Carter's Benefits

eNewsletter Volume 3, Issue 9 September 2010

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Recent News

Change is occurring on almost a daily basis. This month we see guidelines for Over The Counter Medicines and the release of IRS Form 8941 for calculating small business tax credits.

  1. IRS Releases addition guidance: Over The Counter Rules
  2. What will trigger excise taxes and Form 8928 filings?
  3. Some Health Reform Provisions Take Effect This Month
  4. More Americans Switching To High-Deductible Plans To Reduce Costs
  5. New York Times Column Highlights Advantages, Disadvantages Of High-Deductible Health Insurance Plans
  6. New Resource on PPACA's Nondiscrimination Provisions
  7. IRS ISSUES DRAFT FORM 8941 FOR CALCULATING SMALL BUSINESS HEALTH CARE TAX CREDIT FOR 2010
  8. Health reforms trigger spending shift
  9. 2010 Kaiser/HRET Employer Health Benefits Survey
  10. WSJournal Says Healthcare Law Will Expand Federal Control Through State Programs
  11. Role Of Insurance Agents Touted As Even More Necessary Under Healthcare Reform
  12. Patient Choices May Narrow As Insurers Adjust To Healthcare Overhaul
IRS Releases addition guidance: Over The Counter Rules

Healthcare reform changes over the counter medicine eligibility January 1, 2011 in relation to health savings accounts (HSAs) and flexible spending accounts (FSAs) and health reimbursement accounts (HRAs). You will no longer be able to use your HSA or FSA to purchase over the counter (OTC) medicines and drugs beginning January 1, 2011 unless you have a doctor prescription.

Our friends at Ameriflex have created a FAQ to address some of these changes. Here are a few highlights.

PPACA mandates that expenses incurred for OTC medicines and drugs (with the exception of insulin) will not be eligible for reimbursement under a health FSA or HRA unless you have a prescription.

On September 3, 2010, the Internal Revenue Service issued Notice 2010-59 and Revenue Ruling 2010-23, which explained in some detail how this new rule will work. Some of the information that follows is based on this new guidance.

Up until now, you could use your FSA or HRA debit card to purchase OTC medications (like Tylenol or Claritin) at the pharmacy or drug store, without a prescription. After the new rules go into effect, this will no longer be the case. In order to get reimbursed from your health spending account for the purchase of OTC medicines or drugs, you will be required to obtain a doctor's prescription and will not be able to use a health FSA/HRA debit card for the transaction. This means you will need to file a manual claim to be reimbursed for these expenses.

There are two bits of good news: First, OTC medicines and drugs will still be eligible for reimbursement and you will still be able to save money by using your FSA or HRA funds. Only the substantiation requirements have changed, since there must be a prescription for these items. Second, the IRS has allowed for a two-week "non-enforcement period" with regard to debit card use for OTC medicine and drug purchases. This period will last from January 1, 2011 through January 15, 2011. Please note that this non-enforcement period only applies to the use of debit cards for OTC medicines or drugs, meaning that you will be able to use your FSA/HRA debit card to purchase these items, but a prescription will still be required.

This rule also applies to HSAs, but because HSAs operate differently than health FSAs or HRAs, the effect on account holders will be different. Debit cards tied to HSAs will still work for OTC medicines and drugs, but it will be the sole responsibility of the account holder to have a record of prescriptions for those items. If the account holder does not have a prescription for OTC medicines or drugs purchased with HSA dollars on or after January 1, 2011, the account holder must pay the 20% HSA excise tax on ineligible items.

The IRS did not provide specific guidance regarding what is to be considered a medicine or drug under this new law. Nevertheless, at this time we can be reasonably certain that the following categories of items are considered medicines/drugs and therefore will require a prescription effective January 1, 2011 in order to receive reimbursement from an FSA or HRA:


• Antacids • Allergy and sinus medications • Anti-diarrheals • Anti-gas • Anti itch and insect bites • Baby rash ointments and creams • Cold sore remedies
• Digestive aids • Feminine anti-fungal/anti-itch • Laxatives • Motion sickness medications • Pain relievers • Respiratory treatments • Sleep aids and sedatives • Stomach remedies.

We are reasonably certain that the following categories of items are not considered "medicines or drugs" under this new rule and therefore will not require a prescription in order to receive reimbursement from an FSA or HRA. You will be able to use your FSA/HRA debit card to pay for these items at a pharmacy or drug store, just as you have in the past:

• Acne creams • Anti-fungal foot medication • Antiseptics and wound cleaners • Band Aids • Condoms • Braces and supports • Catheters • Denture adhesives • Diabetic testing and aids • Diagnostic tests and monitors • Elastic bandages and wraps • Eye care and contact lens supplies • Family planning kits • Fiber laxatives • First aid supplies • Hearing aid batteries • Infant electrolytes and dehydration solutions • Infant teething pain supplies • Insulin and diabetic supplies • Nebulizers • Orthopedic aids • Ostomy products • Reading glasses • Smoking deterrents • Syringes • Thermometers • Wheelchairs, walkers, and canes.

The IRS has also posted a questions and answers section on its website concerning these provisions.

[IRS Notice 2010-59 (Sept. 3, 2010) and Rev. Rul. 2010-59 (Sept. 3, 2010)]
Notice 2010-59: http://www.irs.gov/pub/irs-drop/n-10-59.pdf
Rev. Rul. 2010-23: http://www.irs.gov/pub/irs-drop/rr-10-23.pdf
Q&As: http://www.irs.gov/newsroom/article/0,,id=227308,00.html (1)

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What will trigger excise taxes and Form 8928 filings?

Question: I have heard Form 8928 excise taxes mentioned in connection with health care reform's new appeals and external review requirements. Is this the only aspect of health care reform that might trigger excise taxes? If there are others, can you describe them?

Answer: In addition to the requirement you mention, noncompliance with several other health reform requirements could trigger excise tax liability and Form 8928 reporting obligations. The key to understanding what requirements might trigger taxes is Code Section 4980D, which imposes a basic tax of $100 per day for any failure of a group health plan to meet the requirements of "Chapter 100" of the Code. Significantly, in addition to COBRA and several other group health plan mandates (like special enrollments and mental health parity), Chapter 100 also includes Code Section 9815. This new section was added by PPACA (the health care reform law) and incorporates by reference several of the health reform mandates. Of note for employer-sponsored plans (some mandates apply only to insurers), included in the list are the following mandates becoming effective for plan years beginning on or after September 23, 2010:

==> extension of dependent coverage to children under age 26,
==> no lifetime limits on essential health benefits,
==> restricted annual limits on essential health benefits,
==> no rescission of coverage,
==> no preexisting condition exclusion for those under age 19,
==> additional appeals and external review requirements for benefit denials,
==> four-page summary of benefits (subject to a special, later distribution rule),
==> first dollar coverage for preventive care,
==> requirements for choice of health care professionals and emergency services, and ==> Code Section 105(h)(2) nondiscrimination rules applicable to insured plans.

By nature, many of these mandates will require plan design changes for compliance. Some of these (like the coverage for children under age 26) also impose notice requirements. Others (like the four-page summary and appeals rules) are more administrative in nature. Failure to comply with any of the obligations imposed by the various mandates would appear to implicate excise taxes. Additional health reform mandates that could trigger excise taxes become applicable in later years. (Of course, some of the mandates do not apply to grandfathered plans.) We should also note that Form 8928 and its Instructions have not yet been updated to reflect the health reform mandates added to Chapter 100 through Code Section 9815, but a future version of the Form is expected to do so. (2)

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Some Health Reform Provisions Take Effect This Month

The Detroit News (9/6, Burden) reported, "More health care reform measures are kicking in, with many of them taking effect this month. While Michigan's major insurers say the changes will have little, if any, impact on health care premiums, analysts say consumers can expect insurance rate hikes eventually." The "two major changes this month include extending insurance coverage for dependents to age 26 and barring insurers from not accepting children 19 and younger because of pre-existing conditions. Both changes could add significant numbers to the ranks of the insured."

Likewise, the Winston-Salem Journal (9/7, Craver) reports, "The rollout of federal health-care reform reaches two more key dates over the next few weeks. On Sept. 23, insurers and insurance plans must allow children under age 26 to stay on their parents' policy," although "in some cases, there is an exception for an adult child who has an offer of job-based coverage." The Journal also notes that "stronger consumer protections also come into effect Sept. 23 that will be felt as individuals and families renew or buy coverage."

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More Americans Switching To High-Deductible Plans To Reduce Costs

In his Los Angeles Times (9/7) column, David Lazarus writes that about "150,000 Blue Shield customers with individual insurance policies...will experience yet another rate hike Oct. 1," and "an additional 180,000 Blue Shield members will see their rates go up by an average of 18.3% over the next year." In addition, approximately "800,000 Anthem Blue Cross individual policyholders will see their premiums rise by an average of 14%." Lazarus notes that "a recent survey by the Kaiser Family Foundation found that 16% of individual policyholders nationwide have switched to less-comprehensive plans to keep costs down. A quarter of individual policyholders now have an annual deductible of $5,000 or more."

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New York Times Column Highlights Advantages, Disadvantages Of High-Deductible Health Insurance Plans

In the New York Times (8/28, B6) "Patient Money" column, Walecia Konrad discussed the advantages and disadvantages of "high-deductible health insurance plans linked to tax-exempt health savings accounts (HSAs)." In return for lower premiums and having a much higher deductible, participants "are allowed to deposit pretax dollars in the HSA, which are used to pay...out-of-pocket medical costs." The account's earnings "are also tax-free, and no taxes are paid on withdrawals used for qualified medical expenses." However, "critics have been less enthusiastic about HSA's, worrying that high-deductible plans work only for young, relatively healthy people who do not spend a lot on healthcare anyway. When sick people are faced with paying high out-of-pocket costs for medical bills, they simply go without the care they need, experts note."

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New Resource on PPACA's Nondiscrimination Provisions

The Patient Protection and Affordable Care Act (PPACA) extends the nondiscrimination requirements of the Internal Revenue Code to most insured group health plans, except for "grandfathered" plans that were in existence on March 23 when PPACA was signed into law.

Plans that run afoul of the rules face excise taxes of $100 per day for each employee whose benefits are not in compliance, up to 10% of the cost of the group health plan or $500,000, whichever is less. The law firm Davis & Harman recently authored a white paper and flow chart discussing the current and likely future workings of the nondiscrimination legal requirements. (3)

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IRS ISSUES DRAFT FORM 8941 FOR CALCULATING SMALL BUSINESS HEALTH CARE TAX CREDIT FOR 2010

[Draft Form 8941; IR-2010-096 (Sept. 7, 2010)]
Form: http://www.irs.gov/pub/irs-dft/f8941--dft.pdf
News release: http://op.bna.com/dt.nsf/id/csaz-893jwu

The IRS has released a draft version of the new Form 8941 ("Credit for Small Employer Health Insurance Premiums") for 2010, which will be used by small businesses to calculate the health care tax credit created by recent health care reform legislation. The small business health care tax credit, which is effective for the 2010 taxable year, allows eligible small employers that offer health insurance coverage to their employees to take a tax credit of up to 35% of the nonelective contributions they make toward premium cost.

The draft Form 8941 that is currently available is an advance proof copy and is subject to change and OMB approval before it is officially released. The IRS reports that the final version of Form 8941 and its instructions will be available later this year.

For an eligible small employer that is not tax-exempt, the small business health care tax credit (as calculated on Form 8941) is only available to offset actual tax liability and is claimed on the employer's tax return as part of the general business credit. It is not payable in advance to the employer, nor is it refundable. (It appears that Form 3800, which is used to report the general business credit, will be revised to add a reporting line for this tax credit.) In the case of a tax-exempt eligible small employer, instead of being a general business credit, the small business health care tax credit is a refundable tax credit limited to the amount of the employer's payroll taxes. The IRS reports that the Form 990-T will be revised so that eligible tax-exempt organizations, including those that owe no tax on unrelated business income, can claim the small business health care tax credit. (4)

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Health reforms trigger spending shift

New U.S. reforms are poised to dramatically shift the nation's healthcare spending, not only curbing Medicare costs but also pumping more money toward the private sector as roughly 32 million people gain coverage.

Although the law has little impact on overall healthcare spending, government researchers said they expect sharp changes in the U.S. healthcare sector as the bulk of the recently passed law starts taking effect in 2014.

The survey, conducted by Centers for Medicare and Medicaid Services (CMS) auditors and released on Thursday, is likely to fuel the debate over whether the reform law truly reins in healthcare spending, now already more than one-sixth of the nation's economy.

"The overall net impact is moderate," said Andrea Sisko, a CMS actuary who helped analyze the data. "But when you peel back the onion and you start looking underneath the surface, you start to see a much more pronounced impact on payers."

The analysis comes just weeks ahead of U.S. elections seen largely as a referendum on Democrats, who control both the White House and Congress. Reforming the nation's healthcare system was a top domestic priority for the Obama administration, but Republicans have vowed to repeal the law or cut funding if they win enough congressional seats.

Additionally, millions of people are expected to gain health insurance. By 2019, nearly 93 percent of the U.S. population should have coverage, researchers said. Now, more than 40 million people in the United States lack insurance, but that figure would drop by 32.5 million, the study found.

LARGER DEMAND FOR SERVICES

"There's definitely going to be a larger demand for services in 2014," said John Poisal, deputy director for CMS's National Health Statistics Group that made the projections.

That year is when the bulk of the health reforms take effect, including a provision that requires Americans to buy health insurance or face fines.

Most uninsured will gain coverage through expanded joint federal-state Medicaid programs for the poor or on their own through state-based exchanges.

Nearly 16 million people will buy health insurance from private companies through the exchanges in 2014, growing to more than 30 million by 2019, the study showed. That would nearly double the amount of money spent on healthcare for such consumers while also helping to reduce prices, it said.

Despite the underlying shifts, however, U.S. healthcare costs will continue to rise considerably, reaching $4.6 trillion by 2019 from $2.6 trillion in 2010. That amounts to 19.6 percent of the nation's Gross Domestic Product. Healthcare is already expected to reach 17.5 percent of GDP this year. (5)

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2010 Kaiser/HRET Employer Health Benefits Survey

Workers on average are paying nearly $4,000 this year toward the cost of family health coverage — an increase of 14 percent, or $482, above what they paid last year, according to the benchmark 2010 Kaiser/HRET Employer Health Benefits Survey. Total premiums for family coverage, including what employers themselves contribute, rose a modest 3 percent to $13,770.

This annual survey of employers provides a detailed look at trends in employer-sponsored health coverage, including premiums, employee contributions, cost-sharing provisions, and other relevant information. The survey continued to document the prevalence of high-deductible health plans associated with a savings option and included questions on wellness benefits and health risk assessments. The 2010 survey included 3,143 randomly selected public and private firms with three or more employees (2,046 of which responded to the full survey and 1,097 of which responded to an additional question about offering coverage). Researchers at the Kaiser Family Foundation, the National Opinion Research Center at the University of Chicago, and Health Research & Educational Trust designed and analyzed the survey.

Complete article can be found here: http://ehbs.kff.org/

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WSJournal Says Healthcare Law Will Expand Federal Control Through State Programs

The Wall Street Journal (9/9, subscription required) says in an editorial that the healthcare law tries to expand federal control over healthcare by offering billions for new state-level programs. Minnesota Gov. Tim Pawlenty has issued an order forbidding any part of the state government from seeking grant funding or applying for demonstration projects without getting approval from his office. Pawlenty says the provisions of the law are meant to hook states into a "new initiative or a new commitment or new spending that is federally directed," and then later leave the state governments to foot the bills. Read online (6)

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Role Of Insurance Agents Touted As Even More Necessary Under Healthcare Reform


Janet Trautwein, CEO of National Association of Health Underwriters writes in Kaiser Health News (9/9), "The supposed demise of the insurance agent has been greatly exaggerated. ... And with the new health reform law set to make the insurance market even more complicated, consumers will need the expert advice of agents and brokers more than ever." Trautwein concludes, "The new health reform law aims to lower health costs for consumers. Agents have decades of experience doing exactly that for their customers. It's no wonder that the National Association of Insurance Commissioners has explicitly stated that health reform must 'protect the indispensable role that licensed insurance professionals play in serving consumers.'" (7)

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Patient Choices May Narrow As Insurers Adjust To Healthcare Overhaul

The Chicago Tribune (9/5, Japsen) says the federal healthcare overhaul's focus on quality "implies that consumers will get better care because doctors and hospitals will be measured against the best performers, but there may be an unintended consequence: It could leave patients with fewer choices of medical care providers, depending on which health plans they purchase. ... Among measures to ensure quality, the law requires state-regulated health plans, largely those selling policies to individuals and small to medium-size businesses, to spend at least 80% of premium dollars on medical care. That's squeezing insurers' profits. As a result, health plans are using the quality measures as a way to scale back choices of doctors and hospitals in certain networks."

With a similar focus, the Minneapolis Star Tribune (9/5, Yee) says the White House "is hoping that the measures will help quell critics of the healthcare law, turning it from a promise and an abstraction in people's minds to a program with real-life benefits. Many of the looming fixes address items that have infuriated consumers about their health insurance over the years. In addition to allowing all kids to stay on their parents' insurance until age 26, the new provisions include preventing insurers from denying coverage to sick kids, gradually closing the doughnut hole that leaves a gap in seniors' drug coverage, and doing away with caps on annual and lifetime medical costs."

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How does Carter's Benefits help ?
Carter's Benefits has immediately begun to notify clients of the changes as they occur. We will continue to stay on top of changes in this industry. In a consultative role, Eddie Carter has begun hosting live seminars to update employers and Human Resource Managers on these changes. If you would like to host a meeting with your local community or civic organization, please contact me for details.

Eddie Carter,
Benefit Consultant
Questions@CartersBenefits.com


Footnotes:

(1) from the Frequently Asked Questions (FAQ) published by Ameriflex http://www.flex125.com/af_site/company_info/forms/OTC_FAQ.pdf

(2) Employee Benefits Institute of America (EBIA), weekly newsletter dated September 2, 2010

(3) National Association of Health Underwriters "NAHU Washington Update" September 03, 2010

(4) Employee Benefits Institute of America (EBIA), weekly newsletter dated September 9, 2010

(5) Reuters News September 09, 2010 article titled "Health reforms trigger spending shift"

(6) September 09, 2010 Wallstreet Journal article titled "The Federal Health Care Tease"

(7) Kaiser Health News, September 09, 2010 article titled "Don't Discount The Value of An Agent, They Discount Your Insurance".

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If you have questions or would like more information please give us a call or send us an email.  Our email address is Questions@CartersBenefits.Com
 
 

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