A Look at the Affordable Care Act: Changes to Health Accounts

Affordable Care Act changes to health accountsEach month AssuredPartners NL will discuss a different aspect of the Affordable Care Act. Stay tuned for more updates on the second Thursday of each month. Click here for more Affordable Care Act blogs.    

Together, the Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 make significant changes to health flexible spending accounts, health reimbursement arrangements and health savings accounts. These changes are:

• Reimbursement permitted only for medicine or drugs with a prescription (excluding insulin)
• Limited contributions to health FSAs, up to $2,500 a year, subject to cost-of-living increases
• Increased tax penalties for withdrawals from HSAs and Archer medical saving accounts not used for medical expenses

Read on to learn more about each of these changes in greater detail:

Limits on Reimbursement for Over-the-Counter Medications

The medications categorized as “qualified medical expenses” have been redefined by the healthcare reform laws for the purposes of reimbursement from FSAs and HRAs and for distributions from Archer MSAs and HSAs. The new definition of a “qualified medical expense” is now consistent with the definition used for the itemized tax deduction. Under this new definition, medicine and drugs eligible for reimbursements include only medicines that are a prescribed drug (does not take into account if the drug is available without a prescription or not) or is insulin.

So what does this mean for you? Health FSAs and HRAs will not reimburse the cost of over-the-counter medications that do not have a prescription. Distributions from Archer MSAs and HSAs used to purchase over-the-counter medicine without a prescription will be taxable and subject to penalties. Keep in mind that amounts paid for over-the-counter medicines with a prescription still qualify as medical expenses.

Limits on Health Flexible Spending Account Contributions

Starting in 2013, heath FSAs offered through a cafeteria plan will limit the amount of salary reduction contributions that employees can make. For plan years, employees may now elect to contribute up to $2,500 a year to a health FSA. This amount will go up to reflect cost-of-living increases in future years.

Increased Tax on Withdrawals from Health Savings Accounts and Archer MSAs

The healthcare reform law increases the additional tax on any HSA distributions before age 65 from 10 to 20 percent for distributions that aren’t used for qualified medical expenses. The additional tax for any Archer MSA distributions not used for qualified medical expenses increases from 15 to 20 percent. Remember, only your withdrawals used to pay for qualified medical expenses are tax-free. If you use funds from your HSA or Archer MSA for other purposes, your funds will be taxable and subject to penalties.

What do you think about the changes to health accounts? Check back on the second Thursday of each month as we discuss the Affordable Care Act and what it means to you. For questions about the Affordable Care Act, contact a AssuredPartners NL representative.

 This post is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.

*Information from Zywave

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