Help Your Employees Manage Skyrocketing Health Care Costs

On September 3, 2003, the Internal Revenue Service (IRS) announced that employers may provide reimbursements for everyday over the counter (OTC) medicines and drugs to employees who participate in medical reimbursement programs. The IRS determined that purchases made for non-prescription medicines are expenses for medical care. This is good news for employees, who can now save money by tracking their OTC expenses and paying for them with pre-tax dollars, although reimbursing OTC expenses will impact an employer's administrative reimbursement procedures, including the use of debit cards.

Before communicating this to your employees you should review your plan documents carefully to determine whether OTCs currently are covered under your plan.  If you choose to reimburse employees for these expenses, your plan may need to be amended.

Recognize What is Included and What is Not

OTC expense reimbursement will be popular with employees. An appropriate OTC expense reimbursement may include items like antacids, allergy and cold medicines, and non-prescription pain relievers. However, employers should exercise caution when making OTC expense reimbursements. The IRS clearly distinguishes expenses that are merely beneficial to an individual's health (e.g. vitamins, vacations, etc.) from expenses for medical care (e.g. antacids, allergy and cold medicines, pain relievers, etc.). Employers will need to carefully review the receipts provided by employees to ensure the submitted OTC expenses qualify for reimbursement.

Review Plan Language

Before permitting employees to receive reimbursements for OTC expenses, employers should review their plan documents carefully. Some employers may find that the language of their flexible benefit plan narrowly defines reimbursable medical expenses. If this is the case, the plan should be amended before reimbursements are permitted. Employers considering whether to offer this feature in the future will want to consider the practicality of permitting OTC expense reimbursements, as well as employees' desire to have OTC expenses reimbursed.

In other cases, reimbursements already may be permissible—even for the current plan year. If OTC expenses are currently reimbursable, employers will want to communicate that to employees.

Prevent Reimbursement Problems

Although the expansion of permissible reimbursable medical expenses under flexible spending accounts (FSA) is welcome news for employees, it may create new administrative challenges for employers. Existing administrative reimbursement procedures may not adequately describe the verification requirements for OTC expenses. When dealing with OTC expenses, employers who utilize debit cards may find that it is difficult to comply with the automatic substantiation methods approved by the IRS earlier this year. Employers may also encounter new challenges when reviewing receipts submitted by employees for OTC expenses. Some retailers may not have computerized equipment that provides employees with detailed receipts. For example, an employee may purchase a cold medicine at a local retailer and receive a receipt that reads "Non-Food Item $4.79." The plan administrator must decide when further substantiation is necessary.

Coming Soon: 2004 FSA Enrollment

Employers who intend to reimburse OTC expenses in the upcoming year should communicate that to employees during open enrollment, so that employees may take OTC expenses into consideration when determining their medical FSA contributions for 2004.

Where to Get Help

For a copy of Revenue Ruling 2003-102, please go here.

If you have any questions or would like more details, please contact Melissa Proffitt Reese, reese@icemiller.com, Christopher S. Sears, sears@icemiller.com, Tiffany A. Sharpley, sharpley@icemiller.com, or Stephanie A. Smithey, smithey@icemiller.com.

If you would like assistance with communicating the advantages of FSAs and other benefits to employees, please contact Julie Herrick, communications consultant, Herrick@icemiller.com

For a complete list of our benefits personnel, please visit our web site at http://www.icemiller.com/service_detail/id/100/mainid/5/index.aspx