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CARES Act reverses ACA restriction on OTC drug reimbursements

BY Damian A. Myers

On March 27, 2020, the president signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law. The CARES Act contains several provisions that affect employer-sponsored retirement and health and welfare plans). This blog entry highlights one particular benefits-related change in the CARES Act: reversal of the Affordable Care Act (“ACA”) restriction on tax-favored reimbursement for over-the-counter (“OTC”) drugs and products.

The ACA amended several provisions of the Internal Revenue Code (the “Code”) to prohibit tax-favored reimbursement for OTC drugs costs by health savings accounts (“HSAs”), Archer medical savings accounts (“Archer MSAs”), health flexible spending arrangements (“Health FSAs”), and health reimbursement arrangements (“HRAs”). The ACA excepted insulin purchases and prescribed OTC drugs from this prohibition. This reimbursement restriction was controversial and has been in the current administration’s crosshairs from day one, since both legislative attempts in 2017 to repeal and replace the ACA would have permitted OTC drug reimbursements.

The CARES Act reverses the ACA’s reimbursement limitation and allows HSAs, Archer MSAs, Health FSAs, and HRAs to reimburse for OTC drugs and products after December 31, 2019. Interestingly, the CARES Act did not explicitly remove the ACA’s reimbursement restrictions. Instead, it replaced the operative Code provisions with a clarification that menstrual care products are to be treated as qualified medical expenses.

Where does that leave group health plans? IRS Revenue Ruling 2003-102 (which was deemed obsolete after the ACA was enacted) held that OTC drugs purchased to alleviate or treat personal injuries or sickness were eligible medical expenses. Using that Revenue Ruling as a guidepost, employers and plan sponsors should consider the following.

  • For an OTC drug or product to be a qualified medical expense, the drug or product must be purchased to “alleviate or treat” personal injuries or sickness. This implies that the OTC drug or product was purchased for an existing ailment, but that can be difficult to substantiate in the case of day-to-day purchases. In the Health FSA context, employers might notice bulk purchases before termination from employment or near the end of a plan year (i.e., the use-it-or-lose-it rule is an incentive for bulk buying). Employers should consider establishing parameters for OTC reimbursements to discourage bulk purchases (e.g., quantity limits, prescription requirements for large quantities, etc.).
  • OTC drugs and products cannot be “merely beneficial to general health.” In Revenue Ruling 2003-102, dietary supplements were not considered qualified medical expenses. The CARES Act provided for an exception to this rule for menstrual care products, which will be treated as medical care that is eligible for reimbursement.
  • Notwithstanding HSAs, Archer MSAs, Health HSAs, and HRAs, OTC drugs and products could also be covered by traditional group health plans. Except where required by a coverage mandate, most employers would not want OTC drugs and products to be covered under their traditional group health plans. Thus, employers should review their plan documents and summary plan descriptions to make sure OTC drugs and products are excluded, and they should be sure to communicate this to third-party administrators and pharmacy benefit managers.
  • Non-prescribed OTC drugs and products (other than insulin) continue to be non-deductible by individuals under Code Section 213.
  • Because the CARES Act change described above is effective for reimbursements on or after January 1, 2020, employers should communicate these changes to participants sooner rather than later.

Reimbursing plan participants for OTC drugs and products can create administrative headaches, so as employers evaluate their group health plans, we recommend consulting with legal counsel when designing the parameters of OTC reimbursement and communicating to participants.

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Damian A. Myers


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