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Health FSA and OTC under CARES Act


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Prop. Reg. 1.125-5(k)(2) provides that a plan can be designed to cover less than 213(d). But it dates back to 2009 (pre-ACA). Now that the CARES Act eliminated the prescription requirement for OTC, can a Health FSA not be amended and remain covering only OTC with prescription under 1.125-5(k)(2)?

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@RubiksCube Employers can always limit the FSA eligible expenses through the terms of the Section 125 cafeteria plan document.

From a practical perspective, employers generally always permit the universe of eligible expenses to be reimbursed under the FSA.  Limiting expenses to only a subset of FSA-eligible expenses creates a few concerns I can think of:

  • Employee communication issues and misunderstanding;
  • Additional forfeitures;
  • Reduced elections (and thereby reduced employer tax benefit from the employer-share of FICA);
  • Incorrect plan materials (because so many materials are templates prepared by the FSA TPAs.

Generally I think you'd have a significant employee relations issue by deciding to continue imposing the Rx requirement on OTCs.  Plus, part of the motivation was to avoid the need to waste the time of medical practitioners by writing scripts for OTC medicines and drugs.

On an interesting sidenote, keep in mind that the CARES Act also added menstrual care products to the list of eligible FSA (and HSA/HRA) expenses.  It didn't add those products as a 213(d) expense though.  Instead, it directly amended 223 and 106 to provide that they "shall be treated as incurred for medical care."  So there's an interesting trivial pursuit answer as to a non-213(d) FSA-eligible expense.

There are also some 213(d) expenses (e.g., premiums) that can't be reimbursed through an FSA.

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