H.S.A. Rules Are Changing

by Ben Jackson 0

Consumers may have a hard timeusing up all the funds in their Health Savings and FlexibleSpending Accounts in 2011. That is because the Patient Protectionand Affordable Care Act (H.R. 3590) signed into law last Marchstates that consumers must have a prescription for any medicinesthat they buy using money from the accounts.Section 9003 says thatmedicines or drugs are only eligible if they are prescribed,regardless of whether or not the medicine is available without aprescription. The only exception is insulin.

Funds used for ineligible purchaseswill be taxed at 20 percent, which is up from the 10 percent thatused to be in effect on H.S.A.s.

Here is a link to the text of thelaw:

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_public_laws&docid=f:publ148.111

According to a question and answerpage from the Internal Revenue Service(http://www.irs.gov/newsroom/article/0,,id=227308,00.html), the newrules take effect in 2011 and do not apply to purchases made in2010. Also, consumers still can purchase all eligible medicaldevices, such as crutches, bandages, and blood sugar test kits withor without a prescription.

Program managers must make surethat they reprogram their card systems by January 15, 2011, so thatthe cards can’t be used to buy over-the-counter medicines,according to the IRS.

Additional guidance from the IRS is available at:

http://www.irs.gov/pub/irs-drop/n-10-59.pdf

This change could lead to H.S.A.sand other medical spending accounts being less attractive toconsumers. If they need to worry about losing unspent money, andthe options for spending that money are reduced, then they arelikely to protect themselves by choosing to fund these plans atlower amounts, or maybe even not at all. Not only will this rulereduce the amount of funds that banks have on hand from theseaccounts, but it will also likely reduce the number of transactionsand account holders, leading to lower revenues for accountholders.