Imported Prescription Drugs Under Employer Health Plans

Employers may be faced with requests for coverage or reimbursement for imported prescription drugs under their health plans. Employers may also be considering covering imported prescription drugs in an effort to lower health plan costs. Any coverage or reimbursements of imported prescription drugs may be taxable to employees and may create other risks for the employer and the plan as well.

Coverage provided under an employer's health plan is generally excludable from the participant's taxable income only if the coverage is for "medical care" as defined in Internal Revenue Code § 213(d). Similarly, a reimbursement from a health flexible spending arrangement (health FSA) or a health reimbursement arrangement (HRA) must be included in the participant's taxable income unless the reimbursement is for an expense for "medical care" as defined in Internal Revenue Code § 213(d).

In order for a prescription drug to be considered "medical care," Treasury regulations require that the prescription drug be legally procured. Also, IRS Publication 502, which discusses the deduction for medical and dental expenses, provides, "In general, you cannot include in your medical expenses the cost of a prescribed drug brought in (or ordered shipped) from another country, because you can only include the cost of a drug that was imported legally."

The Food and Drug Administration's web site has a statement of the FDA's position on foreign drug imports. In the statement, the FDA clarifies that, although the FDA's Personal Importation policy allows consumers to import illegal drugs under certain defined circumstances, importation of drugs from Canada remains illegal. The FDA conceded that the FDA has not often prosecuted those importing drugs from Canada, but the FDA reserves the right to do so in appropriate circumstances. Other guidance on the FDA web site reiterates that even if all of the factors noted in the Personal Importation policy are present, the drugs remain illegal.

Therefore, because obtaining prescription drugs in foreign countries such as Canada and importing the drugs into the United States is illegal under federal law, plan administrators (typically, employers) cannot pay for or reimburse participants for the cost of imported foreign prescription drugs on a tax-free basis. However, as suggested by IRS Publication 502, if a participant legally obtained and used a prescription drug while in a foreign country, reimbursement may be proper.

If an employer wants its health plan to provide coverage of or allow reimbursements for imported foreign prescription drugs, there are several points to remember, and risks to consider. First, the payments or reimbursements for imported prescription drugs generally must be included in the employee's taxable income. It is likely that any savings obtained by importing the drugs would be offset and possibly exceeded by the taxes on the reimbursements. In addition, correctly taxing the benefits adds significant complexity to plan administration, especially in cases where state tax treatment may differ from federal tax treatment.

Second, the plan document must be drafted to allow the reimbursements. If the plan document merely states that it covers or reimburses expenses that qualify as "medical care" as defined under Internal Revenue Code § 213(d), coverage or reimbursement for imported foreign drugs would be prohibited unless the plan is amended to specifically allow it.

Finally, the employer must consider possible legal liability as described in the FDA's statement of position on foreign drug imports. The statement of position is actually a letter from the FDA to an attorney who represents a number of sponsors and administrators of employer-sponsored health plans. The attorney asked the FDA about potential civil and criminal liability of the parties if the health plan sponsor amends a health plan to include coverage for prescription drugs purchased outside the United States, specifically Canada. The FDA listed the potential avenues of civil and criminal liability, including the fact that it is a felony to knowingly import a drug in violation of the reimport prohibition, and those who aid and abet a criminal violation of the law or conspire to violate the law can also be found criminally liable. The FDA would not take a position as to whether the parties would be specifically liable, as the determination is very fact-specific. But the FDA added, "However, any party participating in this kind of import plan does so at its own legal risk. Of course, if FDA were to take enforcement action in this scenario, our highest enforcement priority would not be actions against consumers." The FDA concluded that it is "very concerned" about the kind of scenario described. Any employer considering covering foreign prescription drugs should take the FDA's concern seriously.