Health Care Reform Impacts Section 125 Plans

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Health Care Reform is now reality, and the new law is going to have significant impact Section 125 Plans and Pre Tax Reimbursement Accounts including  Health Flexible Spending accounts (Health FSA's), Health Reimbursement accounts (HRA's) and Health Savings Accounts (HSA's). Here’s a summary of the new rules:

Health FSA's:

  • Contribution Limits: Under the new law, contributions to a health FSA will be capped at $2500 per year.  This contribution limit will be effective for tax years beginning after December 31, 2012, and the amount will be indexed for inflation after 2013.
  • Over-the-Counter Medications: Effective for tax years after December 31, 2010, FSA funds can no longer be used to purchase over-the-counter medications, unless they are prescribed by a health care professional.
  • Dependent Age Increased: Effective immediately, the age for dependent coverage under an FSA can be extended to any participant's child who has not reached age 27 by the end of the tax year.

HRA's:

  • Over the Counter Medications: Effective for tax years after December 31, 2010, HRA funds can no longer be used to purchase over-the-counter medications, unless they are prescribed by a health care professional.
  • Dependent Age Increased: Effective immediately, the age for dependent coverage under an HRA can be extended to any child of a participant who has not reached age 27 by the end of the tax year.

HSA's:

  • Increased Excise Tax for Non-Qualified Medical Expenses: The excise tax levied on non-qualified HAS distributions (withdrawals taken before age 65 that are not qualified medical expenses) will be increased from 10% to 20%, effective for any such distributions made after December 31, 2010.Over the Counter Medications: Effective for tax year s after December 31st, 2010, HSA funds can no longer be used to purchase over-the-counter medications, unless they are prescribed by a health care professional.

SIMPLE Cafeteria plans for small businesses
The Patient Protection Act establishes a SIMPLE cafeteria plan for small businesses. Under the provision, an eligible small employer (up to 100 employees) is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan, including group term life insurance, benefits under a self-insured medical expense reimbursement plan, and benefits under a dependent care assistance program.

The employer will be required to make matching contributions to the employee’s pre-tax elections, similar to s SIMPLE IRA, or Safe Harbor 401K. Under the safe harbor, a cafeteria plan and the specified qualified benefits are treated as meeting the specified nondiscrimination rules if the cafeteria plan satisfies minimum eligibility and participation requirements and minimum contribution requirements.

SIMPLE Cafeteria Plans will provide much needed relief for small employers who have difficulty passing the Section 125 Discrimination Test Rules. The provision is effective for tax years beginning after Dec. 31, 2010.

 

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