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March 15 is the Deadline for FSA Claims

Feb 28th, 2011
by jblankenship.
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FSA SRM crankset by GrayskullduggeryIf you’re a participant in your employer’s Flex-Spending Account plan (FSA), whether for health-care or dependent care cost reimbursement, you have a limited amount of time to claim the monies that have been set aside in your plan.

The way these plans work is that you voluntarily decrease your income by a certain amount, generally paycheck by paycheck, and that amount is placed in a separate account.  Over the course of the calendar year, you can request reimbursement from your FSA funds for qualified expenses that you’ve incurred.

If it’s a health-care FSA account, you can request reimbursement for your healthcare deductibles, co-payments, and co-insurance costs – literally any health-care expense that is not covered (paid) by other insurance.  There are limits, though: beginning with 2011, you cannot be reimbursed for non-prescription (over the counter) medications.

If the FSA account is for dependent-care expenses, you can request reimbursement for your qualified child-care or adult daycare expenses for your dependents.

The income that you have diverted into the FSA account is pre-tax (just like your 401(k) contributions), so your income is reduced when you participate in these plans.  The income is still subject to Social Security and Medicare tax, but not ordinary income tax.

Generally speaking, most FSA plans are set up to allow for a 2½ month grace period for reimbursement from the plans.  This means that, for any particular calendar year that you are participating in a FSA plan, you must request reimbursement of your funds by March 15 of the following year.  If you do not request your funds by this deadline, you lose the opportunity to retrieve these funds forever.

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Over-The-Counter Drugs via Your Flex-Spending Account

Jan 24th, 2011
by jblankenship.
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sookiepose by 416styleIn case you missed it when I wrote about Guidance from the IRS on Flex Spending Plans – one of the changes you’ll have to deal with beginning with 2011 is that you can no longer use your Flex-Spending Account (FSA) to reimburse yourself for over-the-counter drugs like you’ve been able to do in the past.

However, there is a way to get the over-the-counter (OTC) drugs that your physician recommends and use your FSA funds to pay for it… if your physician gives you a prescription for it.  Even though the IRS has disallowed the use of FSA funds for OTC drugs, if your physician gives you a prescription for the OTC drug, your FSA can be used to pay for the drug.

There are some rules though:  first, the prescription has to provided to the pharmacist prior to the purchase, and the pharmacist must dispense the drug just as if it were a regular prescription, with a Rx number assigned to the prescription.  The records must be maintained by the pharmacy and the taxpayer and available to the IRS if necessary.  FSA debit cards (and HSA debit cards) can also be used for this purpose, as long as all of the requirements are met.

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The Truth About Health-Care Reform

Sep 20th, 2010
by jblankenship.
1 comment

Income taxThe health-care reform legislation that passed earlier this year was incredibly broad in scope, so it’s probably not surprising that there’s a good deal of confusion, and a number of false or misleading claims being circulated.  Here’s the truth behind two of the claims that have gained the most traction lately.

Tax on Health Insurance

The claim: Beginning in 2011, you’ll be taxed on the value of your employer-provided health insurance.

There are several email campaigns making their way around right now claiming that, beginning in 2011, taxable income on Forms W-2 will be increased to reflect the value of employer-provided health insurance.  A typical email warns: “You will be required to pay taxes on a large sum of money that you have never seen.  Take your last tax form and see what $15,000 or $20,000 additional gross income does to your tax debt.  That’s what you’ll pay next year.  for many it also puts you into a new higher bracket so it’s even worse.  This is how the government is going to buy insurance for the 15% who don’t have insurance and it’s only part of the tax increases.”

The facts: While it’s true that, beginning in 2011, the health-care reform legislation requires employers to begin reporting the cost of employer-provided health-care coverage on an employee’s Form W-2, the cost is included for informational purposes only, to show employees the value of their health-care benefits.  The amount reported is not included in income, and will not affect your tax liability.

Sales Tax on Real Estate

The claim: Beginning in 2013, a new federal sales tax will apply to the sale of a home.

The claim is that, beginning in 2013, all real estate sales will be subject to a new 3.8% federal sales tax.  The emails making this claim generally contain some variation of the following text:  “Under the new health-care bill – did you know that all real estate transactions are now subject to a 3.8% sales tax?  The bulk of these new taxes don’t kick in until 2013… if you sell your $400,000 home, there will be a $15,200 tax.”

The facts: This claim, though inaccurate, has a basis in fact.  There is no federal sales tax being imposed on the sale of homes.  But, beginning in 2013, the health-care reform legislation does impose a new 3.8% Medicare contribution tax on the net investment income of high-income taxpayers (individuals with adjusted gross income (AGI) exceeding $200,000, and married couples filing joint returns with AGI exceeding $250,000).  Net investment income will include only gain on the sale of a home.  However, the tax will not apply to any gain that is excludable from income.  Individuals, if they qualify, can generally exclude the first $250,000 in gain on the sale of a principal residence, while married couples filing jointly can generally exclude up to $500,000.  That means that in most cases, at least where a principal residence is concerned, the 3.8% tax would kick in only if your AGI exceeds the threshold above and only if profit on the sale of the home exceeds $250,000 ($500,000 for couples filing jointly).

In Closing

These two claims are good examples of how things can get out of hand when the complete facts aren’t fully understood.  The only way to completely understand what’s going on with the new law is to educate yourself – and to use trusted sources when educating yourself.  It’s important to know that not all emails and internet articles are to be fully trusted.  Know the source of the communication – and make sure that it’s someone you can trust to give you the complete picture.  And if you want to get a second opinion on something you’ve read, just let me know.  I’ll be happy to help out, as always.

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Guidance from the IRS on Flex Spending Plans

Sep 6th, 2010
by jblankenship.
1 comment

drugs by gregorfischer.photographyHere’s one of the opening salvos, brought to you by the Affordable Care Act of 2010: the IRS has now issued guidance regarding changes to Flex-Spending plans (or Flex Spending Arrangements, FSAs), which has changed things for folks who use these plans – specifically the medical expense reimbursements.

In the past, these plans have been eligible to reimburse the owner of the account for a myriad of medical expenses, not only physician expenses, prescription drugs, and other health care expenditures, but also over-the-counter medicines or drugs (not controlled by prescription).

Beginning in 2011, due to the Affordable Care Act, over-the-counter drugs and medicines that are not ordered by prescription will no longer be eligible for reimbursement from a medical Flex-Spending plan.  The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses and contact lenses, co-pays and deductibles.

This new standard goes into effect for purchases made January 1, 2011 or after, and a similar standard is due to be in place for Health Savings Accounts (HSAs) and Archer Medical Savings Accounts (Archer MSAs).  But never fear, reimbursements are still going to be available for your 2010 expenditures through March 2011 as always.

If you have one of these FSAs, you’ve probably gotten into a situation in the past (I know I have) where you had too much money set aside through the year for your “regular” medical expenses, and so at the end of the year you make up the difference by stocking up on standard over-the-counter drugs and medicines.  This option will no longer be available to you at year-end in 2011.

Stay tuned as more of this quite helpful guidance comes along.  I’m sure we’ll be collectively satisfied with the results – or but then again, probably not.

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IRA Transfer to HSA: Does This Make Sense?

Dec 18th, 2009
by jblankenship.
1 comment

uk bus transfer tix by Howdy, I'm H. Michael KarshisIn our discussion of Health Savings Accounts (you can see Part 1 here, and Part 2 here), it was mentioned that one possible method for contributing to a HSA is by way of a once-in-a-lifetime tax-free transfer from an IRA.  The question is: Does this make sense?  When would you want to use this one-time option?

Does This Make Sense?

The reason that the question of sense comes up is because when you are eligible to make contributions to your HSA, you can deduct those contributions from ordinary income.  In the case of the tax-free transfer, no deduction is allowed – in fact the income isn’t included at all, so therefore the deduction is lost.

For most folks, the deduction against earned income (above the line; that is, this deduction impacts Adjusted Gross Income and Modified AGI, therefore impacting all sorts of other calculations) is much more valuable than any benefit of a one-time tax-free transfer.

If the IRA is the only source of funds that you have available to make the contribution, you’re probably just as well off to take the distribution, pay the tax, and then take the deduction for the HSA contribution in most cases.  This option is available to you every year, not just once in your life.  If you are under age 59½ you will owe the 10% early withdrawal penalty in addition to the ordinary income tax, of course.

Other Than Most Cases

So when would it make sense to use this one-time tax-free transfer?  I can think of a couple of cases where this might be the right move:

  1. If you are under age 59½ and you have no other funds available to make a contribution to your HSA, using the rollover/transfer from your IRA would bypass the 10% early withdrawal penalty.  I would think you’d want to make this your last resort if you’re in that position.
  2. If you are in a position where you are eligible to take the distribution from your IRA (you’re over age 59½) but showing the income on your tax return will impact some other external calculation – such as financial aid for college, creditors, state income tax, or an ex-spouse.

Bottom Line

The bottom line of all this is: if you have other current income, use those funds to make your deductible HSA contribution.  If you have no other source of funds beyond your IRA and you are over age 59½, take the distribution from your IRA as taxable income and then make the HSA contribution from there.  As a last resort, if you are under age 59½ and have only your IRA as a source of funds to make a contribution to your HSA – then it might make sense to do the one-time IRA-to-HSA tax-free transfer.

NOTE:  It is important to note that this one-time option does not increase the amount that you can contribute to your HSA, nor does it allow you to make a contribution if you are otherwise ineligible to make such a contribution.

If you can think of other situations where the tax-free rollover from your IRA to your HSA might make sense, please leave a comment below!

Photo by Howdy, I'm H. Michael Karshis
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The High Deductible Health Plan

Dec 14th, 2009
by jblankenship.
4 comments

not fully covered by Andrew AliferisIn order to use a Health Savings Account (HSA), one of the requirements is that you have a High Deductible Health Plan (HDHP) in force.  A HDHP is simply a special sort of medical insurance policy with some very particular components.  Specifically, those components are: a) a higher annual deductible than most typical health plans; and b) a maximum limit on the sum of the annual deductible and out-of-pocket (OOP) medical expenses that you pay for covered medical expenses.

HDHP Limits

First of all, the limits for a HDHP are as shown in the following table (2010/2011 figures):

Coverage Type Minimum Annual Deductible Maximum Annual Deductible Plus OOP
Individual $1,200 $5,950
Family $2,400 $11,900

**It should be noted that the Maximum Annual Deductible plus OOP only includes amounts paid within the defined “network” of providers authorized by the plan.  Any expenses outside that network will not be considered within this Maximum Annual amount.

In addition, some family plans have a separate Individual deductible and Family deductible.  When you meet the amount for the Individual deductible for one family member, you no longer have to meet the higher Family deductible for that year. If either the Family deductible or the Individual deductible are less than the minimums for that tax year, the plan does not qualify as a HDHP.

Colleague Mike Chamberlain had the following points to add:

Do not assume that just because your health plan was a high deductible that you are able to use an HSA.

If your plan had a $2000 deductible but paid for office visits and the deductible did not apply, you cannot have an HSA.

If you have a drug deductible that is not connected to the policy deductible it will not qualify either.

Most plans that do qualify state it in the name of the policy or boldly in the paperwork.

Thanks, Mike! — jb

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Health Savings Accounts – The Basics, Part 1

Dec 12th, 2009
by jblankenship.
3 comments

physican by a.drianA Health Savings Account (HSA) is a tax-exempt trust or custodial account that you set up with a bank or other US financial institution which allows you to pay or be reimbursed for qualified medical expenses.  The HSA must be used in conjunction with a High Deductible Health Plan (HDHP).  The HSA can be established using a qualified trustee or custodian that is separate from the HDHP provider.  Contributions to an HSA must be made in cash or through a cafeteria plan.  Contributions of stock or property are not allowed.

Benefits of an HSA

There are quite a few benefits to an HSA:

  1. Contributions to an HSA are deductible from income – even if you don’t itemize deductions;
  2. If your employer makes contributions to an HSA on your behalf (such as via a cafeteria plan) the contributions can be excluded from your gross income;
  3. Your account contributions can remain in the account year-after-year until you use them – there is no annual “use it or lose it” clause;
  4. Growth in the account (via interest, dividends, or capital gains) is tax-free;
  5. Distributions from the account are tax-free if used for qualified medical expenses; and
  6. Your HSA is portable – not tied in any way to your employment with a particular employer.  You take the account with you if you change employers or leave the workforce.

Qualifications for an HSA

In order for you to qualify for an HSA, the following conditions must be met:

  1. You have an HDHP;
  2. You (and your spouse, if married) cannot have any other health plan beyond the HDHP, with the exception of another plan that is limited to the following coverages:
    1. accidents,
    2. disability,
    3. dental care,
    4. vision care,
    5. long-term care,
    6. benefits related to worker’s compensation laws, tort liabilities, or ownership or use of property,
    7. specific disease or illness, or
    8. a fixed amount per day (or other period) of hospitalization.
  3. You are not entitled to Medicare benefits (i.e., beginning with the first month that you are eligible for benefits under Medicare, you can no longer contribute to an HSA.  You are still allowed to take distributions from your existing plan, however.); and
  4. You cannot be claimed as a dependent on someone else’s tax return.

Qualified Medical Expenses

Qualified medical expenses are those that qualify for the medical and dental expenses deduction under §213. Examples include amounts paid for doctors’  fees, prescription and non-prescription medicines, and necessary hospital services not paid for by insurance. Qualified medical expenses must be incurred after the HSA has been established.

You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free amount of the distribution from your HSA.

In Part 2 we’ll cover the contribution limits as well as some of the other special considerations for the HSA.

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Health-Care Reform

Sep 21st, 2009
by jblankenship.
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Confused by the ongoing health-care reform debate? If so, you’re not alone. With multiple bills and proposals in play, it’s often hard to get a grasp on even the most basic elements of the discussion. While the outcome of the debate is uncertain, here are some of the major issues that are being discussed.

Universal vs. mandatory coverage

One of the main goals of health-care reform is to make affordable health coverage available to all Americans. To help provide coverage to individuals and families who can’t afford it, most of the proposals provide assistance in various forms, including new tax credits, an expansion of eligibility for Medicaid, and insurance premium subsidies.

In fact, most of the major proposals currently being discussed actually require individuals to obtain health-care coverage (i.e., “mandatory” coverage). Under these proposals, individuals who refuse to get coverage would pay a financial penalty. Similarly, employers would be required to offer health-care coverage or pay a fine.

The “public option”

One of the most significant areas of debate centers on the so-called “public option.” The term “public option” generally refers to the establishment of a government-run health-care plan that would compete with private insurers and provide coverage to millions of uninsured Americans. There has also been some discussion of establishing health-care cooperatives (nonprofit organizations that would be completely independent of the federal government) as an alternative to a government-run health-care plan.

Paying for reform

The costs associated with most of the health-care reform proposals being discussed are significant. The nonpartisan Congressional Budget Office (CBO) estimates that the legislation currently being considered in the House would cost more than $1 trillion over ten years, with a corresponding increase to the federal deficit over that period of time exceeding $200 billion. To help pay for health-care reform, reductions in Medicare spending are built into the House bill. Other proposals to raise revenue include raising taxes on high-income families, and taxing high-end health plans.

In his address to Congress on September 9, 2009, President Obama proposed a health-care reform plan he estimated would cost $900 billion over ten years, and pledged that he would not sign legislation that increased the deficit. The President described a plan in which savings within the current health-care system paid for most of the cost, with at least a portion of any shortfall paid by charging insurance companies a fee for their most expensive policies.

An evolving landscape

There are, of course, many specific provisions being discussed that we haven’t mentioned here, and not all of them are controversial. For example, any health-care reform legislation is likely to tackle some of the current issues relating to pre-existing conditions. The entire discussion is evolving very quickly, however, with new proposals and ideas coming into play daily. The legislation that emerges will affect all of us in one way or another, so it’s important to stay informed.

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