Spending Account Services Administration Update - Healthcare Reform

Healthcare Reform
On March 23, 2010, the Patient Protection and Affordable Care Act (PPACA) was signed into law followed by the Health Care and Education Tax Credit Reconciliation Act of 2010 on March 30, 2010 (together referred to as the healthcare reform law). These new laws have a broad impact on employee benefits.
As with any major piece of legislation, there will invariably be future modifications to, and further clarifications/interpretations of the new law as the political initiative meets practical application. We will keep you abreast of all developments.

Changes to Flexible Spending Accounts
This act has several implications for sponsors and administrators of Healthcare Flexible Spending Accounts (FSAs). The primary implications and their effective dates are:

January 1, 2011	Over-the-Counter (OTC) Drugs will no longer be eligible for reimbursement
January 1, 2013	The maximum annual Healthcare FSA election will be limited to $2,500, then indexed to the Consume Price Index (CPI) each year after
January 1, 2018	FSA contributions slated to become subject to the excise (“Cadillac Plan”) tax

Over-the-Counter (OTC) Reimbursements
Current Situation:
Since 2003, over-the-counter (OTC) drugs (medicines or drugs sold directly to a consumer without a prescription) were reimbursable through an FSA as long as the item alleviated illness or injury. This included a long list of consumer products including cold medicines, aspirin, first aid items, thermometers, etc.

Change:
Effective January 1, 2011 over-the-counter (OTC) items are not eligible for reimbursement under an FSA without a doctor’s prescription. There is an exception for Insulin as stated in the law:

c) HEALTH FLEXIBLE SPENDING ARRANGEMENTS AND HEALTH REIMBURSEMENT ARRANGEMENTS -Section 106 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:

''(f) REIMBURSEMENTS FOR MEDICINE RESTRICTED TO PRESCRIBED DRUGS AND INSULIN -For purposes of this section and section 105, reimbursement for expenses incurred for a medicine or a drug shall be treated as a reimbursement for medical expenses only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin.''

Impact to Benesyst clients & their Healthcare FSA participants:
Any claim submitted to Benesyst after January 1, 2011 for over-the-counter medicines or drugs must be accompanied by a doctor’s note, stating that the item is medically necessary. If a doctor’s note is not provided, then the claim will be denied in order for your plan to remain in compliance with the law.

There is an exception for medications prescribed by a physician, Insulin, and there may be other exceptions as the actual definition of "over the counter drugs" is refined by the federal government.

Mid-year plan changes:
Please note that this law is effective January 1, 2011 - regardless of plan year. Plans years beginning after 1/1/2010 and before 12/31/2010, will have their participants experience a mid-year change in what is eligible.

Benesyst is refining and will be releasing new communications addressing both types of situations. The impact to HR should be minimal, other than the need to review and replace old communications pieces with the new ones, communicate this change though normal internal channels and distribute the Benesyst-provided materials. Please pay particular attention to your organization’s intranet resources and internal benefits sites. If you have a question, please contact us.

OTC Items & the Benesyst Benny™ Benefits Card
Current Situation:
FSA participants can use their Benesyst Benny™ Benefits Card at any IIAS eligible merchant (http://www.benesyst.net/Spending_Accounts/IIAS.aspx) to purchase eligible OTC items. At the register, the merchant will electronically match the purchased items against a list of FSA eligible items and charges only FSA eligible items to the Card.

Change:
Based on the language above, the bill restricts reimbursements for medicine or drugs to “prescribed” drugs. There needs to be further clarification from the government regarding exactly what is included as an OTC item.

Impact to Benesyst clients & their FSA participants:
Right now, SIGIS (www.sig-is.org) - the industry group that maintains the IIAS standards - is cross referencing medicine and drugs to the current list of eligible items and deleting over-the-counter medicines, drugs and biological treatments from the current eligible items list.

As it appears now, anything remaining (such as adhesive bandages, first aid, etc.) is interpreted to still be eligible and can be purchased by the Card at IIAS eligible merchants. We anticipate that there will be more guidance and clarification published in the coming months and we will keep you informed and update our materials as further information becomes available.

2013 Cap on Healthcare FSA Contributions
Current Situation:
Currently, the maximum annual election an employee can make for their Healthcare FSA is determined by the employer and limited to the annual compensation of the lowest-paid eligible employee. Very few employers have actually taken advantage of the ability to permit election amounts higher than $5,000, but it was legally possible and there are a few who have higher maximum annual Healthcare FSA Elections.

Change:
Beginning January 1, 2013, Healthcare FSAs will be capped with a maximum “health salary reduction” of $2,500 per year. Starting in 2014, this maximum amount will be indexed annually to the Consumer Price Index (CPI) as provided by the Bureau of Labor Statistics.

Impact to Benesyst clients & their FSA participants:
This is the new maximum amount. If an employer currently has a lower maximum election amount, they are not required to meet this amount.

Although this requires further clarification, this amount is not reduced in cases where an employer makes an employer-sponsored contribution to their employees’ Healthcare FSA. For instance if an employer contributes $500 annually to an employee’s FSA to cover unreimbursed medical expenses, the employee could still elect to place $2,500 in the FSA for a total of $3,000.

Employer contributions are often used to compensate for the dropping of another benefit, say, a vision plan, or where the employer simply wishes to provide an additional benefit to their employees. This can sometimes be useful replacement for dental or vision plans and as an aid to plan participation, recruiting and retention. Employees can use the benefit for any medical expense eligible under Section 213 and dollars not used generally revert back to the employer.

Healthcare FSAs Slated to Become Subject to the Excise Tax in 2018
Current Situation:
There is no Excise Tax applicable to healthcare coverage.

Change: If this portion of the law remains unmodified, Healthcare FSAs will be added to the list of health, dental and vision benefits which, when added together, need to be under a new threshold for cost of coverage or be subject to the excise tax. These limits are $27,500 for family coverage and $10,200 for single coverage.

Between now and 2018 we will span multiple administrations and we anticipate a number of changes to the legislation between now and eight years from now, and we should all remain active in the ongoing debate.

Dependent Daycare FSAs, Pre-Tax Commuter Programs and Tuition Reimbursement Programs
Healthcare Reform legislation did not impact Dependent Daycare FSAs, Pre-Tax Commuter benefits or tuition reimbursement programs.

Wellness Rewards
Current Situation:
Employers are currently permitted to deduct expenses of up to 20% of the cost of healthcare coverage for programs to support wellness.

Change:
The new PPACA legislation permits and codifies a higher reward for participation in wellness programs. The reward ceiling permitted is increased from the current maximum of 20% of the current cost of coverage, up to 30% of the actual cost of health coverage. The DOL, HHS and Treasury may increase this reward up to 50%, if they deem it appropriate. These changes are clearly designed to encourage and support employer-based wellness efforts.

Benesyst Commentary
Healthcare FSAs still cover the vast majority of unreimbursed healthcare expenses and remain a valuable part of the benefits package you offer your employees As we have communicated in anticipation of this legislation, we believe that capping and limiting healthcare FSAs eliminates a fair tax break for those who need it the most - individuals and families battling chronic conditions that require ongoing care and medical supplies. Benesyst and its clients were very active in limiting the “damage” to Healthcare FSAs and we will continue to work on your behalf to increase the usefulness of this benefit.

We are pleased that as a result of our efforts and those of others, Healthcare FSAs remain a viable employee benefit and the that maximum Healthcare FSA election amount will be indexed to the Consumer Price Index, continuing to make it of practical use for millions of employees.

In addition the imposition of the Excise Tax in 2018 will be subject to certain “benchmark indices,” and we’ll provide more information of this as it becomes available.

Finally, Benesyst now has a new Wellness Rewards platform designed to reward and support participation in employer’s wellness efforts. If you would like further information on how this system can help you take advantage of the new ceilings on expense for wellness programs, please contact Benesyst.

Next Steps
Benesyst will be revising our systems and all communications materials to reflect the changes to the law. We will be preparing materials for you to share with your employees explaining the changes and pointing out those common items and expenses that are still eligible under their FSAs. FSA participants can call our Customer Care Center toll free to discuss any impact to their FSAs for this year and future plan years.

Benesyst would like to thank the following for their input into this Healthcare FSA Alert:

• Employee Benefits Institute of America (EBIA)
• Special Interest Group for IIAS Standards (SIGIS)
• Leonard Street and Deinard of Minneapolis, MN

Thank you!

The Benesyst Team