Yesterday’s post which you can access here discussed the IRS’s recent ruling, Revenue Ruling 2003-102, which provides that over-the-counter drugs can be paid for with pre-tax dollars through health care flexible spending accounts (“FSA’s”) and that employer reimbursements for nonprescription drugs by an employer health plan are excluded from income. I had been wondering about the effective date of this ruling since the language of the ruling is not clear on the subject and had called the IRS to request clarification. This article mentioned yesterday at SFGate.com—“Feds approve using pretax cash for OTC drugs”–states:
The Internal Revenue Service and the Treasury Department, in a joint press release Wednesday, said, “Over-the-counter drugs can be paid for with pretax dollars through health care flexible spending accounts,” retroactive to the beginning of the plan year.
It was not clear from the ruling whether or not this statement about the changes being retroactive to the beginning of the plan year was necessarily accurate.
In informal discussions with the IRS today (with Barbara Pie who is mentioned in the ruling), it was clarified that whether or not an employer may utilize the ruling retroactively to the beginning of the plan year depends upon the wording of the plan documents. For plans with documents already drafted broadly enough to permit reimbursement of such expenses (e.g., the plan does not limit reimbursement to prescription drugs), it would be possible to permit reimbursement of expenses that were incurred since the beginning of the plan year without a plan amendment, as long as the expenses could be substantiated. For plans that must be amended to allow reimbursement of the cost of over-the-counter drugs, the amendment may only be effective prospectively once the plan is amended. The IRS emphasized, however, that even though an employer may amend the plan mid-year to permit reimbursement of the cost of over-the-counter drugs, participants are, of course, not permitted to change their elections mid-year as a result of the plan amendment. However, for those who have failed to use up their FSA accounts for the year, a mid-year amendment just might help employees to use up their accounts before the use-it-or-lose-it rule comes into play.
The EBIA Weekly newsletter which came today also confirms the same result on the effective date issue. The newsletter provides some helpful information regarding substantiation of expenses for non-prescription drugs:
Our informal discussions with an IRS official indicate that the name of the drug and the date it was purchased would be needed on the pharmacy receipt (but not the consumer’s name, so long as the participant certification in that respect is adequate).
UPDATE: Another article on the new ruling–“Flexible spending accounts take bite out of tax bill“–at Bankrate.com.