Tax-Favored Accounts

Health Care Reform is bringing many changes to the way Tax-Favored Accounts work. One of the first changes to take place impacts Over-the-Counter (OTC) items. Effective January 1, 2011, OTC medicines and drugs will no longer be eligible for reimbursement under a Flexible Spending Account (FSA) or Health Reimbursement Account (HRA) without a valid physicians prescription.

Health Savings Account (HSA) and Medical Savings Account (MSA) participants need to be aware that penalties for non-qualified distributions will increase in 2011. This means that if you use money from your HSA/MSA for an ineligible expense, you will be penalized at a higher rate. So be careful when managing your HSA/MSA expenses to ensure all your expenses are eligible under your plan.

The new health care law also adds a contribution cap to Medical FSAs. Effective in 2013, all Medical FSAs will be limited to $2,500. Currently, employers may set any cap they wish. However, even with the new limit, employer’s have the discretion to set the cap lower if they wish.