IRS Issues Guidance on 2011 Health Care Account Changes

On September 3, 2010, the IRS issued guidance addressing the changes made by the health care reform package (the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010) to the use of certain health care accounts.

More specifically, effective in 2011, the health care reform legislation limits distributions for qualified medicine under health savings accounts (HSAs), Archer medical savings accounts (MSAs), health flexible spending arrangements (FSAs), and health reimbursement arrangements (HRAs) to prescription drugs and insulin.

The health care reform legislation changed the statutory definition of “medical expenses” for health FSAs and HRAs and amended the definition of “qualified medical expenses” for HSAs and Archer MSAs. That means beginning after December 31, 2010, medicine or drug expenses may be paid or reimbursed only by a health FSA or HRA and a distribution from an HSA or Archer MSA for medicine or drugs is a tax-free qualified medical expense only if:

  1. the medicine or drug is prescribed (whether or not it requires a prescription or is an over-the-counter drug for which an individual obtained a prescription); or
  2. the medicine or drug is insulin.

The IRS guidance notes that the changes do not affect certain other over-the-counter medical items and supplies (e.g., crutches, bandages, and blood sugar test kits). Additionally, the new changes apply only to purchases made on or after January 1, 2011, so they do not affect any over-the-counter medicine or drug purchases in 2010 (even if such purchases are reimbursed in 2011).

Find the IRS guidance

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