What changes are coming for Flexible Spending Arrangements?
A big change is that beginning in 2011, nonprescription, over-the-counter drugs are no longer eligible for reimbursement out of an FSA, and that applies to Heath Savings Accounts and Health Reimbursement Accounts, as well. In order to be reimbursed for those costs, a person will have to get a prescription from a doctor for the over-the-counter medication. Because unused money in an FSA is forfeited at the end of the year, people were stockpiling over-the-counter medications to empty the account. There was also a lot of confusion over paying for general wellness items, such as vitamins and weight loss pills, which are not covered. Eventually, as a result, employers will have to amend their cafeteria plan documents to reflect these changes. The burden is on the employer to maintain the plan, keep adequate records and ensure the plan is passing testing.
What are some other changes?
Also beginning in 2011, the penalties are increasing from 10 percent to 20 percent if funds from a Health Saving’s Account are used for nonmedical expenses before age 65.
And beginning in 2013, the maximum reimbursement amount will be limited to $2,500 for Flexible Spending Accounts as part of a Section 125 plan. Currently, there is no IRS limit on the amount that employees can defer on a pretax basis into a flexible spending account, although the average company imposed a limit of $5,000 because the employer is responsible for paying the employee those amounts if the employee had made deferral elections. As a result, if an employee opts to defer $5,000, then in January has surgery and wants to withdraw it, the employer must pay, even though that employee hasn’t had that money taken out of his paycheck yet. This presents a problem if the employer reimburses the employee who then leaves the company.
By imposing a $2,500 cap, the IRS generates more after-tax revenue, but it also presents the opportunity for a cost savings to the employer.
Can employers navigate these SIMPLE cafeteria plans on their own?
I would not recommend employers try to navigate this area on their own. It’s really important to consult with your attorney or your CPA to make sure you have all your ducks in a row. You have to be careful, because there are different rules depending on entity type, and you need to consider the tax implications.
Just talking to your insurance carrier who may not be skilled in tax compliance, or getting information from the Internet, could get you in trouble.
Kimberly Flett, CPA, QPA, QKA, is an associate director in the Retirement Plan Design and Administration group at SS&G. Reach her at (800) 869-1834 or [email protected].
