PATIENT PROTECTION AND AFFORDABLE CARE ACT
DEADLINE TO AMEND CAFETERIA PLANS
FAST APPROACHING
Cafeteria Plans are the exclusive means by which employees can pay with
pre-tax dollars their portion of health insurance premiums and unreimbursed
medical expenses.
Two significant
changes under the Affordable Care Act warrant employers maintaining Cafeteria
Plans to amend their documents no later than December 31, 2010.
1. Adult Children Coverage
The Affordable Care Act requires group health plans providing dependent
coverage to expand coverage to their employees' adult children under age 26. This change is generally required to be in
place for the first plan year beginning after September 23, 2010 (i.e., January
1, 2011 for calendar year plans), although some employers may have voluntarily
chosen to expand such coverage earlier. Historically adult children coverage has been paid by employees on an after-tax
basis. However, beginning with the
enactment of the Affordable Care Act on March 23, 2010, the cost to cover these
adult children can be paid on a pre-tax basis, thus mitigating the cost to
parents of providing these benefits. As noted above, cafeteria plans are the exclusive means by which
employees can pay the premiums for their adult children on a pre-tax basis. Therefore, if an employer has voluntarily
chosen to provide such coverage prior to the first plan year beginning after September
23, 2010 and the employees are paying the adjusted premiums with pre-tax
dollars, the cafeteria plan documents must be amended by December 31, 2010 to
reflect this change. With
only the rarest of exceptions, cafeteria plans must be amended on a
prospective basis. Thus, because adult
children coverage will, in most instances, become mandatory at January 1, 2011,
it is our recommendation that employers amend their cafeteria plans documents no
later than December 31, 2010.
2. Over-the-Counter Drugs
Furthermore, many cafeteria plans through health flexible spending
accounts ("Health FSA") allow employees to be reimbursed with pre-tax dollars
for over-the-counter ("OTC") drugs. Effective
January 1, 2011, the Affordable Care Act provides that OTC drugs can no longer
be reimbursed through a Health FSA unless prescribed by a doctor. The IRS recently clarified that an OTC drug
can be reimbursed through a Health FSA if the individual obtains a written or
electronic order for a medicine or drug that meets the legal requirements for a
prescription in the state in which the medical expense is incurred and that is
issued by an individual who is legally authorized to issue a prescription in
that state, such as a medical doctor, osteopath or dentist. In addition, these expenses must be
substantiated, e.g. by submitting a copy of the prescription to the Health
FSA's administrator. Therefore, the
use of debit cards to reimburse OTC drugs will be substantially limited.
As noted above, this change is effective January 1, 2011, even for
plans maintained on a fiscal year (although debit cards can be used for OTC
purchases through January 15, 2011). Although
the IRS will not require that the amendments to employers' cafeteria plans be
made until June 30, 2011 - a rare exception to the prospective basis rule
discussed above - it is our recommendation that employers amend their cafeteria
plan documents for this change at the same time the amendments are made for
adult children coverage, i.e. no later than December 31, 2010.
Nukk-Freeman & Cerra is available to review your
cafeteria plan documentation, and, where necessary, prepare the appropriate
amendments. Please feel free to contact
Liza Hecht (lhecht@nfclegal.com), Christine Gottesman (cgottesman@nfclegal.com) or the
Nukk-Freeman & Cerra attorney with whom you work to discuss this important
compliance matter, or if you have any questions regarding the Affordable Care
Act.
Any tax advice included in this written or electronic
communication was not intended or written to be used, and it cannot be used by
the taxpayer, for the purpose of avoiding any penalties that may be imposed on
the taxpayer by any governmental taxing authority or agency.
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