Bad diagnosis: Health care reform myths and your FSA and HSA

By Susan Ladika Posted : 02/11/2011

Health insurance myths HSA FSAAs the first wave of health care reform rolls in, misunderstandings and misconceptions about health savings accounts (HSAs), flexible spending accounts (FSAs) and other similar accounts are following in its wake.

Changes to these plans went into effect Jan. 1 as part of the federal government's Patient Protection and Affordable Care Act. More reforms will take hold in coming years. Here are four myths – and the facts – regarding 2011 changes and savings accounts tied to your health insurance plan.

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MYTH: HSAs and FSAs can no longer be used to pay for over-the-counter drugs

FACT: Over-the-counter (OTC) medications are still covered if you have a doctor's prescription. The new law prohibits using funds from your HSA, FSA or similar account to purchase about 15 categories of OTC medications - such as aspirin and cold and allergy medication - unless you have a prescription for these drugs.

Originally, it was unclear whether FSA and health reimbursement account (HRA) debit cards would work for OTC medications, even with a prescription. The Internal Revenue Service issued a clarification stating that it's OK to use FSA and HRA debit cards when pharmacists dispense the OTC medication like they would any other prescription and assign it a prescription number, says Becky Parker, manager of health reform for McQueary, Henry, Bowles, Troy, a privately owned insurance broker based in Dallas.

HSA debit cards generally don't have purchase restrictions – theoretically, you can use the cards to purchase anything, so long as you are willing to pay the taxes plus the penalty incurred for using HSA funds for nonqualfied expenses. However, if you use an HSA debit card to purchase prescription drugs, keep a copy of your prescription in case the IRS audits you, says James Peterson, assistant vice president of business development for HSA Bank, a Milwaukee-based HSA administrator.

ACT NOW: Ask your physician to provide prescriptions for OTCs you use frequently. It might not make financial sense to schedule a special appointment with your doctor to get a prescription for ibuprofen. But if you already have an appointment booked, it's the perfect time to make that request, Parker says.  Becky Parker, manager of health reform for McQueary, Henry, Bowles, Troy, a privately owned insurance broker based in Dallas.

MYTH: The tax status of health savings plans has not changed

FACT: The penalty for nonqualified medical expenses has jumped to 20 percent. Up to now, taking money out of your HSA or MSA for a nonqualified expense – medical or otherwise – has  cost you income tax on the withdrawal, plus a 10 percent penalty. With reform, the penalty now jumps to 20 percent. However, if you're at least 65, you're not subject to the 20 percent penalty.

ACT NOW: Tidy up your emergency account so you aren't forced to dip into your HSA or MSA. There's nothing illegal about taking money out of your account, says Todd Berkley, vice president, market solutions, for OptumHealth Financial Services, a unit of UnitedHealth Group based in Golden Valley, Minn. If the decision is between staving off foreclosure on your home or leaving money in your HSA, the choice is clear cut.

But it's better to prepare for a rainy day by shoring up your emergency fund. That way, you won't have to tap into your HSA or MSA for a nonqualified expense.

MYTH: FSA contribution limits are now lower

FACT: Lower limits don't kick in until 2013. Starting in 2013, FSA contributions will be capped at $2,500, and then increase with inflation. Right now there are no contribution limits, although employers establish their own caps, Parker says.

Berkley says the average FSA contribution is $1,500 to $2,000. Some people rely heavily on the accounts to pay medical expenses. A recent study by Hewitt found that 20 percent of employees contributed to an FSA in 2010, with an average contribution amount of $1,441.

ACT NOW: Plan procedures in 2011 or 2012 if possible. Parker says she expects to see a flurry of contributions as people pay off their children's braces or undergo LASIK surgery before the new limits take effect.

MYTH: Dependent coverage has been reduced

FACT: Dependent coverage has been expanded, but caveats cloud the picture. This is likely to remain an area of confusion, Parker says. The new law lets dependent children remain on their parent's health insurance plan to age 26, regardless of whether they are students, married or are considered tax dependents.

After that, the lines blur. A health plan tied to an HSA allows coverage until the child turns 26. But children must be considered "tax dependents" by the IRS before HSA funds can be used to cover their expenses. That means a child must be younger than 19 and no longer in school, or younger than 24 and a full-time student at the end of the tax filing year.

On the flip side, FSAs and HRAs can be used to cover children's expenses if they haven't turned 27 by the end of the tax year. So, for example, if a child turns 26 on May 3, FSA and HRA coverage remains in effect until Dec. 31.

ACT NOW: Help pay unreimbursed expenses for your kids whenever possible. If you have questions about a child's eligibility under your health insurance plan, talk to your accountant or financial adviser.

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