Health Savings Accounts And Health Care Reform Law

<div class="Section1">Section 9003 of the ACA adds IRC Section 106(f), which revises the definition of medical expenses for employer-provided accident and health plans, including health flexible spending arrangements (health FSAs) and health reimbursement arrangements (HRAs). Section 9003 also revises the definition of qualified medical expenses for health savings accounts and Archer medical savings accounts.</div><br /> <div class="Section1"><br /> <br /> Prior to 2020, over-the-counter drugs were not eligible for reimbursement by these plans unless a physician issued a prescription. The requirement was removed in 2020. Prior to that, for example, if a physician were to prescribe aspirin, this expense could be reimbursed but the purchase of aspirin without a prescription could not be reimbursed.<br /> <br /> Other changes in health FSAs and HRAs are discussed in the following Q&amp;As.<br /> <br /> </div>

<div class="Section1">An HSA generally is exempt from income tax unless it ceases to be an HSA.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> In addition, rules similar to those applicable to individual retirement arrangements (IRAs) regarding the loss of the income tax exemption for an account where an employee engages in a prohibited transaction<a href="#_ftn2" name="_ftnref2">²</a> and those regarding the effect of pledging an account as security<a href="#_ftn3" name="_ftnref3">³</a> apply to HSAs. Any amounts treated as distributed under these rules will be treated as not used to pay qualified medical expenses ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3649">3649</a>).<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 223(e)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 408(e)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 408(e)(4).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 223(e)(2).<br /> <br /> </div></div><br />

<div class="Section1">HSA law provides special treatment for spouses in the following areas:<br /> <blockquote><strong>Tax-Free Distributions.</strong> An HSA owner can use his or her HSA tax-free to pay the qualified medical expenses of spouses. This benefit does not extend to domestic partners (in limited circumstances a domestic partner could be a tax dependent and an HSA owner can use an HSA for a tax dependent).<br /> <br /> <strong>Beneficiary Treatment.</strong> A spouse beneficiary can treat the HSA as his or her own upon the death of the HSA owner. Non-spouse beneficiaries must take a full distribution of the money remaining in the HSA.<br /> <br /> <strong>Divorce Transfer.</strong> An HSA owner can transfer assets into an HSA of former spouse in the case of a divorce.<br /> <br /> <strong>Estate Tax Treatment.</strong> If a spouse is named as the beneficiary of the HSA, the treatment of the HSA may change for estate tax purposes.<br /> <br /> <strong>Family HDHP Treatment.</strong> Spouses covered under a family HDHP are capped at the combined HSA family limit. Also, if one spouse has a family HDHP, then both spouses are deemed to have family HDHPs. This rule closes a loophole that allowed each partner in a same-sex couple to contribute the family HSA maximum in certain circumstances.<br /> <br /> <strong>Child of Former Spouse.</strong> An HSA owner can use the HSA to pay for medical expenses of his or her child that is claimed as a tax dependent by a former spouse (this is helpful in cases of divorce and legal separation).</blockquote><br /> </div>

<div class="Section1">No. An employer cannot sponsor a stand-alone health FSA. An employer may only offer a health FSA if it also offers a major medical plan to the health FSA participants, who are not required to accept the offer of coverage in the employer’s major medical plan.</div>

<div class="Section1">For amounts paid after December 31, 2010 and before 2020, a distribution from an HSA or Archer MSA<a href="#_ftn1" name="_ftnref1">¹</a> for a medicine or drug was a tax-free qualified medical expense only if the medicine or drug (1) required a prescription, (2) was an over-the-counter medicine or drug and the individual obtained a prescription, or (3) was insulin. The prescription requirement for over-the-counter drugs was eliminated beginning in 2020.</div><br /> <div class="Section1"><br /> <br /> If amounts are distributed from an HSA or Archer MSA for any medicine or drug that does not satisfy these requirements, the amounts are distributions for nonqualified medical expenses, which are includable in gross income and generally are subject to a 20 percent additional tax. This change does not affect HSA or Archer MSA distributions for medicines or drugs made before January 1, 2011, nor does it affect distributions made after December 31, 2010, for medicines or drugs purchased on or before that date.<br /> <br /> IRS guidance reflecting these statutory changes makes it clear that the rules in IRC Sections 106(f), 223(d)(2)(A), and 220(d)(2)(A) do not apply to items that are not medicines or drugs, including equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits. These items may qualify as medical care if they otherwise meet the definition of medical care in IRC Section 213(d)(1), which includes expenses for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.<br /> <br /> Expenses for items that are merely beneficial to the general health of an individual, such as expenditures for a vacation, are not expenses for medical care.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 223(d)(2)(A), IRC § 220(d)(2)(A).<br /> <br /> </div>

<div class="Section1">For tax years beginning after December 31, 2010, health care reform originally required that employers disclose the value of benefits provided for each employee’s health insurance coverage on employee W-2 forms. This reporting was to give the federal government statistical information and did not change the income tax treatment for employers or employees.</div><br /> <div class="Section1"><br /> <br /> The required reporting rules were delayed twice. Health care reform required W-2s for the 2011 year to provide the cost of health coverage. That requirement was delayed and made applicable for W-2s issued for the 2012 year. Additionally, IRS Notice 2011-28 (as modified by Notice 2012-9) provides an exemption for this delayed reporting requirement. Until further notice from the IRS, an employer is not subject to the reporting requirement for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year. The IRS has advised that any guidance expanding the reporting requirements will apply to calendar years that begin at least six months after the date that such guidance is issued.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> If employees talk to one another, the new W-2 reporting may mean that employees can discover that their employer pays nothing for some employees and thousands for others, especially in grandfathered plans that are not subject to nondiscrimination rules so long as they retain their grandfathered status. It has been quite common for small employers to provide family coverage for owners and key employees, to provide single employee coverage often with less than 100 percent of cost for other employees, and to exclude employees who have health insurance through another source, such as a spouse’s employment.<br /> <br /> <hr /><br /> <br /> </div>

<div class="Section1">Each year employers must report on the Form W-2 to each employee the amount contributed to an HSA for the employee or the employee’s spouse. The report must be received by the employee by January 31 of the following year.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 6051(a); Notice 2004-2, 2004-1 CB 269, A-34.<br /> <br /> </div>

<div class="Section1">The definition of wages for purposes of the federal unemployment tax (FUTA) does not include any payment made to or for the benefit of an employee if it is reasonable to believe that the employee will be able to exclude the payment from income under IRC Section 106(d), which deals with contributions to HSAs.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> Unfortunately, a similar change was not made to IRC Section 3121(a) with respect to FICA. The IRS has stated, however, that employer contributions to an HSA are not subject to withholding from wages for income tax or subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act.<a href="#_ftn2" name="_ftnref2">²</a> A similar statement has been made by the Joint Committee on Taxation.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 3306(b)(18).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Notice 2004-2, 2004-1 CB 269, A-19.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     General Explanation of Tax Legislation Enacted in the 104th Congress (JCT-12-96), n. 1642, p. 324.<br /> <br /> </div>

<div class="Section1">Yes.</div><br /> <div class="Section1"><br /> <br /> A business making payments to a service provider other than a corporation aggregating $600 or more for services in the course of a trade or business in a year is required to send an information return (Form 1099) to the IRS (and to the service provider-payee) setting forth the amount, as well as name and address of the recipient of the payment (generally on Form 1099).<br /> <br /> The new law changed this requirement so that businesses had to issue 1099 forms to all persons and businesses, including corporations, for which aggregate annual payments are $600 or more, among other things.<br /> <br /> Health care reform expanded the 1099 requirements in two ways:<br /> <blockquote>(1)     1099s were required to be issued to corporations, and<br /> <br /> (2)     1099s were required to be issued for purchases of goods and products (rather than only services) that exceeded $600 per year.</blockquote><br /> On April 5, 2011 the Senate approved H.R. 4, the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, which retroactively repeals expanded Form 1099 information reporting rules. President Obama signed the bill into law on April 14, 2011. Therefore, taxpayers were not required to take any steps in 2012 and thereafter to comply with the new 1099 requirement.<br /> <br /> </div>

<div class="Section1">Yes.</div><br /> <div class="Section1"><br /> <br /> The IRS has ruled that these proceeds are includable under IRC Section 2033.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Rev. Rul. 78-292, 1978-2 CB 233.<br /> <br /> </div>