Can OTC drugs have a separate dollar limit in FSA?

[Guest janna]

We are looking at amending our SPD to allow OTC drugs under our flexible spending program. We can't, however, go into the hole with the plan, which we suspect could happen with this coverage. We have proposed adding a separate limitation to the plan, for example, a maximum of $250 in OTC drugs over the plan year. Is this allowable? If so, should the participant make a separate election, or could we simply quit paying OTC claims at the $250 mark, whatever the participant's election?

[papogi]

I've never seen this, but it would seem this would be allowed. Section 125 rules are written generally as upper limits. Employers can be more restrictive (e.g., not allowing any status changes, or picking and choosing status changes). Some things they can't restrict, such as the requirement that the full election be available to the participants at any time in the plan year. I think you can specify a limit on an item such as this, but it would be an interesting administrative task, depending on the software being used to process the claims.

[WDIK]

I think you can specify a limit on an item such as this

Can you specify limits on other items such as prescription drugs, hospital charges, etc? If not, what makes OTC drugs different?

[papogi]

Based on my thinking above, I think you could specify a limit on any item. I don't think there is any difference for OTC. I'm saying I've never seen a specific limit set on any item, OTC or otherwise.

[Guest janna]

It would be challenging. We are currently moving to a new payroll system with a module for flex administration built in. As long as the separate limit is permitted, we can move ahead with building a codeset, including a code for otc drugs that will bump against a different limit than the total election.

We have considered several different possibilities...requiring participants to specify whether they wish to participate in the portion of the plan that covers OTC drugs, or perhaps allocating $250.00 (or whatever cap is determined) to be used to pay for OTC drugs. If the rest of the election is exhausted on other expenses, then the $250.00 would be available to pay for whatever covered expenses are incurred.

[jsb]

What is your plan's experience with "going into the hole"? I think it unlikely that OTC utilization would make your current problem worse. Look at plan experience in a larger context - perhaps over a multi-year period. Include the employer's tax savings in your analysis. If the plan starts consistenly staying in the red, amend it to take care of the problem or drop it altogether if the overall cost/benefit perception is no longer acceptable to the owner.

I think you run the risk of alienating your employees with unnecessary restrictions. You are worried about someone gaming the system so you penalize me, your loyal employee, by not allowing me the full measure of an available tax break. I feel valued...

[Guest janna]

Well, we have not ever been in the red. This is good, because it is state government, and I really mean we can't go into the hole. We would be up at the capitol doing some fancy explaining if we did. Overspending the budget on the plan may even be in contradiction of state statute. Our current SPD restricts reimbursements under the flex plan to prescription drugs. So allowing OTC drugs at all is an added benefit, not a reduced one. We are not concerned about people "gaming" the system, as such. We do have to use forfeitures to offset unpaid disbursements, though. Additionally, the increased administrative costs are a concern to the plan.

I appreciate that employees might not feel as valued as they would if the if the benefit were unrestricted. However, the loss of the plan is possible if we did have a year where we did not break even. Since we are not private sector, we do not have the luxury of looking at a multi-year average-we have to fit within the biennial budget, period.

Thanks for everyone's comments. I did find a Segal company release suggesting separate drug benefit caps in my research yesterday.