New Flexible Spending Account Rules for 2011

Starting in 2011, employees who use flexible spending accounts (FSAs) to purchase over-the-counter (OTC) drugs will need to supply a prescription in order to be reimbursed. The same rule applies to employees who hold health savings accounts (HSAs), health reimbursement arrangements (HRAs), and Archer medical savings accounts (MSAs). The reason for the change is due to the Affordable Care Act that was passed into law this year.

A flexible spending account, or FSA, is a work benefit that many large corporations extend to their employees in order to help them pay medical costs not typically covered by health insurance. An FSA typically works like this: the employee designates a given amount of money to be deposited into an FSA. The employer deducts the specified amount from the employee's gross earnings at each pay period. The employee tracks the total amount available in the FSA and uses it to purchase approved medical items like prescription drugs, medical co-pays, and deductibles. Receipts can be turned in and reimbursed via a check from the organization managing the FSA, or the employee can receive a Flex spending debit card and use that instead.

The benefit of having an FSA is that medical purchases can be made with pre-tax dollars, providing employees with 15-40% more cash than they would normally have to make such purchases, depending on their tax bracket. The downside to having an FSA is the "use it or lose it" policy of the plan: money set aside into the FSA typically expires at the end of the fiscal or calendar year and is not returned to the employee.

When the FSA was first established, it was intended to be used for medical co-pays, prescriptions, and deductibles. In 2003, the IRS expanded what the FSA could be used to purchase, including non-prescription drugs and medical supplies in the plan. The recent Affordable Care Act restores some of the original intent of the FSA.

This can be an issue for employees who purchase insulin, which is typically available without a prescription. The new FSA rules can also be an issue for individuals who spend a lot of money on cough/cold medicine, bandages, contact lens solution, and hearing-aid batteries. However, one way around such an issue is to ask the physician for a prescription for common items such as aspirin, acetaminophen (often sold as Tylenol), and the like. Interestingly, some household items, such as sunscreen lotion with an SPF greater than 30 and hand sanitizer, will still be covered under the FSA.

What should the average employee do as 2010 draws to a close? First of all, evaluate how much of the current FSA funds are being used up for OTC drugs. If there is a significant amount going towards items like headache medication, cut back this amount for next year's FSA designation. Alternately, stock up on such medication in 2010 so that it is not needed in 2011 (keeping in mind such critical information as drug expiration dating). Alternately, it may be necessary to line up an appointment with a doctor in order to obtain prescriptions for items such as children's cold and flu medicine, antihistamine medication, etc.