Tuesday, January 18, 2011

What You Need to Know About Medical Expenses and 2011

The impact of health care reform begins to pick up speed after 2010. While churches received a reprieve on one health care-related issue, other changes are right on schedule even if little information is available to carry out some of the provisions.

The reporting reprieve. Churches were scheduled to report the value of employer-provided health coverage on Form W-2’s for 2011 to be filed in 2012. However, the IRS has now given churches (and other employers) a one-year reprieve (Notice 2010-69). Reporting the value of the health coverage for 2011 is now optional. The IRS has determined that this relief is necessary to provide churches (and employers) the time needed to make changes to payroll systems or procedures in preparation for compliance with the new reporting requirement. So, the information will now be required on Form W-2s for 2012 filed in 2013.

In addition, the IRS announced that it has issued a draft Form W-2 for 2011. When churches report the value of coverage under a church-sponsored group health plan (optional for 2011 Form W-2s/required for 2012), the data must be reflected in Box 12 with a code of DD.

Remember: The cost of church-provided health insurance is not taxable. The new reporting requirement is intended to be informational only and to provide employees with greater transparency into overall health care costs.

A 2011 change that is right on schedule. Over-the-counter drugs and medicines are not eligible for tax-free reimbursement under an employer-sponsored health plan beginning January 1, 2011 (insulin is not a medicine or drug for purposes of this rule).

A few large churches have cafeteria plans and many other churches have health care flexible spending accounts (FSAs). This new limitation imposed by the Patient Protection and Affordable Care Act impacts reimbursements under these plans (OTC drugs and medicines were never deductible as medical expenses on Schedule A.)

It is very important to determine whether a particular OTC item is a medicine or drug because the new rules do not apply to OTC medical supplies and equipment (such as contact lens solutions, bandages, crutches or durable medical equipment or diagnostic devices such as blood sugar test kits.)

The new OTC rules apply to medicines or drugs (other than insulin) incurred on or after January 1, 2011, without regard to the plan year of the plan. Thus, a plan with a fiscal plan year must begin complying with the rules mid-plan year. And, expenses for OTC drugs and medicines incurred during the two-and-a-half-month grace period following the end of a 2010 calendar plan year must be accompanied by a prescription.

What to do. Churches should make the following preparations:
  • Form W-2’s for 2012 to be filed in 2013. Even though reporting the value of coverage under a church-sponsored group health plan, it might be a good plan to report the data on Form W-2s for 2012 to get ready for the reporting required for Form W-2s for 2013.
  • Establish a flexible spending account. Your church doesn’t have to even be close to megachurch size to have a FSA. The smallest church in the U.S. can set up an FSA at virtually no cost to the church and allow church staff to have amounts reduced from salary and used to reimburse medical expenses tax-free (free of federal income and social security taxes—and often free of state income taxes).
  • Amend existing cafeteria and FSA plans. Existing plans must be amended to reflect the new OTC rules. Fortunately, plans may be retroactively amended effective January 1, 2011 so long as the amendment is adopted no later than June 30, 2011.