• IRS Delivers Two December Gifts: Notices 2011-1 and 2011-5
  • March 2, 2011 | Authors: Kenneth A. Raskin; Laura R. Westfall
  • Law Firm: King & Spalding LLP - New York Office
  • Prior to the end of 2010, the Internal Revenue Service (“IRS”) released two notices providing additional guidance on two new health plan-related requirements under the Patient Protection and Affordable Care Act of 2010, and the Worker, Retiree and Employee Recovery Act of 2010 (together, “PPACA”). IRS Notice 2011-1

    provided welcome relief to employers sponsoring insured, non-grandfathered group health plans that offer enhanced features to executives, while IRS Notice 2011-5 provided additional flexibility regarding the continued use of certain debit cards to purchase over-the-counter (“OTC”) medicines or drugs. Both of these Notices are discussed in greater detail below.

    Notice 2011-1

    PPACA requires, among other things, that insured group health plans (which are not grandfathered) satisfy the nondiscrimination requirements of Section 105(h)(2) of the Internal Revenue Code (the “Code”), as early as January 1, 2011, for calendar-year plans. In addition, PPACA stated that rules “similar to” the rules contained in paragraphs (3) (requiring that such group health plan’s eligibility classifications not discriminate in favor of “highly compensated individuals”), (4) (requiring that benefits offered under such group health plan not discriminate in favor of “highly compensated individuals”), and (8) (applying “controlled group” rules) of Section 105(h) of the Code would apply to such group health plans. PPACA also imposes penalties on an employer sponsoring an insured, non-grandfathered group health plan that does not comply with the new nondiscrimination requirements, including an excise tax of $100 per day, per individual discriminated against, during the period the plan is noncompliant. Prior to PPACA, the nondiscrimination requirements of Section 105(h) of the Code applied only to self-insured plans; further, the only penalty for a self-insured plan’s noncompliance with the Section 105(h) nondiscrimination rules was the loss of the tax benefits relating to such plan by the “highly compensated individuals.”

    Notice 2011-1 delays required compliance by insured, non-grandfathered group health plans with PPACA’s nondiscrimination rules (as well as enforcement by the IRS, the Department of Labor (“DOL”) and the Department of Health and Human Services (“HHS”)) until the effective date of future guidance (which has not yet been released) that will address how rules “similar to” Code Sections 105(h)(3), (4) and (8) apply to such plans.

    Notice 2011-1 states that the delay was prompted by public comments received by the IRS regarding confusion about application of the nondiscrimination rules to insured, non-grandfathered group health plans, and about how such rules will interact with provisions of PPACA that take effect after 2013, such as the state exchanges, employer and individual responsibility, and premium tax credit provisions.  Notice 2011-1 also seeks public suggestions for resolution of specific issues raised by PPACA’s nondiscrimination rules, including:

    • the determination of what constitutes nondiscriminatory benefits under Section 105(h)(4) of the Code, and what is included in the term “benefits” (for example, it is unclear whether the rate of employer contributions toward the cost of coverage is a “benefit” that must be provided on a nondiscriminatory basis);

    • whether the IRS, the DOL and HHS have the authority to provide for an alternative method of compliance with PPACA’s new rules, that would involve only an “availability of coverage” test; and

    • the possible use of the Code Section 414(q) definition of “highly compensated employees” for purposes of the nondiscriminatory classification test instead of  the definition of highly compensated individuals under Code Section 105(h)(5) (which could lower the number of “highly compensated individuals,” thereby making PPACA’s rules easier to comply with).

    Comments on Notice 2011-1 must be submitted by March 11, 2011. Click here to access a copy of Notice 2011.

    Notice 2011-5

    PPACA revised the definition of “medical expenses” for employer-provided accident and health plans, including health flexible spending arrangements (“health FSAs”) and health reimbursement arrangements (“HRAs”), to cover only prescribed medicines and drugs (including OTC medicines and drugs) and insulin. Accordingly, Notice 2010-59, which was released by the IRS in September 2010, explained that after December 31, 2010, OTC medicine or drugs (except for insulin) were not “medical expenses” unless such medicines or drugs were prescribed. In addition, Notice 2010-59 stated that OTC medicines or drugs could not be purchased with health FSA and HRA debit cards after January 15, 2011 (other than at “90% pharmacies,” in which at least 90% of the store’s income derives from eligible healthcare expenses).

    IRS Notice 2011-5 modifies Notice 2010-59, as it applies to the use of health FSA and HRA debit cards for reimbursement of expenses for OTC medicine or drugs, by allowing health FSA and HRA debit cards to be used after January 15, 2011 to purchase OTC medicine or drugs at drug stores and pharmacies, non-health care merchants that have pharmacies, and mail order and web-based vendors that sell prescription drugs, so long as (i) prior to the purchase, (1) a prescription (as defined in Notice 2010-59) for the OTC medicine or drug is presented to the pharmacist, (2) the OTC medicine or drug is dispensed by the pharmacist in accordance with applicable laws and regulations, and (3) an Rx number is assigned; (ii) the pharmacist or other vendor retains a record of the Rx number, the name of the purchaser (or person for whom the prescription applies), and the date and amount of the purchase in a manner that meets IRS recordkeeping requirements; (iii) all of the records described above in (ii) are available to the employer or its agent upon request; (iv) the debit card system will not accept a charge for an OTC medicine or drug unless an Rx number has been assigned; and (v) the additional rules for the use of health FSA or HRA debit cards contained in other IRS guidance and in the relevant Treasury Regulations are satisfied. Where the above requirements are satisfied, Notice 2011-5 states that the debit card transaction will be considered fully substantiated at the time and point-of-sale.

    Notice 2011-5 also provides that debit card transactions with vendors having health-care related “Merchant Codes” (e.g., physicians, dentists, vision care offices, hospitals, and other medical care providers) will be considered fully substantiated at the time and point-of-sale if they meet requirements (ii) (other than the requirement to retain the Rx number), (iii) and (v) of the above-listed requirements.  Notice 2011-5 further provides that the substantiation rules of  Notice 2010-59 continue to apply to 90% pharmacies, and that for all providers and merchants other than those discussed in Notice 2011-5, health FSA and HRA debit cards may not be used to purchase OTC medicines or drugs (other than insulin) after January 15, 2011. Notice 2011-5 is effective for health FSA and HRA debit card purchases of OTC medicines or drugs made after January 15, 2011. Click here to access a copy of Notice 2011-5.