What Will the PPACA Mean for HRAs, HSAs, and FSAs?

This week’s column focuses on changes to those account-based plans, some of which are effective January 1, 2011.

Did PPACA change the tax that applies to distributions from HSAs for non-medical purposes?

Under current law, distributions from HSAs that are not used for qualified medical expenses are subject to an additional 10% tax, on top of ordinary income tax.  Beginning January 1, 2011, this additional tax on distributions for non-medical purposes will increase to 20%. 

Are contributions to Health Flexible Spending Accounts (FSAs) now subject to a cap?

Yes.  Under current law, there is no limit on the amount that can be contributed to a Health FSA.  Beginning January 1, 2013, salary reduction contributions to a Health FSA will be limited to $2,500 per year.  In future years, this limit will be adjusted annually for inflation.

Does this change impact Dependent Care FSAs?

No.  The change in PPACA to limit salary reduction contributions to HSAs will not impact Dependent Care FSAs.  Contributions to Dependent Care FSAs will continue to be subject to a $5,000 per year limit. 

Can over-the-counter (OTC) drugs still be reimbursed from HSAs, FSAs and HRAs after PPACA?

In 2003, the IRS issued guidance (Revenue Ruling 2003-102) providing that OTC drugs could be reimbursed by health FSAs and other employer-provided health plans.  As a result, many plan sponsors amended their plans to provide for the reimbursement of OTC drugs.  Beginning January 1, 2011, PPACA generally provides that OTC drugs will no longer will treated as non-taxable, medical expenses unless they are pursuant to a “prescription.”  This means that aspirin and other OTC drugs will no longer be reimbursable from an FSA or HRA, or be treated as a non-taxable medical expense under an HSA, unless pursuant to a prescription.  It also means that account holders may no longer be able to purchase OTC drugs using an HSA, FSA or HRA debit card.

Got a health-care reform question?  You can ask YOUR health-care reform legislation question online at http://www.surveymonkey.com/s/second_opinions 

You can find a handy list of Key Provisions of the Patient Protection and Affordable Care Act and their effective dates at http://www.groom.com/HCR-Chart.html  

Contributors:

Christy Tinnes is a Principal in the Health & Welfare Group of Groom Law Group in Washington, D.C.  She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare.  She represents employers designing health plans as well as insurers designing new products.  Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.

Brigen Winters is a Principal at Groom Law Group, Chartered, where he co-chairs the firm’s Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.

PLEASE NOTE:  This feature is intended to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.