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The IRS releases new rules for drug reimbursements after 2010 from FSAs, HRAs and cafeteria plans

The Internal Revenue Service released rules that govern the reimbursement of over the counter drugs by flexible spending and health reimbursements accounts, including cafeteria plans.  These rules are designed to raise revenue for the U.S. government to help finance the health care overall enacted by the Patient Protection and Affordable Care Act.  In general, the new rules will reduce the amount of qualified expenses historically covered by tax-favored reimbursement plans.

The cost of an over the counter medicine or drug incurred after December 31, 2010 cannot be reimbursed from a flexible spending account or health reimbursement arrangement unless a prescription is obtained.  Any amount incorrectly distributed by such plans for nonqualified medical expenses will be included in taxable income and taxed an additional 20 percent. The change does not affect insulin, and other health care expenses such as medical devises, eye glasses, contact lenses, co-pays and deductibles. Plans with a written document, such as cafeteria plans, will need to be amended to reflect the new rules.  Also, individuals with unspent amounts in their flexible spending and health reimbursement accounts may wish to “stock up” on over the counter medicines before the end of 2010, to take advantage of the more favorable tax rules in effect through December 31, 2010.

For more information, contact the Labor and Employment Practice Group.

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