You may have the option through your employer to utilize a flexible spending account (FSA). Depending on your circumstances, this could be beneficial to you and your family’s health spending. This program works by subsidizing a portion of your salary PRE withholding (tax), and your savings would equate to the taxes that you would otherwise pay on this money (this account cannot be used to pay your insurance premiums). These funds are usually deducted in regular installments from your payroll.
This means that the money taken out is NOT taxable income AND because your paycheck is “reduced,” (money is put into the FSA), effectively your taxable income is reduced.
Some history to the creation of FSAs:
Under President Bill Clinton, section 301 of HIPAA amends the IRC to contain tax-related health provisions: Medical Savings Accounts (MSA). Title III defines a MSA as a trust for paying the account holder’s medical expenses. It further allows individuals who are eligible to deduct for the taxable year an amount equal to the aggregate amount paid in cash to MSAs. MSAs came with limitations such as not allowing any portions of the trusts to be invested in life insurance contracts, commingling with other property, and they were limited on utilization to qualified medical expenses as defined in § 220d. For 1996, this was an innovative idea with the potential to reduce financial burdens on those with High-Deductible Health Plans.
This legislation was improved by President George W. Bush’s, Medicare Prescription Drug, Improvement, and Modernization Act of 2003, through the creation of Health Savings Accounts (HSA). Contributions from employers are excluded from gross income, which inherently makes them tax exempt, and the contributions remain in the account from year to year until they are exhausted. Newer types of arrangements are Flexible Spending Arrangement (FSA) and Health Reimbursement Arrangements (HRA). The MSAs of the past became known as Archer Medical Saving Accounts, named for the Representative from Texas, William Archer, who was the creator of the HIPAA of 2003.
The FSA allows the use of pre-tax dollars, and lowers the effective taxes taken out of pay. This is mutually beneficial to the employee and employer, as the funding is payroll tax free. The only notable disadvantage to this plan is that the contributions are not transferrable between plan years; therefore it is important to place financial thought into health care spending. HRAs are solely funded through employers, and contributions are not made through voluntary salary reductions. The employee is reimbursed tax-free for qualified medical expenses, and unlike the FSAs, the unused contributions can be transferred to later years.
The funds in an FSA can be used on your eligible health expenses. Since January 1, 2011, the IRS has implemented new guidelines for what is considered to be an eligible product. What was once used to cover over-the counter medicines, now covers prescribed over-the-counter medicines: as in, you need a doctor’s prescription for your non-prescription product. Section 9003 of the Affordable Care Act established new standards
Talk to your human resources department about your options and see if these would be good ways to aid your annual health expenditures.
Jeremy KW Spiewak, Pharmacy Intern, CPhT, MA RPhT, BA Chemistry, Doctor of Pharmacy Candidate at Massachusetts College of Pharmacy and Health Sciences
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United States Department of the Treasury Internal Revenue Service. (2011). Health Savings Accounts and Other Tax-Favored Health Plans. Publication 969, 1-22.
United States Department of the Treasury Internal Revenue Service. (2012). Affordable Care Act: Questions and Answers on Over-the-Counter Medicines and Drugs. WEB. [accessed June 2012]
Pub. L. 111-148
FSA (links to claim forms and paperless reimbursement)
SIGIS Press Release September 22, 2010
IRS Publication 969
2012 FSAFEDS Brochure
Original Published:June 2012