Reduce taxes with flexible spending accounts
“Green Thumb: The Easy Money People Ignore; No Excuses for Not Using Flexible Spending Account,” said the headline of a The Wall Street Journal article in early October. The Philadelphia Inquirer followed up a few weeks later with: “Time for year-end financial tidying.”
So what is it about flexible spending accounts that’s so newsworthy? It’s easy: Flexible spending accounts, or FSAs, are an easy way of saving money on healthcare and dependent care expenses that you’re already paying for. Your savings come from lowering your taxes, without the hassle of itemizing your expenses or filing a tax return, because your contributions are deducted from your pay before taxes are calculated.
Temple has offered healthcare and/or dependent care FSAs to employees for several years, but less than 10 percent of employees participate. With this year’s FSA open enrollment running from Nov. 28 to Dec. 28, we want to tackle head-on questions and concerns that people have about these accounts.
‘I’m afraid of losing my money’
Why don’t people enroll in FSAs? People generally give two reasons: “I’m afraid of losing my money,” and “It’s too much of a hassle to get my money back.”
Those who worry about losing money are referring to the “use it or lose it” feature. This IRS rule says if an entire FSA account balance is not exhausted by the end of the year, the unused balance is forfeited. Let’s face it: No one wants to lose money in FSAs. However, by taking a conservative approach to deciding how much to contribute and monitoring expenses during the year, it’s easy to avoid having an unused balance at the end of the year.
Let’s look at an example: Sam, who covers his family under Temple’s health benefits, takes medication for high blood pressure every day and wears contact lenses to correct his vision. His wife also wears glasses and is thinking about having her vision corrected with Lasik eye surgery. Their oldest daughter will be getting braces next year.
To estimate expenses that can be reimbursed through the healthcare spending account, Sam estimates his out-of-pocket expenses:
• Co-pays for his blood pressure medications: $120 for the year.
• His wife’s Lasik eye surgery: approximately $1,500 for both eyes.
• Orthodontia expenses that exceed dental plan benefits: $500.
• The total is $2,120.
This is a lot of money, and Sam is afraid of losing it, so he decides to contribute less. Since his wife hasn’t yet talked to her ophthalmologist about the Lasik surgery, he decides not to include that expense. His total now is $620 for the year — a smaller amount that, if his situation changes, he could spend on other healthcare expenses to use up his account. If he still has money remaining in his account toward the end of 2006, he can purchase over-the-counter medications or an extra pair of prescription eyeglasses to use it up before year-end.
Even at $620, Sam will save more than $200 in taxes if he’s in the 25 percent tax bracket (with taxable income between $29,700 and $71,950 in 2005), because he won’t pay federal income tax or FICA on his contributions. The tax savings make his out-of-pocket, after-tax cost only $420.
You can estimate your out-of-pocket expenses and tax savings with the easy-to-use calculator on the WageWorks web site (see Flexible Spending Account resources box). WageWorks administers flexible spending accounts for Temple employees.
‘It’s too much of a hassle to get my money’
Gone are the days when you “pay twice” for your healthcare expenses. When FSAs were introduced 20 years ago, contributions were deducted from your pay and set aside in an FSA waiting for you to pay for an expense and submit a claim to get your reimbursement.
Today people who enroll in the healthcare spending account get a debit card soon after the beginning of the year. The debit card is credited with the full amount of their 2006 contributions and can be used at pharmacies and doctors’ offices. With a simple swipe, employees have immediate access to their healthcare spending accounts.
For dependent care claims, as well as health claims, you can download a claim form from the WageWorks Web site and fax the claim directly to WageWorks. WageWorks will send your reimbursement via direct deposit. The company processes reimbursements twice a week, so you will not have to wait long for your money.
How does it work?
Enrolling in an FSA is easy. Simply go to the WageWorks web site. First use the calculators to help estimate your out-of-pocket health and/or dependent care expenses for next year. Then follow the instructions for enrolling online. Remember: Be conservative in deciding how much to contribute to an account.
Beginning with the first pay in January 2006, deductions will be taken and set aside in the accounts. You can view your account online 24/7.
If you have any questions about whether you’re eligible for the FSAs, call the Temple Benefits Office at 215-204-1321.
With open enrollment occurring just once a year, now is the time to sign up for 2006 flexible spending accounts. The WageWorks Web site has all the information you need — descriptions of expenses that can be reimbursed through the accounts, calculators to estimate your expenses and tax savings, and online enrollment.
Take advantage of FSAs, the easy way to reduce your taxes and save money on health care and/or dependent care expenses.