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No more tax-advantaged spending on Advil

Michelle Hicks

Michelle Hicks

If you’re a larger employer, there’s a good chance you offer employees the option of participating in a flexible spending account for health care expenses.

A few years ago, the rules governing what could be reimbursed by FSAs were expanded to include over-the-counter medications, such as cold medicines and antacids. But under the new health care reform law, those reimbursements are again restricted starting on Jan. 1, 2011. This change is going to require a lot of communication this fall and throughout 2011 to reinforce it. Otherwise, employees will be very upset when either their claims are denied or they are unable to use up all the money they set aside in the account.

Health care flexible spending accounts allow employees to set aside money from their paycheck before it is taxed. That money is then used to reimburse them for qualified health care expenses. Savvy health care users will estimate what they typically spend out of pocket each year and try to make sure they contribute an equal amount in their FSAs.

In some cases, it creates a savings of up to 35 percent on those expenses, depending on the person’s tax bracket. So, when over-the-counter drugs were included as an eligible expense a few years ago, those same employees were careful to make sure they accounted for everything from Advil to allergy medicine.

During this fall’s open enrollment season, it is very important to remind employees that those expenses are no longer eligible, unless they are prescribed by a doctor. In many cases, those employees will need to spend some time recalculating the right amount to contribute to their health care FSA.

This is important because in exchange for the tax benefit, the accounts are only available for one year. In other words, if employees don’t spend what they set aside by either the end of the year or the grace period, they can’t use those funds. It’s a “use it or lose it” account.

Another important item to communicate about this is that the grace period does not apply to over-the-counter medications after Dec. 31, 2010. Some plans are designed to allow employees to use previous year’s dollars to pay for expenses the first couple of months of a new plan year – the “grace period.” But, in this case, over-the-counter medications stop being reimbursable at the end of this year.

As if this isn’t an already complicated topic, other, non-medication, but drug store-type items are still allowed to be reimbursed. Those include bandages and contact lens solution. It would be a great idea to work with your FSA administrator to develop a list of examples of what does and does not qualify. And then, give it to employees so they have it as a handy reference tool.

Remember, even though employees may receive the message of this change during open enrollment, and hopefully recalculate their FSA contributions, old habits die hard. Those same employees may still forget about the change as the year progresses and try to be reimbursed for over-the-counter medications.

The best way to change behaviors is to reinforce the message. At least once a quarter, employees should be reminded of the FSA change, whether you put an article in your company newsletter or set up a reminder on the company intranet.

Nearly a quarter of all eligible employees participate in health care FSA accounts, with the average annual contribution around $1,500. With that much money at risk, it can add up to a significant amount of questions and frustrations if this change isn’t communicated proactively – before employees enroll and while they participate throughout the year.

Michelle Hicks is a communications consultant with Buck Consultants. Contact her at michelle.hicks@buckconsultants.com.

About Michelle Hicks


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