Reform changes rules for tax-exempt accounts

Reform changes rules for tax-exempt accounts

November 2nd, 2010 by Emily Bregel in News

New and little-known changes under federal health care reform could throw a kink into patients' use of tax-exempt medical spending accounts.

Starting Jan. 1, consumers no longer will be able to use money in their flexible spending accounts, health savings accounts and health reimbursement arrangements to pay for over-the-counter medications, unless they have a prescription or note of medical necessity from a doctor.

The rule exempts insulin, which still will be reimbursable without a prescription. Plus, over-the-counter health equipment or supplies that aren't drugs or medications -- such as crutches or bandages -- still can be reimbursed without a prescription.

The change could have a real impact on tight budgets if patients aren't aware of the changes, experts said.

"It's one of those things that nobody really talks about," said Joanne Denise, employee benefit specialist with Strategic Employee Benefit Services in Chattanooga. "We're into open enrollment season right now, and it's just starting to be communicated to employees."

Some doctors also are concerned about a potential increase in administrative hassles, as well as possible legal implications.

The tax-favored accounts give consumers a way to budget money to use tax-free for qualified medical expenses. Flexible spending accounts are stand-alone accounts, usually funded solely by employee contributions through a voluntary salary reduction. Health reimbursement arrangements strictly involve contributions from an employer.

Health savings accounts, often accompanied by matching funds from an employer, are paired with high-deductible health plans that compel patients to pay a greater portion of their medical costs.

The changes don't affect the purchase of drugs before Dec. 31, 2010, even if those drugs are reimbursed after Jan. 1, and they do not impact copayments and deductibles, according to the Internal Revenue Service.

The goal of the changes "really boils down to potentially raising tax revenue" by making it harder to use those tax-favored accounts for over-the-counter drugs, said Mark Berggren, benefits and HR outsourcing legal consultant for Aon Hewitt, human resources consulting.

Also under new rules, those with health savings accounts face a higher penalty for misuse of their funds -- a 20 percent tax instead of 10 percent tax, Berggren said.

Doctors worry that the new limits instead will result in a deluge of requests for prescriptions for over-the-counter medications, instead of patients simply paying out of pocket for those drugs.

"It's a terrible idea," said Dr. Stephen Adams, director of UT Family Medicine in Chattanooga. "In the last couple years the [U.S. Food and Drug Administration] has made a lot of really useful medications over the counter," such as Claritin for allergies and Prilosec for acid reflux, he said.

"Requiring [patients] to have a prescription for them now to get them reimbursed -- that's just a waste of time," he said.

The requirements also could take up a lot of doctors' time responding to prescription requests, Adams said.

Those extra calls will "tie up the phones and make more administrative work for us," he said.

In an October letter to the IRS, Tennessee Medical Association legal affairs director Yarnell Beatty outlined the group's concerns about the rule. He argued that the changes seem to encourage physicians to write prescriptions not for medical reasons but for tax purposes, and they could increase health care costs from unnecessary patient visits.

"If the real intent of this law is to keep patients from being able to use tax-exempt dollars to pay for nonprescription drugs, the IRS needs to provide guidance to physicians who are faced with the decision of whether to take on the burdens and potential legal implications of writing these OTC prescriptions or potentially face a breakdown in the physician-patient relationship," he wrote.

Health savings account-holders still will be able to access their funds without prior approval, but flexible spending account holders will now have to use their own money to pay up front for the drugs, then submit paperwork -- including their prescription and receipt -- to get reimbursed from their account, Berggren said.

Contact staff writer Emily Bregel at ebregel@timesfree or 423-757-6467.

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