Effective January 1, 2011 over-the-counter (OTC) medications and drugs without a prescription will not be reimbursable through the healthcare FSA. Other OTC items such as bandages and contact lens solution are still eligible. OTC produces such as cold medicines, aspirins, etc., will not be reimbursable under the FSA plan on or after January 1, 2011.
insuranceHow health care reform changes FSAs, HSAs
By Claes Bell • Bankrate.com
HighlightsFSAs allow employees to sock away tax-free dollars for medical expenses.
Starting Jan. 1, 2013, FSAs will have annual limits of $2,500 per year.
Tax-free contributions to HSAs and Archer MSAs will still be unlimited.
If you pay for medical care out of a tax-advantaged account such as a health savings account or flexible spending account, passage of the new health care reform law might make these so-called cafeteria plan benefits such as FSAs and HSAs a little less tasty when it comes tax time.
The new law reduces the amount of money you can contribute to these accounts and shelter from Uncle Sam's reach. It also creates stricter rules about how the dollars you put away can be used. These new rules and penalties are designed to generate revenue to offset the cost of the health care reform law's health insurance tax credits and other spending.
Cafeteria plans are so named because they allow employees to choose from a list of benefit options much like a cafeteria menu. Among those options are health care spending accounts.
Flexible spending accounts, or FSAs, allow employees to sock away tax-free dollars that can be used to pay for medical expenses such as drug co-pays, deductibles and treatments not covered by insurance plans. Up until now, there hasn't been an official limit to how much you could contribute to an FSA, although IRS rules dictated that employers create some kind of maximum contribution. Many employers cap the amount in the $2,000 to $5,000 range according to a 2009 report by the Center on Budget and Policy Priorities in Washington, D.C.
Starting Jan. 1, 2013, FSAs will have annual limits of $2,500 per year. Going forward, the limit will rise annually based on the rate of inflation. Still, it likely will remain above the average employee contribution, which was $1,424 in 2009, according to Mercer's National Survey of Employer-Sponsored Health Plans, an annual report on health care benefits.
In addition, FSAs will remain "use-it-or-lose-it" accounts. That is, any unused balance for one year can't be used to fund health care spending in the next year.
New restrictions on how you can spend FSA funds will change more quickly. Starting Jan. 1, 2011, you won't be able to spend FSA dollars on over-the-counter medical supplies that aren't specifically prescribed by a doctor, putting a damper on the annual ritual of FSA holders trying to spend unused funds by stocking up on their favorite over-the-counter medicines.
Despite the new limits, the law isn't intended to discourage the use of FSAs, says Sara Collins, vice president for the Affordable Health Insurance Program at The Commonwealth Fund, a health care research foundation in New York.
"It's designed to bring some balance back into the tax code and make sure those dollars are used for medical purposes," says Collins. "You can still put money aside in these accounts, there just won't be quite as big of a tax break."
Health savings accounts, or HSAs, also are getting new limits and restrictions. HSAs allow employees who have a high income or who are in good health to save part of their earnings tax-free and use the savings to pay most of their medical care out of pocket. Unlike FSAs, which are meant to supplement a typical health insurance plan, HSAs are paired with a "catastrophic" insurance policy that kicks in once the high annual deductible has been paid.
Also unlike FSAs, HSA balances roll over from year to year, allowing participants to save for health care costs and even for long-term care later. Because of the new health care reform law, HSA funds can no longer be used to buy over-the-counter drugs without a doctor's prescription. Those who withdraw HSA funds for nonmedical purposes will see their tax penalty double, from 10 percent to 20 percent of the total withdrawal, starting Jan. 1, 2011.
The Archer Medical Savings Account, the small-business version of an HSA known as an Archer MSA, will see similar restrictions, with the only difference being the Archer MSA's penalty for nonmedical withdrawals now stands at 15 percent and will go up to 20 percent. Archer MSAs also will have restrictions on buying over-the-counter drugs without a prescription starting Jan. 1, 2011.
The HSA's cafeteria plan cousin, the health reimbursement account, known as an HRA, is also affected by the new law. HRAs work similarly to HSAs, but instead of being funded by employee contributions, HRAs are funded by the employer. HRAs will get the same restrictions on over-the-counter medicine.
On the bright side, tax-free contributions to HSAs and Archer MSAs won't be affected. And with far-reaching reform set to transform health care by 2020, it might be comforting for HSA holders to know that the HSA/high deductible model isn't going anywhere.
In fact, legislators looked to the high-deductible insurance plans typically packaged with HSAs today as a template for the minimum coverage that will be available on state insurance exchanges once they're up and running in 2014.
"The floor for health insurance plans under the new law will be similar to the insurance plans that are now HSA compliant," says Collins.
Changes to the Childcare Vouchers Salary Sacrifice Scheme
■What's going to change?
■What does this change mean for you?
■What do you need to do?
■A few more facts and figures
What's going to change?
• Until 5 April 2011, all childcare voucher scheme members will receive tax and National Insurance relief on up to £55 per week (£243 a month) of childcare vouchers.
• Higher-rate taxpayers who sign up for childcare vouchers after 5 April 2011 will only receive tax and National Insurance relief on up to £28 per week (£124 a month) of childcare vouchers.
• Parents who pay 40% tax can currenlty save up to £1,196 a year by using childcare vouchers. The savings will fall to £608 a year for higher-rate taxpayers who sign up after April 2011.
What does this change mean for you?
If you are basic-rate taxpayer:
• As long as you continue to be a basic-rate taxpayer, the change will not affect the savings you receive from childcare vouchers.
• If you have a break from childcare vouchers or if you move to a new employer after April 2011, your earnings will be assessed when you re-order your vouchers and at the start of each new tax year. If you subsequently become a higher-rate taxpayer, the new rules will apply.
• If you stay with your current employer and you continue to order childcare vouchers with no breaks, then the new rules will not apply to you even if you become a higher-rate taxpayer.
• If you are not sure whether you will become a higher-rate taxpayer in future, we recommend that you avoid taking any breaks from childcare vouchers and instead maintain a continuous voucher order.
If you are a higher-rate taxpayer:
• If you sign up for childcare vouchers after 5 April 2011, you will only be entitled to tax and National Insurance relief on up to £28 a week of childcare vouchers.
• If you are currently receiving childcare vouchers but have a break in your voucher order, the new rules are likely to apply if you rejoin the scheme after April 2011.
• If you move to a new employer after April 2011, you will be treated as new member and the new rules will apply to you.
What do you need to do?
• If you are not currently using childcare vouchers but you expect to pay for childcare in future, sign up before 5th April 2011 to protect your voucher entitlement.
• We recommend that you start receiving childcare vouchers no later than March 2011, to make it easier to demonstrate that your scheme membership started before 5th April 2011.
• If you are already using childcare vouchers and you currently opt in and out of the scheme, for example to cover school holiday childcare, we recommend that you maintain a continuous voucher order of at least £10 a month rather than opting in and out.
• You don’t need to spend your childcare vouchers as soon as you receive them – any unused vouchers will stay in your KiddiVouchers account for future use. Refunds are not always possible, so please only order vouchers which you expect to be able to spend.
A few more facts and figures
• If you join the scheme after 5th April 2011, you will need to have your earnings estimated when you join the scheme and at the start of each future tax year. Your childcare voucher entitlement will be recalculated at the start of each tax year. If you are a basic-rate taxpayer, you will still have the earnings assessment but your childcare vouchers will not be affected.
• The earnings assessments will be based on your basic contractual pay plus any taxable benefits. Income such as overtime, bonuses or interest from savings will not be taken into account. If you pay higher-rate tax as a result of receiving overtime, bonuses or other income, you may be treated as a basic-rate taxpayer for your childcare voucher entitlement.
• If you have had an earnings assessment but your earnings then change during the tax year, your childcare voucher allowance will only be recalculated at the start of the next tax year.
• If you are a 50% taxpayer, your childcare voucher allowance will be capped at £22 a week (£98 a month) unless you join the scheme before 5th April 2011.
• If you are expecting a baby after April 2011, unfortunately you cannot sign up for childcare vouchers until your baby has been born.
• If you have recently had a baby but you are not expecting to need childcare until after April 2011, you can order childcare vouchers now and spend them later.
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