The train is leaving the station, and change is the only cargo. Heading into the new year, I thought I would give you a quick rundown on changes that will be coming down the track so you won’t be left behind.
Over-the-Counter Medicines and Drugs
On Friday, September 3, 2010, the IRS issued its initial guidance with respect to the new rule included in the Affordable Care Act that requires a doctor’s prescription for the reimbursement of over-the-counter (OTC) drugs and medicines from a tax-advantaged health care account. While the guidance offers little in the way of new information, it does confirm the generally accepted interpretation of how the change will be applied.
In summary, the guidance confirms the following: Participants will still be able to use their tax-advantaged health care accounts for purchases of all over-the-counter drugs and medicines—as long as they have a doctor’s prescription.
The rule applies to all tax-advantaged health care accounts, including flexible spending accounts (FSAs), health savings accounts (HSAs), health reimbursement arrangements (HRAs) and Archer medical savings accounts (Archer MSAs). This rule takes effect January 1, 2011 and applies to all purchases on or after January 1, 2011, regardless of plan year.
The only acceptable forms of documentation for reimbursement for over-the-counter drugs and medicines are a receipt indicating the prescription number in addition to the date purchased, purchaser and amount, or if the receipt does not contain the prescription number, the doctor’s prescription must also be included, as regulated by state law.
Insulin, medical devices (crutches, blood sugar monitors, etc.) and items such as bandages, contact lens solution, denture bond, etc., will not require a prescription.
Generally, health care debit cards cannot be used to purchase over-the-counter drugs and medicines. The Special Interest Group for IIAS (International Institute for Advanced Studies) Standards (SIGIS) is working with Treasury to allow the use of a debit card for prescribed OTC drugs and medicines when filled as a prescription at the pharmacy counter. I will keep you posted on that progress.
You may be receiving questions from your employer clients. When communicating the information, it is important to stress that participants can still use their accounts for OTC drugs and medicines and that the rule does not take effect until January 1, 2011. The IRS has posted a helpful FAQ about the OTC rule change on its Affordable Care Act website at www.irs.gov/newsroom/article/0,,id=227308,00.html.
Adoption Assistance Plans
For tax years beginning on or after January 1, 2010, the maximum adoption credit increased from $12,170 to $13,170 per eligible adoption attempt for both “special needs” and “non-special needs” adoptions.
This limit is also used for the adoption tax credit that may be taken on a taxpayer’s income tax return. Also, the adoption credit is now refundable; however, the indexed figure of $13,170 will sunset, reverting to the previous limit of $10,000, on December 31, 2011 for both the adoption assistance plan and the tax credit unless there’s Congressional action.
CHIPRA
The Children’s Health Insurance Program Reauthorization Act (CHIPRA) of 2009 amended the HIPAA special enrollment rights. It allows special enrollment for loss of eligibility to Medicaid or State Children’s Health Insurance Program (SCHIP) or gaining eligibility for state-provided group health plan premium assistance. Requirements for 2011 enrollment include: (1) revisions to HIPAA special enrollment notice (sent on or prior to enrollment), (2) revisions in SPDs or enrollment materials and (3) a review of election change processes. Model forms have been developed by the Department of Health and Human Services and the Department of Labor.
Dependent Care Tax Credit
The current child and dependent care tax credit limits are scheduled to sunset on December 31, 2010. Besides the dependent care FSA that is included in most cafeteria plans, there is a federal child and dependent care tax credit. One of the Bush tax cuts included an increase in the expenses that can be taken into consideration for the tax credit, beginning January 1, 2003. Table 1 shows changes in the amount of employment-related child care expenses that can be taken into account for the child and dependent care tax credit.
Table 1
Child Care Expense Changes
2002 and 2003- 2011 and
Earlier 2010 Later
One Child $2,400 $3,000 $2,400
Two or More $4,800 $6,000 $4,800
Children
Without Congressional action, the amounts revert back to the pre-2003 levels at the end of this year.
HSA Taxes
Starting January 1, 2011, the penalty tax due on non-qualified distributions from HSAs and Archer MSAs will increase from 10 to 20 percent. If funds from an individual’s HSA or Archer MSA are not used for qualified medical care, the account holder will pay an additional 20 percent tax on the amount, in addition to normal income taxes.
These increased taxes will be assessed on the individual’s 2011 tax return, generally due April 14, 2012.
Tanning Services Excise Tax
A 10 percent excise tax was inaugurated on July 1, 2010. This “sin” tax is imposed on any indoor tanning services and provides income to underwrite a portion of health care reform.
Transit
When the American Recovery and Reinvestment Act (ARRA) became law in 2009, it included a not-very-publicized provision that had the good effect of increasing the maximum monthly pre-tax transit limit from $120 to $230. Unfortunately, the provision and increase also included an expiration date of December 31, 2010. Now with that date drawing near, it looks like Congress may let the provision and increase expire. If they do, the limit will revert back to $120 on January 1, 2011.
W-2 Reporting
Beginning in 2011, the value of all employer-provided health insurance must be disclosed on an employee’s W-2. While detailed guidance is yet to come, employer-provided health insurance information appears to include the COBRA rate of all health coverage whether fully insured or self-insured, employer contributions to HRAs, employer contributions and cafeteria plan salary reductions to HSAs or employer contributions to MSAs and both non-elective and salary reductions to health FSAs. Dental and vision costs, accident and disability insurance, long term care insurance and after-tax funded hospital indemnity and/or specified disease coverage are not included in this W-2 reporting requirement. It’s important to note that this value is simply to be reported starting next year; it does not affect the employee’s taxable income in any way.
Now is the time to contact your employer clients to make sure they are aware of these changes and how this information will be collected.
The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.
