- June 30th Amendment Deadline for Reimbursable Expenses
- June 8, 2011 | Authors: Anthony E. Antognoli; Elizabeth H. Earl; James Harbert
- Law Firm: Hinshaw & Culbertson LLP - Chicago Office
Among the changes made by last year’s health care reform law is a limitation on the ability of participants in Health Flexible Spending Account plans (Health FSAs) and Health Reimbursement Accounts (HRAs) to receive reimbursements for certain expenses. As noted in our April 26, 2010 issue of the Employment Practices Special Alert, as of January 1, 2011, Health FSAs and HRAs may no longer reimburse participants for expenses related to nonprescription drugs, other than insulin. Thus, expenses incurred for medicines or drugs may be paid or reimbursed by Health FSAs or HRAs only if the medicine or drug: (1) requires a prescription, (2) is available without a prescription and the individual obtains a prescription, or (3) is insulin.
As this standard became effective January 1, 2011, plans are already required to be in compliance with the new reimbursement rules. Guidance issued last year, however, permits plan sponsors to amend their plans retroactively to January 1, 2011, as long as that amendment is adopted no later than June 30, 2011 (regardless of the sponsor’s plan year). Failure to meet this deadline could have significant adverse tax consequences for an employer’s plan, including the possibility of all employee contributions to the plan being immediately taxable.
The new limitation on reimbursements also applies to Health Spending Accounts (HSAs) offered under high-deductible health plans and to Archer Medical Savings Accounts (MSAs). If account holders of HSAs and MSAs receive a distribution for expenses for nonprescription drugs in violation of the new rules, such distributions will be subject to a 20 percent excise tax, in addition to being fully taxable to the account holder.
Another significant health care reform change impacting Section 125 cafeteria plans extends favorable tax treatment to the employer-provided health insurance and medical expense reimbursements for an employee’s children who have not attained age 27 as of the end of the employee’s taxable year. Effective March 30, 2010, employer-provided health coverage and reimbursements for medical care are excluded from the employee’s gross income where they are provided for an employee’s adult child under the age of 27 as of the end of the employee’s taxable year, regardless of that child’s marital or dependent status. This change complements the mandate under health care reform that generally required employers to offer health care coverage for adult children up to age 26. It allows the cost of coverage or eligible expenses incurred for the adult children to be funded or reimbursed through a Section 125 cafeteria plan with pretax dollars.
Employers should review their plan documents now to ensure compliance with these new requirements.