New IRS Guidelines for Flexible Spending Accounts

Many companies today offer flexible spending accounts (FSAs) as part of their health care packages for employees. On September 3, 2010, the IRS issued new guidelines to help employers interpret the rules put in place by recent health care reform changes, relating to over-the-counter medicines and drugs. These changes will take effect as of 2011.

The Patient Protection and Affordable Health Care Act, enacted in March, 2010, established a new uniform standard that, effective January 1, 2011, applies to FSAs and health reimbursement arrangements (HRAs). Under the new standards, the cost of over-the-counter medicines or drugs cannot be reimbursed from the account unless a prescription is obtained. The IRS clarified that the new standards do not affect insulin, medical devices, and contact lenses, even if purchased without a prescription. The new standards also do not affect deductibles and co-payments.

The new standards apply only to purchases made on or after January 1, 2011. Claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2010, if allowed by the employer's plan.

To verify prescription purchases in 2011, employees must provide the prescription or a copy, and a customer receipt showing the date of the sale and the amount of the charge. Another important change pertains to the use of FSA Debit Cards or credit cards. After December 31, 2010, employees will not be able to use the cards to buy over-the-counter medicines or drugs. According to the IRS, employers must ensure that the card is reprogrammed no later than January 15, 2011, so that the card can no longer be used to purchase over-the-counter medicines or drugs.

If your company has a FSA program, it is imperative that you notify your employees in advance of the upcoming changes, so that they are aware of these modifications going into the new year. Details on the new rules can be found online on the IRS website, at www.irs.gov, under IRS Notice 2010-59. The attorneys at Kring & Chung are available to discuss these important issues with you.

Allyson K. Thompson is an Associate with Kring & Chung, LLP's Irvine, CA office. She can be contacted at (949) 261-7700 or athompson@kringandchung.com.