Alert December 07, 2010

Patient Protection and Affordable Care Act May Require Cafeteria Plan Amendments by Year End

The Patient Protection and Affordable Care Act (the “Act”), signed into law by President Obama earlier this year, imposes new requirements on group health plans and flexible spending arrangements that may necessitate Section 125 cafeteria plan amendments and changes in administrative procedures by year end.

New Coverage Mandate for Adult Children Up to Age 26

The Act requires group health plans and health insurers that provide dependent coverage of children to continue to make such coverage available for an adult child until age 26.  This expanded coverage is required for plan years beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans).  An employer could elect to offer expanded coverage on or after March 30, 2010. 

In connection with these changes, the Act amended the Internal Revenue Code to extend the exclusion from gross income for reimbursements for medical care under an employer-provided accident or health plan to any employee’s child who has not attained age 27 as of the end of the taxable year, regardless of whether the child is the tax dependent of the employee.  This exclusion applies on and after March 30, 2010 to an employer-provided accident or health plan, as well as to amounts paid or reimbursed pursuant to a flexible spending account health reimbursement arrangement.  Commencing March 30, 2010, under Section 125 pre-tax premium plans, elections and changes in elections relating to participation of an adult child can be permitted under the same rules as for tax dependent children.

An employer’s Section 125 cafeteria plan must permit elections, changes and reimbursements relating to the coverage of adult children on a pre-tax basis.  Any required amendment to cover this new category of pre-tax contributions or reimbursements must be made prior to the beginning of the year in which the new rules become effective (by December 31, 2010 for a calendar year plan).  Under a  special IRS rule, if a plan implemented the changes early, the amendment should be retroactive to the implementation date (but not before March 30, 2010).

Over the Counter Medicines and Drugs Ineligible for Health Plan Reimbursement Commencing January 1, 2011

The Act included a second provision that will require an amendment to a Section 125 health reimbursement account that permits reimbursement of over-the-counter medicine and drugs.  Effective January 1, 2011, over-the-counter medicine and drugs are not eligible for reimbursement under health reimbursement arrangements, unless the individual obtains a prescription or the medicine is insulin.  Plan documents containing health reimbursement arrangements are required to be amended by June 30, 2011, retroactive to January 1, 2011, to exclude ineligible over-the-counter medicines and drugs from reimbursement.  Providers of debit cards used in connection with health reimbursement arrangements are required to have new procedures in place by January 15, 2011.

The above rule applies only to medicines and drugs, not to equipment, such as bandages and crutches, or diagnostic devices, such as those testing blood sugar levels.  Such items will qualify for reimbursement if they meet the definition of medical care under Section 213(d)(1) of the Internal Revenue Code. 

Immediate Action

Employers should review the above requirements and the timing of the required plan amendments with their Section 125 plan service providers.