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Small Business Digest



New Regulations For Employers Offering HRA, FSA, HSA Options in Effect

Starting July 1, employers need to insure they’re in compliance with the new restrictions on health reimbursement accounts (HRAs) and flexible spending accounts (FSAs).

Employer-sponsored health plans are no longer able to use HRA or FSA funds to reimburse employee expenses for over-the-counter meds — unless those meds are insulin, or prescribed by a doctor.

Those rules took effect Jan. 1, 2011. But the IRS granted sponsors a full six months to amend their plans.

Sponsors had until June 30, 2011 to get their plans in compliance.

Sponsors need to apply the new rules retroactively to expenses for non-prescribed meds incurred on or after Jan. 1, 2011. This date applies regardless of an arrangement’s plan year.

Internal Revenue Service (IRS) regulations state that any failure to satisfy these requirements results in all employee contributions to HSAs or FSAs becoming taxable.

HSAs and Archer MSAs

Distributions from a health savings account (HSA) or Archer medical saving account (Archer MSA) are subject to the same new requirements, with one major difference.

Reimbursements for purchases of non-prescribed meds under HSA and MSA plans are considered “nonqualified distributions,” and, in addition to becoming taxable, are also subject to a 20% penalty tax.

For more information the new rules, click here to see a breakdown of the IRS’ guidance.

The IRS cleared up 4 tricky points of new FSA, HRA regs

Christian Schappel offers some some clarification of these and other rules.


Through Dec. 31, 2010 health savings plans — including flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs) and Archer medical savings accounts (MSAs) — are generally permitted to pay for, or reimburse, all over-the-counter (OTC) medicines and drugs on a tax-free basis.

But thanks to healthcare reform, all of that will change on Jan. 1, 2011. On that date employer-sponsored health plans will no longer be able to reimburse expenses for OTC meds — unless they’re insulin, or prescribed by a doctor.

Important clarifications

And just recently the IRS issued the following guidance to help clarify four of the most perplexing parts of the new reimbursement restrictions.

1.      The prohibition applies to all OTC expenses incurred on or after Jan. 1, 2011 — no matter when the funds were set aside. So even if funds are set aside prior to 2011, they may not be used to pay for non-prescription OTC meds incurred after Dec. 31, 2010.

2.      Jan. 1, 2011 is the effective date for the new regs, regardless of whether a plan is a calendar year or fiscal year plan. However, OTC expenses may be reimbursed on or after Jan. 1, 2011, as long as the expenses subject to reimbursement were incurred prior to that date.

3.      The prohibition does not apply to items that are not medicines or drugs. For example, crutches, bandages and diagnostic devises (like blood sugar testing kits) will still be reimbursable.

4.      Follow state laws for the definition of “prescription.” For the purposes of the new regs only, a “prescription” is defined as “a written or electronic order for a medicine or drug that meets the legal requirements of a prescription in the state in which the medical expense is incurred and that is issued by an individual legally authorized to issue a prescription in that state.”


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