BOOKKEEPING TIPS is a twice monthly e-letter published by The American Institute of Professional Bookkeepers (AIPB), Suite 500, 6001 Montrose Road, Rockville, MD 20852. Tel.: 800-622-0121, Fax: 800-541-0066, email: info@aipb.org.

September 7, 2004

New Opportunities - and Traps
for HSAs and FSAs

The opportunity: New Health Savings Accounts (HSAs) let an individual sock away thousands of dollars tax free to pay for medical expenses if the individual is covered only by a high-deductible health policy. Individuals or employers can contribute.

As we have been reporting in The General Ledger (the technical publication for members), the IRS recently ruled (Rev. Rul. 2004-45) that an individual may be able to have a flexible sending account (FSA) and an HSA if the FSA is limited-purpose so that it does not violate HSA high- deductible requirements.

Example: Use the FSA to cover dental care, preventive care and eye care. Use the HSA and high-deductible policy to cover other medical expenses. (An FSA can cover medical expenses if it does not pay or reimburse expenses before the high-deductible minimum is met.) The same rules apply to reimbursement arrangements.

The traps are in a completely different area: reimbursements for drugs. Individuals and employers looking to Canada or other countries for cheaper prescription drugs should review all the consequences -- including tax consequences. Importing prescription drugs violates federal law, and an illegal expenditure is not deductible, so the cost of such drugs cannot be deducted as a medical expense on an individual's income tax return.

Warning to employers and employees: To be reimbursed under an HSA or FSA (flexible spending account), a medical expenditure must be eligible for a deduction as a medical expense, so employers should not reimburse the cost of illegally imported drugs under either type of plan.

So far, the IRS has not been enforcing this violation. But if it does, your company and its employees will have no defense.
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