Most flexible spending arrangements (“FSAs”) and health reimbursement accounts (“HRAs”) must be amended to reflect the change in the law with respect to the reimbursement of over-the-counter medication for employer-provided health plans, including FSAs and HRAs. Beginning January 1, 2011, reimbursements for over-the-counter medication is no longer permitted on a pre-tax basis unless new requirements are met.

Under the new requirements, expenses incurred for medicines or drugs may be paid or reimbursed by an employer-provided plan, including FSAs or HRAs, only if the individual has a prescription or the medication is insulin. Distributions from a health savings account (“HSA”) or Archer medical saving account (“Archer MSA”) used to pay for over-the-counter medication are subject to the same new requirements and will be subject to an additional penalty of 20% of the amount of the distribution included in gross income where these requirements are not met.

Plans that permit reimbursement of expenses for over-the-counter medication should be amended to conform to the new requirements. The deadline to amend a plan to comply with the new requirements is June 30, 2011. The amendment can be made effective retroactively for expenses incurred after December 31, 2010 (or after January 15, 2011, for FSA and HRA debit card purchases).

Action Items

Employers that have not amended their plans or programs to reflect changes to requirements for over-the-counter medication reimbursements should review their plans or programs to ensure the appropriate amendment is in place on or before June 30, 2011.