Changes for Spending Accounts in 2011

Here’s another change as a result of the Patient Protection and Affordable Care Act (PPACA).  This change affects Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) for 2011.

INCREASED PENALTY

The tax penalty for non-qualified distributions from your HSA account will increase from 10% to 20%!  If you use your HSA account for services or purchases that don’t qualify as a legitimate expenses, beware of the stiff penalty increase.

OVER THE COUNTER ITEMS (OTC)

You won’t be able to use your account for non-prescription allergy drugs, cold medicines, nicotine patches or pain relievers, unless a doctor or licensed health care professional prescribes the item.  You will be able to use your spending accounts for things like bandages, braces, crutches (equipment, supplies and diagnostic devices).  You can use the funds in your account for insulin whether prescribed or not.

WHAT ABOUT THE PROOF?

For those of you with a flexible spending account (FSA), if you are buying an OTC medicine,  you’ll need to have an itemized receipt, a copy of the prescription, and another item verifying a prescription has been issued.  But don’t worry, your administrator for your flexible spending account will tell you what you need when you request reimbursement.

HSA participants can be reimbursed from their accounts without providing proof, but the IRS may request substantiation, so participants will need to keep their documents backing up the purchase in a shoebox titled 2011.  Okay, a shoebox isn’t a required storage place, but doesn’t it make sense.  Just throw all your stuff in a shoebox in case you need it later, mark on top of the box what year the receipts are for, put a rubber band around it and store it.

WHEN DOES THIS HAPPEN?

Good question.  This change started January 1, 2011.  For employers who have a Flexible Spending Account that runs other than the calendar year, the changes still apply to any expenses or purchases beginning January 1, 2011.

QUALIFIED EXPENSES

So what are qualified expenses you may be asking yourself.  Well, you came to the right place or at least the right paragraph.  Check out this website IRS Publication 502.  Of course things are subject to change by the IRS and you should contact your tax advisor if in doubt about a particular expense (but you knew I was going to say that didn’t you!)

LIMITS FOR HSA AND FSA ACCOUNTS

Employers set the limit for FSA Health Care Spending accounts, but the IRS limits Dependent Care Spending accounts to $5,000 annually.  Beginning in 2013, the IRS will limit the amount that an employee can contribute to a Health Care Spending account to $2,500.

HSA accounts are limited to a contribution of $3050 for singles and $6150 for families in 2011.

WHY THE CHANGE?

Taxes!  By slightly adjusting what someone can (or can’t) receive in a tax free environment, the government stands to increase tax revenues.  It’s just one of the tweeks being made for funding PPACA.