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Health Reform September
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Health Reform September

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  • 1. HEALTHCARE REFORM SEPTEMBER 2010 What you need to know New Healthcare Law and it’s Impact on HRA’s, HSA’s, and FSA’s. Background Through December 31, 2010 health savings plans — including flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs) and Archer medical savings accounts (MSAs) — are generally permitted to pay for, or reimburse, all over-the-counter (OTC) medicines and drugs on a tax-free basis. Due to healthcare reform, all of that will change on January 1, 2011. On that date employer- sponsored health plans will no longer be able to reimburse expenses for OTC medicines — unless they are prescribed by a physician (insulin will still be covered). Qualified Medical Expenses: The new law removes over-the-counter drugs not prescribed by a physician from being paid from an HSA, FSA, or HRA on a tax-free basis. Until the end of this calendar year, you can pay from your Account to buy over-the-counter medications. While most HRA plans cover only expenses covered by the underlying health plan, the new regulations address HRA’s in general. Important clarifications Just recently the IRS issued additional guidance to help clarify four of the most perplexing parts of the new reimbursement restrictions.
  • 2. HEALTHCARE REFORM SEPTEMBER 2010 The prohibition applies to all OTC expenses incurred on or after January 1, 2011 — no matter when the funds were set aside. So even if funds are set aside prior to 2011, they may not be used to pay for non-prescription OTC meds incurred after December 31, 2010. January 1, 2011 is the effective date for the new regulations, regardless of whether a plan is a calendar year or fiscal year plan. However, OTC expenses may be reimbursed on or after January 1, 2011, as long as the expenses subject to reimbursement were incurred prior to that date. The prohibition does not apply to items that are not medicines or drugs. For example, crutches, bandages and diagnostic devices (like blood sugar testing kits) will still be reimbursable. Follow state laws for the definition of “prescription.” For the purposes of the new regulations only, a “prescription” is defined as “a written or electronic order for a medicine or drug that meets the legal requirements of a prescription in the state in which the medical expense is incurred and that is issued by an individual legally authorized to issue a prescription in that state.” Additional Tidbits included in this provision Non-qualified expense penalty: Under the new law, if you use your HSA funds for non- qualified expenses, you will face a higher penalty. The tax penalty for non-qualified HSA distributions will increase, effective January 1, 2011, from 10% to 20%. Maximum Contribution Limit on Health Flexible Spending Accounts. Beginning January 1, 2013, medical FSA contributions will be limited to the lesser of a $2500 cap for a taxable year or the company maximum. This maximum will be adjusted annually for inflation beginning in 2014.
  • 3. HEALTHCARE REFORM SEPTEMBER 2010 “START PLANNING FOR NEW W-2 REPORTING REQUIREMENT NOW” According to Miller –Johnson publications and Author Susan Sherman in her article dated September 22, we need to start preparing for the new W-2 reporting requirement now. The article points out that The Patient Protection and Affordable Care Act (Health Care Reform Act) contains many provisions that have little to do with how health care is delivered or how health plans provide coverage. One of these “extra” provisions is a requirement that the employers report the value of the health insurance they provide to an employee on the employee’s Form W-2. This requirement is effective for 2011, which means the information will need to be included in W-2s issued in Jan. 2012. But IRS regulations contain a “quirk” that requires employers to be prepared for this requirement much sooner. A former employee may request a W-2 at any time during the calendar year, and former employer is required to respond to the request within 30 days. This means employers need to be prepared to comply with the new reporting requirement in early 2011. The new requirement does not change the tax treatment of employer-provided health insurance. It is still a tax-free benefit. Congress created the new reporting requirement for two reasons. First, it wants to educate employees on the cost of health insurance benefits they receive, and it determined that reporting the value of the benefit on the employers’ W-2 would accomplish that goal. Second, compliance will help employers determine whether they have a high-cost plan that will be subject to the excise tax on “Cadillac” health plans, and give them time to modify the coverage before the excise tax becomes effective in 2018. It is also a potential tool to help the federal government monitor for compliance with individual and employer “pay to play” mandates that go into effect in 2014. We are still waiting for IRS guidance on the specifics of complying with this new reporting requirement. But here is what we do know so far: Employers must report the aggregate cost of “applicable employer-sponsored coverage.” Applicable employer-sponsored coverage is major medical coverage , including “mini-med” or limited coverage plans, amounts under self-funded medical reimbursement plans and HRAs, employer=provided Medicare supplemental insurance, and employee assistance plans. The value of stand-alone dental and vision plans, salary reduction contributions to medical flexible spending accounts, contributions to a HSA, and the value of coverage for a specific disease or illness need not be reported.
  • 4. HEALTHCARE REFORM SEPTEMBER 2010 The value reported to an employee will be based on the coverage provided to the employee and “similarly-situated employees.” Employees are similarly situated based on the coverage option they select under the plan. For example, if a plan offers employee-only, employee +1, employee +2, and family coverage it will have four categories of “similarly-situated” employees. The value of each coverage option is reported for those employees who elected that option. The value is not determined based on usage. Instead, the value reported will be determined the same way COBRA cost is calculated. If an employer has not been calculating COBRA premium (for example, if it is a small employer not subject to COBRA) or if it has not been calculating COBRA Premiums for each coverage option, it will need to do so and break it down for similarly-situated employees.