Under the American Recovery and Reinvestment Act (ARRA), the monthly tax exclusion for employer-provided commuter highway vehicle transportation and transit pass benefits increased to $230, effective from March 2009 through December 2010. The Tax Relief and Job Creation Act of 2010 extended these benefit amounts through December 2011.

Employees may exclude from income $230 per month in transit benefits and $230 per month in parking benefits –– up to a maximum of $460 per month. Employees may receive benefits for commuter transportation and transit passes and benefits for parking during the same month; they are not mutually exclusive.

These qualified transportation fringe benefits are excluded from an employee’s gross income for income tax purposes and from an employee’s wages for payroll tax purposes.

Previously, there were two separate monthly exclusion amounts, one for transit passes and commuter highway transportation — such as commuter vans — and a different one for qualified parking. The exclusion amount for qualified parking was set at a higher rate. The new law makes all the exclusion amounts equal and sets them at the higher rate for qualified parking. ARRA provided the equal benefits through Dec. 31, 2010, and the Tax Relief and Job Creation Act of 2010 extended this provision through Dec. 31, 2011.

Soure: IRS.gov

2012 Flexible Spending Accounts Information

These accounts are sometimes called flexible spending arrangements. They are tax-advantaged accounts that let employees automatically deposit a specific amount of each paycheck into them. After funds accumulate, they can be used to pay for qualified medical expenses. These accounts are different from HSAs and HRAs in the respect that they are usually offered with traditional medical plans. They also differ from HSAs in the respect that the unused funds in the account may not be carried over to the next year. Debit cards or forms are used to access funds from the account if money is needed.

Flexible spending accounts allow account holders to contribute to the FSA for any costs that aren’t covered by insurance. Some examples of such expenses include coinsurance, copay amounts and deductibles. If a health insurance won’t cover a treatment or related health expense, FSA funds can be used to pay for it. The specified limits saw some changes from 2011 to 2012

Contribution Limits for 2012

It was decided that 2012 would be the last year for no limits on FSA contributions. While there may not be limits in place, plans must specify a maximum percentage of compensation to be contributed to the FSA or a maximum dollar amount. The changes from 2010 to 2011 included over-the-counter medicines being eliminated from coverage if they weren’t prescribed by a doctor. The year 2013 will likely see one of the biggest changes: FSA contribution limits of $2,500 annually with yearly inflation increases.

Health Savings Accounts

HSAs are medical savings accounts that also have tax advantages. Taxpayers who are enrolled in HSA-qualified health plans with high deductibles are able to obtain them. At the time of deposit, the funds contributed to these accounts are not subject to federal income tax. Any unused funds that remain in the account at the end of the year are carried over to the next year and added to further contribution amounts. Since contribution also change with these plans each year, it’s important to be aware of the changes. The changes from 2011 to 2012 include an increase in out-of-pocket HDHP maximums and HSA contribution limits. However, there are no changes with the HDHP required minimum deductibles.

HSA Contribution Limits

Family: $6,250
Individual: $3,100
Catch-Up Contributions: $1,000

The individual amount of $3,100 reflects an increase of $50 from 2011′s limit. The $6,250 limit for families is an increase of $100 from 2011. Catch-up contribution limits, which are for people over the age of 55, remain the same between 2011 and 2012.

HDHP Minimum Required Deductibles

Self: $1,200
Family: $2,400
HDHP Out-Of-Pocket Maximum – Family: $12,100
HDHP Out-Of-Pocket Maximum – Self: $6,050

The HDHP limit increased by $100 between 2011 and 2012 for singles and by $200 for families. Another change between 2011 and 2012 is eligibility of over-the-counter medicines. Insulin is the only OTC medicine approved for reimbursement in 2012 under a health FSA, HSA or HRA without a prescription. In addition to this, it was decided that the penalty of 10 percent for ineligible expenses paid for using HSA funds would increase to 20 percent in 2012.

Flexible Spending Account – Debit Cards and IRS Guidance

These procedures are set out in IRS Notice 2011-5. According to this guidance, after January 15, 2011, FSA and HRA debit cards may continue to be used to purchase OTC medicines or drugs at drug stores and pharmacies, at non-health care merchants that have pharmacies (such as grocery stores with a pharmacy), and at mail-order and Web-based vendors that sell prescription drugs, so long as all of the following conditions are met:

1. Prior to purchase-

a. the prescription for the OTC medicine or drug is presented (in any format) to the pharmacist,

b. the OTC medicine or drug is dispensed by the pharmacist in accordance with applicable law and regulations pertaining to the practice of the pharmacy, and

c. an Rx number is assigned.

2. The pharmacy or other vendor retains a record of the Rx number, the name of the purchaser (or the name of the person for whom the prescription applies) and the date and amount of the purchase in a manner that meets IRS recordkeeping requirements.

3. All of these records are available to the employer or its agent upon request.

4. The debit card system will not accept a charge for an OTC medicine or drug unless an Rx number has been assigned.

5. All other requirements for use of debit cards associated with health plans are followed.

So long as the above procedures are followed, the debit card transaction will be considered fully substantiated at the time and point of sale.

OTC drug purchases made at other vendors that have health-care-related merchant codes (such as hospitals and physicians), and purchases made at “90% pharmacies” (pharmacies for which 90% or more of gross receipts in the prior taxable year were for tax-code-qualified medical expenses), are permitted under a less stringent set of requirements.

Important Information for Merchants that Sell OTC Drugs

Importantly, for other merchants that sell OTC drugs, but which are not covered in the notice (such as a grocery store or convenience store without a pharmacy), an FSA or HRA debit card cannot be used to purchase OTC drugs. Employees need to be aware of this limitation, as well as of the conditions that now must be met to use debit cards for any OTC medication purchases, to ensure that health plan-related debit cards are used properly.

Originally published March 11, 2011.

Related to accident and health plans that are provided by employers, including FSAs and HRAs, The Patient Protection and Affordable Care Act (PPACA) revised the definition of medical expenses. The definition of qualified medical expenses for Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA) were also revised by PPACA. This will involve several changes for over-the-counter drug reimbursement, cafeteria plans, HRA and FSA debit card usage, etc..

Incurred expenses for non-prescription over-the-counter medications and drugs bought on or before December 31, 2010 can be reimbursed without taxes in accordance with the employee plan. However, as of January 1, 2011, an employer-provided health plan, such as an FSA or HRA, can only pay or reimburse the cost of drugs and medications under the following circumstances:

• The medication is insulin
• A prescription is required for the medication
• The individual acquires a prescription for a medication available without a prescription (over-the-counter medication.)

Note that a prescription is defined as a hand written or electronic medication order for a particular individual to have a particular medication or drug. It must abide state legal requirements and be composed by a healthcare professional that is legally authorized to issue prescriptions for the state it was written in.

HRAs and FSAs that use a debit card will also have new special rules. The IRS notice purports that current debit card systems are not capable of recognizing and maintaining that over-the-counter medications were in fact prescribed by a healthcare professional – as in compliance with the new definition of payable/reimbursable over-the-counter medication medical expenses. As a result, health HRA and FSA debit cards should not be used to buy over-the-counter drugs or medications after December 31, 2010. In an effort to smooth and facilitate the transition, the IRS will not be challenging FSA and HRA debit card usage for incurred expenses through the 15th of January in 2011. Thereafter, plans are required to ensure cards have been reprogrammed so that they can not be used in the purchase of over-the-counter drugs or medications.

Those with a health FSA should be careful, as some FSAs contain a grace period provision to allow use of unused funds not spent by December 31 of a given year to reimburse incurred expenses for the initial 2 ½ months of the subsequent year. Even if an individuals’ existing FSA includes this grace period provision, over-the-counter medications bought without a prescription (after the deadline) will not be eligible for reimbursement under the new rules outlined in the IRS notice.

Finally, cafeteria plans may also need revising to adhere to the new over-the-counter medication requirements. Despite the tenet against retroactive amendments, this notice allows an amendment to conform cafeteria plans to requirements adopted by June 30, 2011. For incurred expenses after January 1, 2011 or HRA and FSA debit purchases after January 15, 2011, the amendment may be retroactively effective.

Originally published October 12, 2010

Under the new law, maximum annual FSA contributions are reduced, and there are new regulations affecting how the funds can be used. The intent of the new rules and penalties is to generate revenue which can be used to fund aspects of the health care reform package.

FSAs and HSAs (assuming the employee is covered under a qualified high deductible health plan) allow an employee to contribute tax-free funds that can be used to pay for deductibles, drug co-pays, treatments that are not covered by health insurance, and other qualified medical expenses.

Annual Limits for Flexible Spending Accounts

Beginning on January 1, 2013, the annual limit for FSAs will be set at $2,500. Previously, the IRS (click here for more from the IRS) had stipulated that employers could establish their own FSA contribution limit, and according to the Center on Budget and Policy Priorities, these limits generally fell into the $2,000 to $5,000 range. In 2009, Mercer’s National Survey of Employer-Sponsored Health Plans stated that the average yearly employee contribution was $1,424.

Annual limits for HSAs, however, were not affected by the new legislation.

Be aware that some restrictions will become effective more quickly. For example, as of January 1, 2011, FSA and HSA participants will no longer be able to spend the funds on over-the-counter medications unless a physician has specifically prescribed them. Also starting next year, non-qualified withdrawals from HSAs will be subject to a 20% penalty instead of the 10% penalty which is currently applied.

Originally published November 12, 2010

Related to accident and health plans that are provided by employers, including FSAs and HRAs, The Patient Protection and Affordable Care Act (PPACA) revised the definition of medical expenses. The definition of qualified medical expenses for Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA) were also revised by PPACA. This will involve several changes for over-the-counter drug reimbursement, cafeteria plans, HRA and FSA debit card usage, etc..

Incurred expenses for non-prescription over-the-counter medications and drugs bought on or before December 31, 2010 can be reimbursed without taxes in accordance with the employee plan. However, as of January 1, 2011, an employer-provided health plan, such as an FSA or HRA, can only pay or reimburse the cost of drugs and medications under the following circumstances:

• The medication is insulin
• A prescription is required for the medication
• The individual acquires a prescription for a medication available without a prescription (over-the-counter medication.)

Note that a prescription is defined as a hand written or electronic medication order for a particular individual to have a particular medication or drug. It must abide state legal requirements and be composed by a healthcare professional that is legally authorized to issue prescriptions for the state it was written in.

Health Reimbursement Arrangements and Flexible Spending Accounts with Debit Cards

HRAs and FSAs that use a debit card will also have new special rules. The IRS notice purports that current debit card systems are not capable of recognizing and maintaining that over-the-counter medications were in fact prescribed by a healthcare professional – as in compliance with the new definition of payable/reimbursable over-the-counter medication medical expenses. As a result, health HRA and FSA debit cards should not be used to buy over-the-counter drugs or medications after December 31, 2010. In an effort to smooth and facilitate the transition, the IRS will not be challenging FSA and HRA debit card usage for incurred expenses through the 15th of January in 2011. Thereafter, plans are required to ensure cards have been reprogrammed so that they can not be used in the purchase of over-the-counter drugs or medications. Click here for a list of eligible items as of January 1, 2011.

Those with a health FSA should be careful, as some FSAs contain a grace period provision to allow use of unused funds not spent by December 31 of a given year to reimburse incurred expenses for the initial 2 ½ months of the subsequent year. Even if an individuals’ existing FSA includes this grace period provision, over-the-counter medications bought without a prescription (after the deadline) will not be eligible for reimbursement under the new rules outlined in the IRS notice.

Finally, cafeteria plans may also need revising to adhere to the new over-the-counter medication requirements. Despite the tenet against retroactive amendments, this notice allows an amendment to conform cafeteria plans to requirements adopted by June 30, 2011. For incurred expenses after January 1, 2011 or HRA and FSA debit purchases after January 15, 2011, the amendment may be retroactively effective.

Originally published December 12, 2010.

Please note that in order to purchase breast pumps and related equipment with a benefits debit card at:

A pharmacy location – the pharmacy merchant must have modified their point of sale system to recognize these as eligible items during the check out process.  If that has not yet happened, the cardholder will have to make the purchase at a pharmacy that has made the update, or, pay out of pocket and submit a reimbursement request.

Other merchant location (e.g., medical equipment supplier)  – the benefits debit card will work as long as that merchant falls into one of the health care related categories allowed by the IRS.

Originally published on March 14, 2011.

The IRS has released the 2012 cost-of-living adjustments affecting HSAs. The HSA contribution limits and HDHP out-of-pocket maximums will increase slightly, while the HDHP minimum required deductibles remain unchanged. Here are the details:

· HSA Contribution Limits. The 2012 annual HSA contribution limit for individuals with self-only HDHP coverage is $3,100 (a $50 increase from 2011), and the limit for individuals with family HDHP coverage is $6,250 (a $100 increase from 2011).

· HDHP Minimum Required Deductibles. The 2012 minimum annual deductible for self-only HDHP coverage remains $1,200 and for family HDHP coverage remains $2,400.

· HDHP Out-of-Pocket Maximum. The 2012 maximum limit on out-of-pocket expenses (including items such as deductibles, co-payments, and co-insurance, but not premiums) for self-only HDHP coverage is $6,050 (a $100 increase from 2011), and the limit for family HDHP coverage is $12,100 (a $200 increase from 2011).

For the full version of this update visit IRS.gov

Discussions of consumer-directed health plans frequently focus on high-deductible health plans coupled with health savings accounts (HSAs). Sometimes overlooked are health reimbursement arrangements (HRAs) or a cafeteria pan, employer-funded accounts that can be a solid first step in transitioning to a consumer-directed approach to health care.

In some ways, HRAs work like other kinds of account-type health care plans. Employees can use an HRA to pay for their qualified medical expenses, along with those of a spouse and children. Such expenses could include deductibles, copayment and coinsurance amounts, and any type of expenses that fall under the Internal Revenue Code definition of a qualified medical expense. Funds withdrawn to pay for qualified medical expenses are not taxable to the employee.

The Health Reimbursement Arrangement Advantage

From an employer’s perspective, one of the great advantages of HRAs is that they have tremendous design flexibility. Unlike health savings accounts, they do not need to be tied to a high-deductible health plan. Their design, however, can complement the company health care plan; for example, if you have had to make changes to your company health plan to make it more affordable-such as increasing deductible or copayment amounts-you can offset the impact of such changes on employees by setting up HRAs and letting employees know that they have access to HRA funds to pay for these increased costs. The employer can also, by plan design, limit the expenses that can be paid for through the HRA (such as only for those increased deductibles or copayments); change or enlarge the scope of reimbursable expenses year to year; and change the contribution it makes to the plan each year.

For employers unable to sponsor a comprehensive type of medical plan, an HRA can be a way to provide some health care benefit to employees. The cost of the plan would be predictable-whatever amount the employer chooses to contribute to employees’ accounts-and could vary year to year. Employees could use their HRA funds to pay for medical expenses, or apply them toward the premium of a health plan they purchase on their own.

As noted above, HRAs are employer-funded accounts; no employee contributions are permitted. However, as with any type of health plan contributions, the contributions an employer makes to an HRA are deductible. Though funding HRAs entails some expense for employers, strategic implementation can sometimes be used to offset these costs to some degree. For example, if the HRA is implemented along with health plan design changes that help control plan costs-such as an increase in deductibles or copayments-the employer can use any premium cost savings to help fund the HRA.

Raise Awareness with Employees

HRAs also have the advantage of helping employees develop more awareness of the cost of health care. Just as when withdrawing funds from any type of savings account, each time employees contemplate using the HRA to pay for a medical expense they’re faced with considering whether they’re meeting the medical expense in the most cost-effective way possible. Such thinking is an incentive to take the steps necessary to make informed, cost-conscious health care spending decisions. And, since HRA funds carry over year to year (and are not forfeited, such as are unused amounts left in health care flexible spending accounts), employees have additional reasons to be careful about how they spend HRA money. By design, however, an employer can limit the carry-over feature of the HRA and decide whether to make unused funds available for retirees to use.

HRAs offer the opportunity to provide a cost-defined, tax-advantaged health benefit that can help employees become more informed, savvy health care consumers. Of the many options employers have to choose from in providing health benefits to employees, HRAs are an attractive one to consider.

USING YOUR FLEX DEBIT CARD FOR PRESCRIPTIONS AND ELIGIBLE OVER-THE-COUNTER ITEMS IS EASY!