Medical Insurance

Health Care Flexible Spending Accounts

These accounts can be used to make up for the portion of the costs not covered by the medical, prescription drug, dental, and vision/hearing plans. The benefit of these accounts is primarily tax savings.

These accounts are a convenient, pre-tax way to pay for your out-of-pocket health care expenses. Money from each paycheck is deposited into your personal flexible spending account. You then submit claims to reimburse yourself for eligible expenses from the account. The money that goes into your account is not subject to federal income tax or Social Security withholding. The amount you can contribute to your account is generally limited annually.

When Should You Use a Health Care Flexible Spending Account?

If you expect to incur any medical, dental, or vision/hearing expenses during the year that will not be reimbursed by insurance and that will be payable by you personally, you should consider using this benefit.

How Does It Work?

You submit claims to pay for eligible out-of-pocket expenses related to health care. Reimbursement for your expense is paid to you out of your account, which you have contributed to on a pre-tax basis. Bottom line: You save money on taxes.

What's an Eligible Expense?

Every plan has different definitions. You should refer to your Benefits Book for a listing of what qualifies and what doesn't. Generally, qualifying expenses are those health care expenses that would be considered tax-deductible as a medical expense deduction by the IRS. Note that over-the-counter (OTC) drugs unless prescribed are not a qualifying expense.

SUGGESTION: For a current, complete listing of all IRS approved medical expense deductions, contact the IRS to obtain Publication 502. The publication can also be downloaded from the IRS website at www.irs.gov.

Let's look at an example of how a two-earner couple takes advantage of a health care flexible spending account. Here are the facts: Jack and Mary are married and have one child named Jane. They are in the 25% tax bracket, have combined taxable income of $60,000, and both of their salaries are fully subject to FICA tax at 7.65%. Both companies provide Health Care Flexible Spending Accounts. The following is a list of out-of-pocket medical expenses that they incur in a typical year, assuming there are no major medical problems.

Deductibles

$1,000

Copayments for medical bills

600

Contact lenses for both
(employer has no vision plan)

600

Prescription costs not covered by insurance

180

Total out-of-pocket medical expenses

$2,380

They could save 32.65% (25% on federal income tax and 7.65% on FICA tax) of the total out-of-pocket medical expenses for the year by using a health care flexible spending account. If Jack had put away $2,380 in a health care flexible spending account, the tax savings would have been $777 (32.65% of $2,380). The savings can be significant—all you have to do is estimate your expenses for the year and have it deducted from your paycheck over the course of the year.

Your plan will specify a maximum amount that you can contribute to the plan each year. If both you and your spouse wish to contribute to your respective accounts, you can do so up to the maximum amount specified by each of your plans. You are not limited to a certain amount because you both participate, other than what your plans specify.

SUGGESTION: You can choose to contribute to the health care flexible spending account even if you opt out of medical coverage under your plan.

SUGGESTION: If one spouse's wages are greater than the current FICA wage cap and the other spouse's wages are below the wage cap, you should use the health care flexible spending account, if available, at the lower paid spouse's company since you would save more FICA tax.

SUGGESTION: Many plans allow employees to adjust or change the amount contributed when there is a change in family status, for example, the birth of a child. Make sure to review when you may adjust or make changes to the account. If you have a choice of plans, you may want to choose the plan which allows more flexibility.

IMPORTANT NOTE: You should carefully determine how much to contribute to the flexible spending account, because if you don't use all the money that you put in the account by the end of the plan year, you will lose it. That is the only catch, so it pays to estimate carefully. However, if you do forfeit a small amount of money in any given year, the tax advantage to participating in this plan may make up for the amount of money you've lost. If you feel comfortable estimating your additional out-of-pocket medical expenses, you should arrange to begin contributing or increase contributions to a Health Care Flexible Spending Account.

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