Can Employers Retroactively Amend Health FSAs to Cover All Over-the-Counter Drugs and Menstrual Care Products?
Employers that sponsor Health Flexible Spending Accounts (FSAs) may encounter a potential pitfall if they amend their Section 125 cafeteria plans to retroactively allow reimbursement of over-the-counter (OTC) drugs without a prescription and menstrual care products as of January 1, 2020. Health FSAs are almost uniformly included as a component part of an employer’s Section 125 cafeteria plan. In general, proposed regulations issued under Section 125 of the Internal Revenue Code (the Code) prohibit amending a Section 125 cafeteria plan to retroactively add new benefits. But this may not be an issue for some Section 125 cafeteria plans, depending on how the plan document was drafted.
CARES Act
Under the CARES Act, enacted on March 27, 2020, the requirement for OTC drugs to have a prescription before they can be reimbursed from a Health FSA or a Health Reimbursement Arrangement (HRA) was removed. In addition, Section 106(f) of the Code was amended to provide that amounts paid for menstrual care products will be treated as amounts paid for medical care, which makes them eligible for reimbursement from Health FSAs and HRAs. Similarly, individuals may use a Health Savings Account (HSA) or Archer Medical Savings Account (MSA) to pay for OTC drugs without a prescription and menstrual care products. These changes became effective as of January 1, 2020. (See our previous client alert regarding health benefit plan provisions in the CARES Act here.)
Proposed Regulations
Proposed regulations under Section 125 of the Code issued by the Department of Treasury in 2007 generally permit retroactive Section 125 cafeteria plan amendments, as long as the amendment is adopted (i.e., signed) by the last day of the plan year. The same is not true, however, if the amendment adds a new benefit to a Section 125 cafeteria plan. The proposed regulations only permit adding new benefits on a prospective basis (i.e., on or after the date the amendment is adopted). Thus, amending a Section 125 cafeteria plan retroactively to January 1, 2020 (the effective date of the CARES Act) to add OTC drugs and menstrual care products as eligible expenses under a Heath FSA may run afoul of the proposed regulations.
Miller Johnson Insight
For some Section 125 cafeteria plans, a plan amendment may not be adding a new benefit. Many Health FSAs are drafted to allow reimbursement of OTC drugs with a prescription. An amendment that removes the prescription requirement may, therefore, not be adding a new benefit. In other words, if a Health FSA always allowed the reimbursement of OTC drugs, but the amendment simply removed the prescription requirement, there is an argument that this is not the retroactive addition of a new benefit.
With respect to menstrual care products, however, this may not be the case. Many Health FSAs are drafted to allow the reimbursement of all eligible expenses under Section 213(d) of the Code. Menstrual care products are generally not eligible expenses under Section 213(d) of the Code. The CARES Act added menstrual care products as a qualifying medical expense for purposes of Section 106(f) of the Code, which makes them reimbursable from a Health FSA (as well as an HRA and an Archer MSA). (Another section of the Code makes menstrual care products eligible to be paid by an HSA). In other words, the CARES Act did not make menstrual care products eligible expenses under Section 213(d) of the Code. As a result, an amendment that retroactively adds menstrual care products as an eligible expense under a Health FSA may violate the proposed regulations. (Retroactive amendments to HRAs to add a benefit don’t appear to be a problem, as long as the amendment is adopted by the last day of the plan year in which the benefit is added.)
We understand that many third-party administrators of Health FSAs allow the reimbursement of OTC drugs without a prescription and menstrual care products retroactively to January 1, 2020 as a matter of uniform administration, even if the Section 125 cafeteria plan has not been amended. Given the pervasiveness of this problem, we hope that the IRS will offer temporary relief from the restriction on retroactive amendments to add OTC drugs without a prescription and menstrual care products. (For many of the other COVID-19 related relief applicable to Section 125 cafeteria plans, the IRS provided an extended deadline of December 31, 2021 to adopt amendments that may be retroactively effective on January 1, 2020. See our previous client alert here.) Regardless of whether the IRS provides relief, in our opinion a retroactive amendment is better than no amendment at all.
If you have any questions or you need assistance amending your Section 125 cafeteria plan, please contact the authors or one of the Miller Johnson employee benefits attorneys.