Anna Peekstok Communications
Seattle, WA 206-524-5050 ap@annapeekstok.com
Go with the Flow: Flexible Spending Accounts
PERKS4U, Winter 2000
Even good insurance plans leave some health costs uncovered, such as copayments, deductibles, and alternative care. Employer-sponsored flexible spending accounts can put a dent in those costs by letting participants save pretax dollars to pay for them. Some benefit programs also include FSAs for dependent care expenses, adoption, and even commuting to work.
Here’s how it works: You estimate how much you will spend on qualifying expenses for the coming year, and divide by the number of paychecks you receive annually. That amount is withheld from each paycheck, before taxes are deducted. After paying for a qualified expense, you submit a claim to your employer, who reimburses the amount claimed out of the funds that have been set aside.
“Turning in the receipts and getting that refund is like a little savings plan,” says Michelle Peterson, a communications manager in Setatle whose employer offers FSAs for health and dependent care. Last year, she saved her receipts for several months before filing a claim, and enjoyed getting a “big chunk of cash back all at once.”
Use It or Lose It
FSAs reduce taxes and allow each employee to choose their level of participation, up to a yearly maximum (usually between $1,000 and $5,000 for health care, and $5,000 per family for dependent care). But estimating expenses carefully is a must — participants lose any unclaimed funds at the end of the year. Also, remember that Social Security and unemployment benefits are calculated on taxable earnings, so contributions to FSAs can lower these benefits.
To calculate how much to set aside for health care, Peterson looked at her bills and even asked her pharmacy for a list of her prescriptions during the prior year. “Basically, you’re guessing, but I try to guess low so I’m not forfeiting anything,” she says. Rich Stover, a benefit consultant in New Jersey, says many employers who offer FSAs provide worksheets to help employees figure out how much to set aside.
“Usually we suggest employees start out with more conservative amounts. Once they’re in the program for a year or two, they get a better idea” of their yearly costs, he says. FSAs also enable people to plan in advance for larger expenses, such as having a baby or having major dental work done.
And while no one wants to forfeit money at the end of the year, Ronald Walter, president of Professional Benefit Administrators, Inc., in Hinsdale, Illinois, points out that most people are still ahead of the game even if they don’t spend every dollar in their accounts.
“Even if they spend only 75 percent of the money they set aside, they’ve at least broken even,” Walter says. “If you think about it, your minimum tax is going to be 15 to 18 percent. In Illinois we have a 3 percent state tax, and then you add your 7.65 percent FICA (Social Security and Medicare) tax. Without an FSA you have an automatic forfeiture of at least 25 percent to the federal and state governments.”
Walter tells his clients to think of FSAs as a tax planning tool, and keep an eye on how much remains in their accounts as they year goes by. “If it’s getting to be the end of the year, you might go out and buy a pair of glasses a few months early,” he says. “You have a right to go out and incur those expenses.”
Sidebar:
Which health care expenses qualify?
Items that qualify for reimbursement from a health care flexible spending account include:
- Alternative therapies such as acupuncture, chiropractic, Christian Science practices
- Birth control
- Cost and care of specially trained service animals, such as guide dogs
- Eye examinations, eyeglasses, and contact lenses (also saline solution and enzyme cleaners)
- Hearing aids and batteries
- Insurance premiums for health care
- Smoking cessation programs
- Transportation expenses for health care trips such as bus, taxi, and mileage costs
Expenses that don’t qualify include:
- Child care while a parent is receiving health care
- Cosmetic surgery that is not medically necessary, such as facelifts, hair transplants, and liposuction
- Health club dues or fitness training
- Household help, even if recommended by a doctor
- Insurance premiums for policies that cover loss of life or earnings
- Maternity clothes
- Transportation to and from work, even if a health condition requires an unusual means of transportation
- Weight-loss programs, even if prescribed by a doctor
Sidebar:
Choose contribution levels carefully
Carefully consider how much to contribute to a flexible spending account each year. Not only will you forfeit any money still in your account at the end of each year, but once you decide how much to contribute, the amount is locked in for the entire year — unless your family status is changed by:
- Marriage
- Divorce
- Death of a spouse or child
- Birth or adoption of a child
- Start or termination of a spouse’s employment
- Change from part-time to full-time employment, or vice versa, by either employee or spouse
- The taking of an unpaid leave of absence by either employee or spouse
- The significant change in the employee’s or spouse’s health coverage that results form the spouse’s employment