CPA & Business Advisory Blog

Health Care Reform & FSAs and HSAs

The Patient Protection Act, as amended by the House Reconciliation Act, modifi es the definitions of qualified medical expenses for health FSAs, HSAs, and HRAs to conform them to the defi nition used for the medical expense itemized  deduction (excluding over-the-counter medicines prescribed by a health care professional). The health care package also caps health FSA contributions at $2,500 per year after 2012, which is indexed annually for inflation after 2013.

The Patient Protection Act, as amended, also increases the additional tax on nonqualified distributions from health savings accounts (HSAs) from 10 percent to 20 percent and from Archer MSAs from 15 to 20 percent.

Impact

The Patient Protection Act as passed by the Senate would have applied to health FSA distributions and reimbursements for tax years beginning after December 31, 2010. The House Reconciliation bill delays the effective date by two years, to tax years beginning in 2013.

To prevent an end-run around the new FSA restrictions using cafeteria plan rules, the House Reconciliation Act provides that, if a benefi t is available under a cafeteria plan through employer provided contributions to a health FSA, the benefit will not be treated as a qualified benefi t unless the cafeteria plan provides that an employee may not elect for any taxable year to have salary reduction contributions in excess of $2,500 made to the arrangement.

SourceCCH, a Wolters Kluwer business

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