May 24, 2011|
A little-noticed provision in the 2010 health care legislation may affect flexible spending accounts (FSAs) in 2011. ackground: With an FSA, participants save tax by making contributions to the account. The contributions, which are typically made through regular payroll deductions, are exempt from Social Security tax. Funds may then be withdrawn tax-free during the year to pay for qualified health care expenses. (A similar type of plan allows contributions for dependent care expenses.) Generally, any amount remaining in the FSA at the end of the year is forfeited. This is often called the "use-it-or-lose-it" rule. However, if the employer permits, payments may extend under a 2½-month grace period. New rules: Beginning in 2011, FSA funds can no longer be used for over-the-counter (OTC) drugs and other medications, unless specifically prescribed by a physician. For example, a participant cannot take a withdrawal to pay for cold or allergy medicines, aspirin or other common pain relievers. But withdrawals may still be used to pay for medical supplies such as crutches, medical testing for kids, contact lens solutions and hearing aid batteries-even Band-Aids. Also, distributions for expensive items such as braces and eyeglasses are still permitted. Finally, the new health care law specifically allows reimbursements for the cost of insulin purchased without a prescription. Footnote: Currently, there is no tax law limit on annual contributions, although a limit may be self-imposed. Beginning in 2013, the health care law caps contributions at $2,500 (subject to indexing). FSA Plan"Beginning in 2011, FSA funds can no longer be used for over-the-counter (OTC) drugs and other medications, unless specifically prescribed by a physician."