Flexible spending for health insurance will be less flexible in 2011

When Americans are saying hello to 2011, many of them will be saying goodbye to a health insurance benefit used every day at drugstores and other retail outlets.

As of Jan. 1, 2011, Americans no longer will be able to pay for over-the-counter medication with their flexible spending accounts (FSAs) and health reimbursement accounts (HRAs). FSAs and HRAs let employees set aside pretax earnings to cover various medical expenses. But under the new health care reform law, users of these accounts won’t qualify for reimbursement of over-the-counter drugs, unless they’re prescribed by a doctor.

Effective Jan. 1, 2011, people who are enrolled in flexible spending accounts (FSAs) and health savings accounts (HSAs) will be required to get prescriptions for over-the-counter drugs to qualify for reimbursement.

Traverse City, Mich., resident Kristen Hains estimates she’ll be losing an annual benefit worth about $1,500 when the clock strikes midnight on Dec. 31, 2010.

Hains, whose 10-year-old son has various allergies and is lactose-intolerant, has an FSA through her employer and estimates she spent about $4,000 on various medications, including over-the-counter Claritin and Lactaid for her son, during the past year.

As of Jan. 1, products like Claritin and Lactaid won’t be covered unless Hains obtains a doctor’s prescription and keeps it on file with her health plan administrator, Society for Human Resources Management spokesman Peter Ronza says. In those cases, Ronza says, employees won’t be able to use their accounts’ debit cards for payment as they had in the past. Instead, they’ll need to pay for an over-the-counter item and submit a copy of the prescription once a year to their health insurers, along with purchase receipts, to qualify for reimbursement.

“People are going to go to their doctors with a laundry list of over-the-counter items for which they want prescriptions. But most (people) will just say, ‘Forget it.’ They either won’t buy the medication, or they will just buy it and not claim it,” says Ronza, president of Pontiflex Consulting Group, an employee benefits consulting firm in Blaine, Minn.

Only about 7 percent of all FSA claims in 2009 were for over-the-counter drugs, according to Hewitt Associates. About 20 percent of U.S. employees contributed to an FSA in 2010, the firm says.

For the more than 35 million Americans who take advantage of FSAs and HSAs, more than 27,000 items remain eligible for reimbursement, says Terry McCorvie, president of the National Association of Professional Benefits Administrators. For example, the new rule does not apply to reimbursements for insulin or to non-drug items like crutches, bandages and blood sugar testing kits. According to IRS guidelines, if employee plans provide a grace period for reimbursement after Dec. 31 for items bought in the previous calendar year, those claims still can be covered without a prescription.

Crutches are among the items that still will be covered by FSAs and HSAs.

Regardless of whether you’re affected by the new rule about over-the-counter medications, you should fund your FSA or HSA at the maximum amount early in the year, according to eHealthInsurance. That way, you can put pretax dollars toward co-payments and deductibles while allowing unused money to collect interest for more of the year.

Effective Jan. 1, 2011, the penalty for withdrawing HSA money not related to medical expenses rises from 10 percent to 20 percent, according to Ronza.

The next round of significant FSA and HSA changes will happen in 2013, when the amount that can be contributed to these accounts will be capped at $2,500 a year, says Rob Butler, president of PayFlex Systems Inc. in Omaha, Neb. In some cases, employers now allow individual contributions of $5,000 or more each year.

“But the good news there is that the average person does not put in more than $1,600,” he says. “We find that most contribute $2,500 or less.”

But not Hains, who socked away $4,000 in 2010 — $1,500 more than the year before — after reviewing the amount she was spending on over-the-counter drugs. She’s dismayed by the cap that will take effect in 2013.

“I’m not one of those people who has $1,200 left … and is going to try to use it up at the end of the year. We really use it throughout the year. It’s disappointing (because) it was a good way to save, and some of those savings will be gone,” Hains says.

–Gwen Moran