National health reform changes that affect consumer-driven health care accounts

Aug. 3, 2010

The Patient Protection and Affordable Care Act (PPACA) includes a number of modifications to employee benefit programs. Among these, there are four provisions that will affect Health Savings Accounts (HSA), Health Reimbursement Arrangements (HRA) and Flexible Spending Accounts (FSA).

• Effective immediately, the age for dependent coverage under a Health FSA or HRA can be extended to any participant's child who has not reached age 27 by the end of the tax year. 
• Effective Jan. 1, 2011, a physician prescription is required for over-the-counter (OTC) drugs, medicines and biologicals (products found in medicines) to be considered eligible for reimbursement against an HSA, HRA or FSA (more detail below). 
  • Members utilizing these kinds of accounts may be required to submit a copy of the prescription along with required receipts when seeking reimbursement. 
  • Expenses for OTC purchases incurred prior to Jan. 1, 2011, will not require a prescription. 

• Effective Jan. 1, 2011, the excise tax for using HSA funds for non-qualified medical or other expenses increases from 10 percent to 20 percent. 
• Effective for tax years beginning after Dec. 31, 2012, contributions to a Health FSA will be capped at $2,500 per year. 
  • This amount will be indexed for inflation after 2013.

Though the specific list of items affected has not been completely assessed, the following categories of items will require a doctor's prescription in order to be an eligible expense:

• Acid controllers 
• Acne medications 
• Allergy and sinus 
• Antibiotic products 
• Antifungal (foot) 
• Antiparasitic treatments 
• Antiseptics and wound cleansers 
• Anti-diarrheals 
• Anti-gas 
• Anti-itch and insect bite 
• Baby rash ointments and creams 
• Baby teething pain 
• Cold sore remedies 
• Contraceptives 
• Cough, cold and flu 
• Denture pain relief 
• Digestive aids 
• Ear care 
• Eye care 
• Feminine antifungal and anti-itch 
• Fiber laxatives (bulk forming) 
• First aid burn remedies 
• Foot care treatment 
• Hemorrhoidal preps 
• Homeopathic remedies 
• Incontinence protection and treatment products 
• Laxatives (non-fiber) 
• Medicated nasal sprays, drops, and inhalers 
• Medicated respiratory treatments and vapor products 
• Motion sickness 
• Oral remedies or treatments 
• Pain relief (includes aspirin) 
• Skin treatments 
• Sleep aids and sedatives 
• Smoking deterrents 
• Stomach remedies 
• Unmedicated nasal sprays, drops and inhalers 
• Unmedicated vapor products

This change affects only OTC drugs, medicines and biologicals. Bandages, home health-aids and other OTC items will still be eligible and can be purchased using HRA and HSA funds without further documentation. The following are examples of some of the items that will remain available without a physician prescription:

• Baby electrolytes and dehydration 

Pedialyte, Enfalyte 

• Contraceptives 

Unmedicated condoms 

• Denture adhesives, repair, and cleansers 

PoliGrip, Benzodent, Plate Weld, Efferdent 

• Diabetes testing and aids 

Ascencia, One Touch, Diabetic Tussin, insulin syringes; glucose products 

• Diagnostic products 

Thermometers, blood pressure monitors, cholesterol testing 

• Ear care 

Unmedicated ear drops, syringes, ear wax removal 

• Elastics/athletic treatments 

ACE, Futuro, elastic bandages, braces, hot/cold therapy, orthopedic supports, rib belts 

• Eye care 

Contact lens care 

• Family planning 

Pregnancy and ovulation kits 

• First aid dressings and supplies 

Band Aid, 3M Nexcare, non-sport tapes 

• Foot care treatment 

Unmedicated corn and callus treatments (e.g., callus cushions), devices, therapeutic insoles 

• Glucosamine and/or chondroitin 

Osteo-Bi-Flex, Cosamin D, Flex-a-min Nutritional Supplements 

• Hearing aid/medical batteries 

• Home health care (limited segments) 

Ostomy, walking aids, decubitis/pressure relief, enteral/parenteral feeding supplies, patient lifting aids, orthopedic braces/supports, splints and casts, hydrocollators, nebulizers, electrotherapy products, catheters, unmedicated wound care, wheel chairs 

• Incontinence products

Attends, Depend, GoodNites for juvenile incontinence, Prevail 

• Prenatal vitamins 

Stuart Prenatal, Nature's Bounty Prenatal Vitamins 

• Reading glasses and maintenance accessories

For a full list of eligible expenses, see IRS publication 502.

UPDATED: Sept. 15, 2010

The IRS provided updates on the allowable medical expenses for consumer-driven health care accounts on Sept. 3, 2010. Beginning Jan. 1, 2011, over-the-counter (OTC) medicines and drugs can only be purchased with the spending account if it is prescribed. This rule does not apply to insulin, which can be purchased without a prescription.

Health FSA and HRA debit cards cannot be used for purchasing OTC medicines or drugs after Jan. 1, 2011. The IRS will allow a grace period until Jan. 15, 2011, where they will not dispute such charges. After Jan. 15, 2011, any debit card charges for purchasing OTC medicines or drugs will not be permitted or will be challenged by the IRS. Debit cards can be still be used for other medical expenses other than OTC medicines or drugs.

With the limited exception of those OTC drugs and medicines purchased with a Health FSA or HRA debit card during the grace period, the regulations specify that all OTC medicine and drug purchases made after Jan. 1, 2011, will require proof that they were prescribed before being reimbursed with an HRA or Health FSA. Such proof may include: 

• Receipts that include the name of the person who was prescribed the medicine or drug, the date, cost of purchase, and the prescription number 
• For receipts without the prescription number included, receipts must be attached to a copy of the prescription 

The prescription requirement does not apply to those items that are not medicines or drugs, such as crutches, bandages, diagnostic devices (i.e., blood sugar test kits), or personal care items that qualify as medical expenses.

UPDATED: Jan. 18, 2011

The health care reform law allows parents to keep their dependent children on their health plan up to age 26 regardless of student status, marital status, or tax dependency. However, the adult child must be a tax dependent to receive the tax benefits associated with a Health Savings Account (HSA).

A HSA-qualified health plan must allow coverage for any child up to age 26. However, any use of HSA funds to cover the child’s medical expenses will not be a qualified medical expense, unless the child is a tax dependent. Non-qualified use of an HSA account is considered taxable income and is subject to a 20 percent penalty.

The law extends tax benefits of a Flexible Savings Account (FSA), Health Reimbursement Arrangement (HRA), Voluntary Employees Beneficiary Association (VEBA) plan and retiree health accounts to adult children who have not turned 27 by the end of the tax year, regardless of tax dependency status.

The information on this website is based on BCBSM's review of the national health care reform legislation and is not intended to impart legal advice. Interpretations of the reform legislation vary, and efforts will be made to present and update accurate information. This overview is intended as an educational tool only and does not replace a more rigorous review of the law's applicability to individual circumstances and attendant legal counsel and should not be relied upon as legal or compliance advice. Analysis is ongoing and additional guidance is also anticipated from the Department of Health and Human Services. Additionally, some reform regulations may differ for particular members enrolled in certain programs such as the Federal Employee Program, and those members are encouraged to consult with their benefit administrators for specific details.