Ask Our Expert: Effects of Health Care Reform on Flexible Spending Accounts (FSAs)
We've asked Mark Berggren, Aon Hewitt's lead employee benefits attorney for flexible spending accounts, to answer several questions on the effects of Health Care Reform on flexible spending accounts. If you'd like to ask a question on this topic, or about any other pressing human resources challenge you are facing, e-mail us. We'll share responses to select questions on a regular basis.
Question: What is a health care flexible spending account?
Answer: A health care flexible spending account, or health care FSA, is a tax-favored account that your employer may offer to help manage your health care expenses. You may contribute to a health care FSA on a pre-tax basis by electing health care FSA salary reduction contributions. You can then be reimbursed on a tax-free basis for eligible medical expenses you and your family members incur throughout the year.
Question: I heard The Patient Protection and Affordable Care Act made some changes to health care FSAs. Can I still use my health care FSA for over-the-counter drugs?
Answer: In short, the answer to your question is yes, over-the-counter or "OTC" items may still be reimbursed from your health care FSA. However, beginning January 1, 2011, OTC medicines and drugs must be prescribed in order to be reimbursed from your health care FSA. The act didn't change how OTC items that are NOT medicines or drugs may be reimbursed. In other words, the current rules continue to apply to OTC health supplies that are not considered medicines or drugs (e.g., bandages).
Question: Did the act change the reimbursement rules for co-pays and co-insurance?
Answer: No, those rules did not change. You may continue to be reimbursed for co-pays and co-insurance under the current rules.
Question: What does it mean that an OTC medicine must be prescribed starting on January 1, 2011?
Answer: In guidance issued on September 3, 2010, the IRS clarified that starting January 1, 2011, you will need to submit a prescription to be reimbursed from your health FSA for OTC medicine expenses. Hewitt clients and their plan participants can visit www.YourSpendingAccount.com for more information.
Question: Can I continue to use my debit card for OTC medicines starting in 2011? How will I know if an OTC item is considered a medicine or health supply?
Answer: Generally, merchants that use an eligible items list are updating their lists so that you won't be able to purchase OTC medicines with the debit card starting January 1, 2011 (note that in guidance released on September 3, 2010, the IRS stated that it will not challenge the use of the debit card at affected merchants for OTC medicine expenses incurred through January 15, 2011). Otherwise, the rules don't change how you may use your debit card. For example, you can still use it to purchase health care supplies such as bandages. Most health care FSA administrators are working on updating lists to categorize OTC items as either a medicine or a health care supply so employees know how an item is categorized.
Question: Did the act change how much I can contribute to my health care FSA?
Answer: Yes. Starting January 1, 2013, subject to plan provisions the most that you can contribute to your health care FSA is $2,500. The maximum is then indexed to the consumer price index (CPI) starting January 1, 2014.
Question: Does the new maximum apply on a family basis?
Answer: It applies on a per-participant basis. So if two members of a family are offered a health care FSA from their respective employers, each could contribute up to $2,500 to his or her separate health care FSA.
Question: My employer contributes to my FSA. Will those contributions count towards the new maximum?
Answer: The maximum caps the amount of salary reductions that can be made to a health care FSA. As a result, employer contributions to an FSA that you can't elect to receive in cash do not appear to count towards the maximum.
About Our Expert
Mark is an attorney in Aon Hewitt's Lincolnshire office. He has 11 years of experience in employee benefits law, and holds the lead employee benefits attorney role for Aon Hewitt's Flexible Spending Account practice. Prior to joining Hewitt, Mark was an attorney at a prestigious Chicago law firm, assisting clients with various benefit issues including qualified and non-qualified plan design, drafting, and compliance. Mark earned his law degree with high honors, Order of the Coif, from Chicago-Kent College of Law, where he was a member of the Law Review. He also received an M.B.A from I.I.T. – Stuart School of Business and holds a B.A. in history from Miami University.