interim final regulations were issued in July 2010, and the Department of Labor ("DOL") had initially offered an enforcement grace period for compliance with some of the additional standards until July 1, 2011. However, because the DOL intends to revise the interim final regulations, the DOL has extended the enforcement grace period until January 1, 2012, with respect to the following standards:

  • shortening the timeframe for responding to urgent care claims from 72 hours to 24 hours;
  • providing notices in a culturally and linguistically appropriate manner;
  • requiring broader content and specificity in notices;
  • requiring substantial compliance with the claims procedures rules.

See for the full text of DOL Technical Release 2011-01.

IRS Delays Small Employer W-2 Reporting of Health Care Coverage Costs

The Internal Revenue Service (IRS) has further delayed the PPACA deadline for small employers to report the cost of health care coverage on employees’ Form W-2s. Small employers that file fewer than 250 Form W-2s in 2011 do not need to comply with the reporting requirements before January 2014. The IRS did not delay the deadline for larger employers. Larger employers must comply with the health care coverage cost reporting requirements for Form W-2s issued in January 2013. Employers may voluntarily elect to include the information in Form W-2s issued in January 2012.

Notice 2011-28 also provided that employers will not be required to issue Form W-2s to retirees who no longer receive wages or salary solely to comply with the PPACA health care coverage cost reporting requirements. This IRS guidance is welcome news for employers with retiree health care plans.

The IRS guidance also provides more details on how to report, what coverage to include, and how to determine the cost of the coverage for 2012 Form W-2s.

See for the full text of IRS Notice 2011-28. 

For more information about this topic, please contact any member of the Williams Mullen Employee Benefits & Executive CompensationTeam.

Please note:

This newsletter contains general, condensed summaries of actual legal matters, statutes and opinions for information purposes. It is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel. For more information, please visit our website at or contact Catherine M. Marriott, 804.420.6901 or For mailing list inquiries or to be removed from this mailing list, please contact Julie Layne at or 804.420.6311.