Tuesday, December 8, 2009

Health Care and Flexible Money

Saving money with money that is not taxed is the best way to pay for health care expenses. A variety of pre-tax accounts are available in the employer market place, and any employee who has access to putting income into one of these vehicles is smart to take advantage of these medical savings accounts. One primary source of saving money is through Flexible Spending Accounts, or FSAs. There are pros and cons about plans like this, but the positives outweigh the negatives for any workers who use them. A Flexible Spending Account (FSA), also called a flex plan or reimbursement account, is an employer-sponsored benefit that allows you to pay for eligible medical expenses on a pre-tax basis (there are also similar accounts for dependent and child-care expenses), according to About.com.

If you expect to incur medical expenses that won't be reimbursed by your regular health insurance plan, you should be taking advantage of your employer's FSA if one is offered. An FSA saves you money by reducing your income taxes. The contributions you make to a Flexible Spending Account are deducted from your pay BEFORE your Federal, State, or Social Security Taxes are calculated and are never reported to the IRS. The end result is that you decrease your taxable income and increase your spendable income. You can save hundreds or even thousands of dollars a year.

According to IRS.gov, health FSAs are employer-established benefit plans. These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. And, employers have complete flexibility to offer various combinations of benefits in designing their plan. You do not have to be covered under any other health care plan to participate. Self-employed persons are not eligible for an FSA. Certain limitations may apply if you are a highly compensated participant or a key employee. You contribute to your FSA by electing an amount to be voluntarily withheld from your pay by your employer. This is sometimes called a salary reduction agreement. The employer may also contribute to your FSA if specified in the plan. You do not pay federal income tax or employment taxes on the salary you contribute or the amounts your employer contributes to the FSA. However, contributions made by your employer to provide coverage for long-term care insurance must be included in income.

According to The Resource Group, there are two common types of FSAs – a medical expense FSA and a dependent care FSA:
1.) Medical Expense FSA - used to pay for medical expenses not covered by insurance – usually deductibles and co-payments, but may also pay for other expenses not typically covered by insurance, such as dental, vision and over-the-counter drug expenses.
2.) Dependent Care FSA - used to help pay for expenses related to the care of a dependent who lives with you while you are at work. While this most commonly refers to child care, it can also be used for adult day care for senior citizen dependents who live with you.

At the beginning of the plan year, you must designate how much you want to contribute, according to the IRS. Then, your employer will deduct amounts periodically (generally, every payday) in accordance with your annual election. You can change or revoke your election only if there is a change in your employment or family status that is specified by the plan. There is no limit on the amount of money you or your employer can contribute to the accounts; however, the plan must prescribe either a maximum dollar amount or maximum percentage of compensation that can be contributed to your health FSA. Generally, contributed amounts that are not spent by the end of the plan year are forfeited. For this reason, it is important to base your contribution on an estimate of the qualifying expenses you will have during the year.

Generally, according to the IRS, distributions from a health FSA must be paid only to reimburse you for qualified medical expenses you incurred during the period of coverage. You must be able to receive the maximum amount of reimbursement (the amount you have elected to contribute for the year) at any time during the coverage period, regardless of the amount you have actually contributed. The maximum amount you can receive tax free is the total amount you elected to contribute to the health FSA for the year. You must provide the health FSA with a written statement from an independent third party stating that the medical expense has been incurred and the amount of the expense. You must also provide a written statement that the expense has not been paid or reimbursed under any other health plan coverage. The FSA cannot make advance reimbursements of future or projected expenses. Debit cards, credit cards, and stored value cards given to you by your employer can be used to reimburse participants in a health FSA. If the use of these cards meets certain substantiation methods, you may not have to provide additional information to the health FSA.

Qualified medical expenses are those specified in the plan that would generally qualify for the medical and dental expenses deduction, according to IRS.gov. However, even though non-prescription medicines (other than insulin) do not qualify for the medical and dental expenses deduction, they do qualify as expenses for FSA purposes. You cannot receive distributions from your FSA for the following expenses:
--Amounts paid for health insurance premiums.
--Amounts paid for long-term care coverage or expenses.
--Amounts that are covered under another health plan.

According to Aetna.com, it's a great way to save money. Here are just some expenses you can pay with your health care FSA:
--Health plan copays and more
--Dental work and orthodontia
--Doctor's fees
--Eye exams and eyeglasses
--Contact lenses and saline solution
--Hearing aids
--Chiropractic treatment
--Laboratory fees
--Over-the-counter medicines, if your plan allows
--Mental health counseling
--All expenses must be qualified medical, vision, pharmacy or dental benefit expenses defined by the IRS.

The amount you may save, according to Aetna, depends upon:
--The amount you put into your FSA.
--The tax percentage you would normally pay on that money (tax bracket).
For example, let's say you want $2,000 taken out of your paycheck this year to put into your FSA. The money you direct to your FSA is taken out of your check before taxes are taken out. That reduces your taxable income by $2,000. Let's say you normally pay 30 percent in federal, social security and state taxes on your income. In this scenario, you would enjoy a tax savings of 30 percent of the $2,000. In other words, you could get a $600 tax savings on the $2,000 you directed to your FSA. This example should not be taken as tax advice. See a tax advisor to seek the best advice for your situation. It's good to plan ahead. Consider the medical, vision or pharmacy costs not covered by a health plan. Need dental work? How about contact lenses? Buy cold medicine, aspirin and sunscreen throughout the year? Your FSA may help pay for these items and more. Also look at family changes that might have an impact on your expenses. The IRS does not limit the amount you can put into a health care FSA. But many employers limit the amount of FSA contributions to between $2,500 and $5,000. Your employer may also set a minimum amount you can contribute. Just remember this: FSA dollars are "use-it-or-lose-it" funds. Account balances cannot be carried over from year to year. If you have any unused funds at the end of the plan year, or at the end of any applicable grace period, those funds will be forfeited. That's an IRS requirement. So carefully estimate what you want to direct to your FSA .

According to PayFlex.com, your Flexible Spending Account (FSA) can help reduce your taxes and increase your take-home pay. On average, people save 23% in taxes, (assuming Federal, state, and social security taxes), by paying their out-of-pocket health care and child care expenses on a pretax basis through an FSA . Actual tax savings depends on several variables, including state and local tax rates and the tax bracket of the participant:
--15% tax bracket can save up to 22.65%
--27% tax bracket can save up to 34.65%
Financial planners and tax advisors advocate participation in an FSA. You can pay your work-related daycare expenses, and your out-of-pocket medical, dental and vision expenses on a pretax basis through an FSA.

To save even more money, you can use your FSA accounts to pay for expenses by combining it with a discount medical plan through a reputable DMPO (Discount Medical Plan Organization) registered in your state. A DMPO offers plans that provide access to networks that include doctors, dentists, optometrists, chiropractors, pharmacies, and other health related products that provide savings at the time of service usually in the 20% to 60% range. Always deal with a reputable company that is registered in your state and has a great BBB rating. You will also want to verify that providers you wish to see are still participating in the networks. Companies like Careington International (www.careington.com) have plans for as low as $6 per month for dental and less than $30 per month for a full blown medical discount plan. By getting a significant discount at the dental, vision, or medical provider, and using pre-tax dollars eligible for use, you can save significant money when you use an FSA plan in conjunction with a discount plan.

Saving money in the current economic climate is tough. However, making the most of your income by using pre-tax savings with FSAs, and using discount medical plans that increase your ability to stretch your dollars, are two ways to get health care at an affordable rate.

Until next time. Let me know what you think.

1 comment:

brian7 said...

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