Senator Ben Cardin (D-MD) and Senator Mike Enzi (R-WY) introduced S. 1404, the Medical Flexible Spending Account Improvement Act of 2011, a bill that would allow employees to pay taxes on and withdraw any unused funds in their employer-sponsored FSAs at the end of the year. Current rules require that any leftover balance in an FSA must be forfeited to the employer at the end of the plan year, hence the "use it or lose it" rule. This bill is the Senate companion to H.R. 1004, introduced earlier this year by Representative Charles Boustany (R-LA) and Representative John Larson (D-CT).

In an effort to repeal Section 9003 of PPACA that requires individuals to obtain a physician prescription to receive reimbursement through an FSA and HSA to purchase OTC medications, bipartisan legislation was introduced as well. The Restoring Access to Medication Act (S. 1368 / H.R. 2529) is lead by Senators Pat Roberts (R-KS) and Ben Nelson (D-NE), and Representatives Lynn Jenkins (R-KS) and Shelley Berkley (D-NV). Additional senators and representatives have joined in cosponsoring the legislation.

We encourage you to contact your legislators in Washington, and ask them to actively endorse these bills.

To locate contact information for your members of the House of Representatives, click here.
To locate contact information for your Senators, click here.

Yesterday, bipartisan legislation was introduced that would repeal a portion of the health care reform law that prohibits people from using their health FSAs and HSAs to purchase OTC medications.

Under current law, plan participants may no longer use funds from these accounts to purchase OTC medications, unless they have a prescription for the medication, as of Jan. 1, 2011. The legislation introduced Thursday was sponsored by Sens. Ben Nelson (D-Neb.) and Pat Roberts (R-Kansas) in the Senate, and Reps. Lynn Jenkins (R-Kansas) and Shelley Berkley (D-Nev.) in the House.

A bill number has not been assigned.

Last week, Sen. Orrin Hatch (R-Utah) introduced the Family and Retirement Health Investment Act of 2011 that would modify and streamline rules for both HSAs and FSAs. Companion legislation was introduced in the House by Rep. Erik Paulsen (R-Minnesota) to improve health care through expanded HSAs.

Support is needed, as Hatch's bill specifically includes the following provisions:

Catch-up Contributions
Allows the spouse of an HSA account holder to double their catch-up contribution to account for their eligible spouse.

Contributions for Medicare Part A Eligible
Allows seniors enrolled in Medicare Part A only to continue contributing to their HSAs.

FSA Rollover
Permits up to $500 of unused FSA funds to carry forward to the following year.

Transition to HSAs
To ease transition to HSAs, clarifies current law to provide employers greater opportunity to roll-over funds from employees' FSAs or HRAs to HSAs.

Removes OTC Restrictions
Repeals restrictions on use of HSA/FSA/HRA dollars for the purchase of over-the-counter medications without a prescription.

Purchase of Health Insurance from HSA
Allows purchase of COBRA coverage, long-term care insurance, and HSA-qualified policies from an HSA.

Medicaid Health Opportunity Accounts
Provides states with the flexibility to create Health Opportunity Accounts for their Medicaid population.

Lifts Limits on Deductibles for Employer-Sponsored Plans in the Small Group Market
Repeals the recently enacted deductible limits of $2,000 for single coverage and $4,000 for family coverage for plans sold to small employers.

Expanded Definition of Qualified Medical Expenses
Modifies the definition of "qualified medical expenses" to promote wellness, and encourage exercise and better diet, by allowing HSA and FSA dollars to be used for gym memberships and meal replacement products.

Click here to read S. 1098 (Hatch).

Click here to read H.R. 2010 (Paulsen).

This month, Congressmen Charles Boustany (R-La.) and John Larson (D-Conn.) introduced the Medical Flexible Spending Account Improvement Act, a bill that would allow consumers to withdraw and pay taxes on any remaining funds in their medical FSAs instead of forcing them to forfeit the remaining balance to their employer as the current rules require.

H.R. 1004 aims to encourage more people to use FSAs and provides relief to the estimated one-quarter of FSA holders who must forfeit funds each year. Under this proposal, any funds not used to pay for medical expenses during the plan year can be withdrawn by the account holder, who would then pay tax on the amount.

Click here to read H.R. 1004.

The IRS has concluded that breast pumps and lactation supplies will qualify as medical care expenses under Code Section 213(d) because they are for the purpose of affecting a structure or function of the lactating woman’s body. Therefore, these items will qualify for tax-free reimbursement from a health FSA or HRA, or for a tax-free distribution from an HSA. The IRS will revise Publication 502 to include this new information.

Click here to read IRS Announcement 2011-14.

Last week, Senator Kay Bailey Hutchison (R-TX) and Representative Erik Paulsen (R-MN) reintroduced the "Patients' Freedom to Choose Act." This legislation would repeal the health reform provision that requires individuals to have a prescription for over-the-counter (OTC) medicines in order to receive reimbursement through a Flexible Spending Account (FSA), Health Reimbursement Arrangement (HRA) or Health Savings Account (HSA). It would also repeal the $2,500 FSA cap set to become effective on January 1, 2013.

We urge you to act immediately. Please contact your legislators in Washington and ask them to actively endorse this repeal. We encourage you to send a letter to your representatives and urge them to sign on immediately.

To locate contact information for your members of the House of Representatives, click here.

To locate contact information for your Senators, click here.

For more information, go to savemyflexplan.org.

Publication 15-B. The 2011 version of Publication 15-B (Employer's Tax Guide to Fringe Benefits) contains information on the employment tax treatment of various benefits. Click here to view the updated Publication 15-B.

Publication 502. The updated version of Medical and Dental Expenses describes what medical expenses are deductible by taxpayers on their 2010 federal income tax returns. It holds substantive changes including updates to the COBRA premium assistance subsidy and the Health Coverage Tax Credit (HCTC). Click here to view the updated copy of Publication 502.

Publication 503. Publication 503 (Child and Dependent Care Expenses) assists employees in preparing 2010 Income Tax Returns. Click here to view the updated Publication 503.

Publication 521. Publication 521 assists employees in preparing 2010 tax returns. This publication explains what types of work-related moving expenses may be deductible on an individual's federal income tax return and who can deduct those expenses. Click here to view the updated Publication 521.

Publication 969. Publication 969 provides basic information about HSAs, HRAs, health FSAs, Archer MSAs, and Medicare Advantage MSAs, including brief descriptions of benefits, eligibility requirements, contribution limits, and distribution issues. Click here to view the updated Publication 969.

Publication 4894. This new publication summarizes the key changes enacted as part of health care reform, with topics including the prescription requirement for OTC drugs and the small business health care tax credit. Click here to view the new Publication 4894.

Form 8889 and Instructions. HSA holders must attach this form to their 1040s to report HSA activity. HSA deductions may be calculated via this form. Click here to view Form 8889 and click here to view the instructions.

The IRS has released guidance pertaining to the use of health debit cards for the purchase of OTC medicines after Jan. 1, 2011. As you know, as of Jan. 1, 2011, all OTC medications will require a prescription in order to be eligible for reimbursement from FSA, HRA, HSA or Archer MSA accounts. This has not changed. However, in the prior guidance, it was stated that health debit cards could not be used to purchase OTC items, with or without a prescription.

IRS notice 2011-5 allows for the use of debit cards for the purchase of qualified OTC items accompanied by a prescription, up to and beyond Jan. 15, provided certain circumstances are met.

To read IRS notice 2011-5, click here.

Click here to read the guidance.

Click here for a press release.

Click here for Q&As.

The Patients’ Freedom to Choose Act was introduced in the House of Representatives today by Rep. Erik Paulsen (R-MN) and a companion bill was introduced in the Senate by Senator Kay Bailey Hutchison (R-TX). The bills (H.R. 5923/S. 3673) would repeal the $2,500 cap on FSAs and the restrictions placed on the use of FSA and HSA dollars for reimbursement of over-the-counter drugs included in the health reform law.