Download Qualified Medical Expenses Definition Revised

Qualified Medical Expenses Definition Revised
As of January 1, 2011 the Patient Protection and Affordable Care Act (PPACA) has revised
the definition of “qualified medical expenses” for purposes of reimbursement from health
FSAs, health reimbursement arrangements (HRAs). It also affects the distributions from
Archer medical savings accounts (Archer MSAs) and Health Savings Accounts (HSAs). The
new definition is consistent with the definition used for itemized tax deductions. Under the
new definition, qualified medical expenses include amounts paid for medicines or drugs only
if the medicine or drug is a prescribed drug (determined without regard to whether the drug
is available without a prescription) or is insulin.
This means that health FSAs and HRAs may not reimburse the cost of over-the-counter
(OTC) medications (such as pain relievers or allergy medications) that do not have a
prescription. Also, distributions from Archer MSAs and HSAs used to pay for OTC
medications without a prescription will be taxable and subject to penalties (20% beginning
January 1, 2011). However, amounts paid for OTC medicine with a prescription still qualify
as medical expenses. The new limits on OTC medications for health FSAs and HRAs are
effective for expenses incurred (when the services are provided) with respect to taxable
years beginning after December 31, 2010.
The prescription requirement applies to drugs and medicine, other than insulin, and does
not apply to other OTC health related supplies, such as bandages or contact lens solutions
for example. For a listing of health related supplies that are allowed go to this link:
http://www.irs.gov/publications/p502/ar02.html#en_US_publink1000178885
Because OTC medicines will no longer be eligible for reimbursement without a prescription
after December 31, 2010, they will not be listed in the Inventory Information Approval
System (IIAS) eligible item list and therefore cannot be purchased with the debit card at
IIAS merchants. The IIAS system allows a retailer’s point of sale system to identify eligible
healthcare purchases made with the debit card. In the case of a prescription OTC purchase,
participants will need to submit those items with a claim form and proof of the prescription
or a letter of medical necessity by their physician in order to be reimbursed.
The IRS recently announced that they will not challenge the use of health FSA and HRA
debit cards for expenses incurred through January 15, 2011if the use of the debit cards
complies with previously accepted IRS Regulations. However, on and after January 16th
over-the-counter medicine or drug purchases at all providers and merchants (whether or
not they have an inventory information approval system (IIAS) must be substantiated
before reimbursement may be taken.
Please provide a copy of this notice to all employees if you provide an employer sponsored
health FSA plan, an HRA plan, or an HSA plan.
If you have any questions please let us know.
Robert A. Browning, Partner
Spencer Fane Britt & Browne LLP