Tax Blog/Blawg

Guest Post by Heather Pesikoff

Careful consideration must be given to the new rules established by section 9003 of the Patient Protection and Affordable Care Act enacted March 23, 2010 (the "Act")(Pub. L. No. 111-148). Cafeteria plans should be reviewed and, in some instances, may need to be amended to conform to the new over-the-counter medicine and drug requirements. The failure to do so may result in noncompliance including potential tax liabilities, penalties and interest.

Notwithstanding the rule against retroactive amendments, an amendment to conform a cafeteria plan to the requirements set forth by the Act that is adopted no later than June 30, 2011, may be made effective retroactively for expenses incurred after December 31, 2010.

Effective January 1, 2011, the Act revises the definition of medical expenses for employer-provided accident and health plans, including HRAs, HSAs, MSAs and FSAs.

IRC section 106 provides that the gross income of an employee does not include employer-provided coverage under an accident or health plan. Section 105(b) generally provides that

the gross income of an employee does not include amounts paid as reimbursements for medical care under an employer-provided accident or health plan.

New IRC section 106(f), as added by the Act, provides that, for purposes of sections 106 and 105, beginning after December 31, 2010, expenses incurred for a medicine or a drug shall be treated as a reimbursement for medical expenses only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin.

The Act also amends IRC section 223(d)(2)(A) with respect to HSAs and section 220(d)(2)(A) with respect to Archer MSAs to set forth similar definitions.

If the amounts do not satisfy the definitional requirements, the amounts will be distributions for nonqualified medical expenses, which are includible in gross income and in some instances subject to a 20% additional tax.

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