HOW TO USE YOUR FLEXIBLE HEALTH SPENDING PLAN WITHOUT LOSING THE MONEY YOU CONTRIBUTE TO IT
A lot of employees have a benefit at work that they are afraid to take advantage of: flexible-spending accounts. Flexible spending plans, especially those related to health care expenses, tend to be misunderstood by employees who then choose to avoid them altogether, or underutilize them rather than dealing with their complexity or their major potential pitfall: a “use it or lose it” provision. This article explains “how to” use the benefit without losing your money.
Although flex plans usually cover up to three different types of expenses: child-care, certain health insurance premiums, and qualified health care related expenses, this article deals only with the latter. You should read the article whether you currently use your plan or do not: you want to get the most out of your plan; therefore, putting away the amount closest to the amount you will actually spend in qualified health care costs will give you the greatest benefit. If you are afraid to do so because of the use it or lose it provision, you are probably wasting a potentially significant financial benefit..
With flex plans, the amount you put into the plan reduces your taxable income for federal taxes, state taxes and social security taxes. So, if you spent $5,000.00 this year on qualified medical expenses, but you did not use your flex plan, you actually spent $5,000.00 on the health services and about $2500.00 in all three types of taxes. (Assuming a 33% federal tax bracket, a 10% state tax bracket and the 7.5% employee contribution to social security – other factors may influence the actual dollar amount of savings, this simplified analysis of actual tax savings is only for illustrative purposes.)
If, however, you put the $5,000.00 into the flex plan, and spent it on qualified health care expenditures, you would not have paid the $2500.00 in taxes on top of the $5,000.00 in health care costs. Thus, by using pre-tax dollars under those circumstances, you have actually had a net savings of $2500.00 over what you would have spent had you not used the flex plan. Although this is not an absolute amount, even this simple calculation shows that such benefits can amount to substantial savings. SO, AS LONG AS YOU ARE SPENDING REAL DOLLARS ON HEALTH CARE COSTS THAT ARE NOT BEING REIMBURSED BY YOUR CURRENT INSURANCE, YOU ARE LOSING A LOT OF MONEY BY NOT USING FLEXIBLE SPENDING ACCOUNTS TO COVER THOSE COSTS.
I don’t know about you, but a benefit that potentially saves me $2500.00 is a great benefit. That pays for a lot of other expenses. This tax savings is the same idea as that behind the much more popular 401(k) plan. A person who saves $5,000.00 in such a plan saves their federal taxes on that money of approximately $1650.00 (if you are in a 33% tax bracket) – thus, even though they are taking $5,000.00 out of their gross pay, it does not feel like $5,000.00 because less money is being taken out for taxes. This encourages a lot of people to save because for every dollar they save, they get back around 33 cents in tax savings (assuming a 33% tax bracket.
If you see the value of a 401(k) savings tax benefit, than you should see the similar benefit of a flex health-spending plan: you save taxes on money that you would have spent and paid taxes on. Thus, it has to be a good idea.
So, why don’t employees like the plans or use them far less frequently than they can? What’s the catch? The catch is in the IRS rules that basically force an employee to forfeit any amounts they have put aside if they do not spend them in the calendar year or, under recent rule changes, within 2 ½ months of the calendar year. Most people fear that they will over-estimate their expenses, put too much into the account and lose their money. For example, if you put aside $5,000.00, but only use $4,000.00, you lose the other $1,000.00.
That should not prevent you from using this benefit. First of all, careful planning can eliminate the risk of overestimating, and, a small loss of net dollars, coupled with the amount of the tax savings, may actually still create an overall dollar savings. But, even more importantly, if you think about your expenses, you can get fairly close to an accurate amount to put aside based on what you are likely to spend. And, if you make a mistake, you can time your health care spending to give you the greatest advantage from the account.
If all of these numbers are making your head spin, think strictly about the bottom line: whatever you actually spend in health care expenses that are placed into a flexible savings account reduces the costs of those expenses by the amount you save in taxes on that amount. Anytime, you can use pre-tax dollars to spend money on expenses that you have anyway, you get a benefit. So, you should definately use this benefit. If you put the correct amount of money into the account, spend it on qualified expenses that you would have bought anyway and then put in the appropriate paperwork to get reimbursed in a timely fashion, you will save money.
So, you want to figure out what you are likely to spend next year in covered expenses, put that amount into the flex account, and submit your receipts for reimbursement in a timely fashion.
How do you decide how much money to put in?
First, start now to look into your employer’s particular plan. To make the best use of this benefit, you should act right away because most employers allow employees to make changes to their benefits in October. So, if you act now, you can learn the particulars of your own plan and decide how it can best be used for you. So, contact your personnel or human resources department (or, whoever it is that takes care of benefits at your place of employment) and ask them for a copy of your plan.
Although plans are similar, they can vary in certain key aspects. For example, the IRS places no limits on the amount that an employee can put into such a plan; most plans, however, have a limit cap of $4,000-$5,000.00 (some even have smaller caps). Thus, look for or ask specifically about any contribution limits.
Another key area in which plans differ is in whether employers have adopted a new rule allowing money in a plan to be used to pay for expenses incurred in the first 2 ½ months of the following year (lessening the impact of the use it or lose it provision). Your employer may or may not have amended their plans to take advantage of this new IRS rule, and, your decision about how much to put into the account should factor in whether or not, if you overestimate, you will have a 2 ½ month period to incur the expenses. That allows you to estimate a bit less conservatively than if you have a traditional 12 month plan.
While you are at it, find out what it takes to put in a claim for reimbursement and how easy or difficult it is to be reimbursed. This will let you assess your own likelihood of ensuring you put in claims for the money. If it is some oddly difficult process, or you have a problem with follow through, you have time to devise a good system to make sure that you get your money back. Also, find out when you have to put in your claims (within a period of time after the service is paid for, when the year ends, within a grace period after the year ends etc.) You should also get the forms, so they will be on hand, and find out what documentation you will need to submit a claim. Once you have done that, you can start to figure out how much to set aside.
This is the hard part: how much to set aside so that you gain the maximum benefit of the plan without losing any money. To make that decision, you need to know generally, and, in particular, what your plan covers and think about what it is you will likely spend on those expenses next year. If you keep records of medical expenses that would be an excellent starting point. However, you probably do not know the variety of medical type expenses covered and have not likely saved receipts for every one of those expenses. Although you should check with your plan, most plans cover many items that most people do not know are covered. In fact, they cover “all expenses incurred for the diagnosis, treatment or prevention of disease, or for treatments affecting any part or function of the body.”
Qualified expenses include co-pays, deductibles, any non-covered medical expenses, prescription drug co-pays and, most surprisingly, most over the counter medicines and devices. They also allow you to be reimbursed for any travel expenses related to receiving medical treatment. Because of the summer’s high gas prices, the gas reimbursement rate is now $0.22 (instead of $0.15)
And they allow you to be reimbursed for some things that typical insurance policies may not cover at all or may cover only slightly: out of network doctors if you are on a plan which covers mostly participating providers; alternative treatments such as acupuncture and chiropractic care; ambulance charges, expenses related to reducing chemical dependencies including, in many cases, smoking cessation devices and courses; childbirth courses; medical devices such as crutches, blood pressure monitors, even ace bandages.
Probably the most important areas that the plans cover that are ordinarily paid for out of pocket are for dental, vision and orthodontia. These are huge expenses that even with insurance are generally costly. The plans allow you to take care of these necessary items through the use of pre- tax dollars. Thus, everything from cleaning to root canal to implants (for more than cosmetic purposes) might be covered, as are glasses, contacts and the solution used for the contacts. Some things are covered simply because you bought and paid for them; others require some kind of further documentation – check with your plan administrator to get the exact list.
While cosmetic surgery is generally not covered if it is for purely cosmetic purposes, other cosmetic surgeries may be covered so long as they are to treat an illness affecting a part of the body. And while most vitamin supplements and basic first aid supplies may not be covered, some can be if they are used to treat a specific illness (although you may need greater proof). The things that are not covered are essentially taken or used for general well being. Once they are taken or used for the treatment of a condition, they may be covered. For example, your typical Vitamin C pill may not be covered; however, you might get it covered if you take it directly to help you lessen the severity of a cold or flu.
The most overlooked benefit seems to be the typical over-the-counter medications that people take all the time – since their purpose is to treat an illness or condition, they are always reimbursable without any proof of why you bought them. These include pain relievers, cold and flu remedies, antacids, even things that you buy for an injury such as ace bandages. Other little known covered expenses that may cost your family a lot of money include the cost of lead-based paint removal; the costs associated with some schools and programs for learning disabled children, birthing classes and guide dogs for the blind. Thus, many expenses that are not covered by traditional insurance such as dental, eye care, mental health care and over the counter medications, are reimbursable through these plans. Your plan will probably include a list of the covered expenses; because there are so many they cannot all be listed here. Although the list of what is covered is very broad, there are some things that are clearly not covered. Thus, a weight loss plan may be covered, but a gym membership is not.
With all of these types of services, it seems that putting no money aside is just throwing out a benefit. Underestimating is also a waste of benefits; however, it will at least get you some of the benefits to which you are entitled. How do you decide how much to put aside: that is not as hard as you think whether or not you keep good records. In fact, you could probably off the top of your head right now figure out about what your family spends in co-pays on doctor’s visits and prescription drugs. Are they likely to change significantly in the next year? Once you have that basic amount for coverage of the traditional medical expenses, think about the dentist and money you do or will spend on eye care. If you have a plan that covers this, figure out if you are likely to have non-plan expenses. You know what it costs to go to the dentist for your family – are you going twice a year? If so, add that amount to your account. Are you all going to need glasses or do you wear contacts? How much are those. Add it to your account. Do you use a prescription that is not covered by insurance? Add it. Do you use mental health services? Does your insurance reimburse all of it? If not, add your portion to the amount in your flex plan account. Keep going: are you planning to quit smoking? Sit down and think about your expenses: even with insurance, your medical related expenses add up – you should put them away in a flex plan and pay for them using the plan.
Finally, try to average what you spend on over-the-counter medications: is it $20.00 per month, $50.00, more, less? If possible, look at receipts (or even save them from now until you have to make a decision). If you do not know how much exactly, that is okay. Like I said, at a certain point, the tax benefit will outweigh the loss of any money that you might not have used. On the other hand, you do not want to “waste” money. If you fear wasting money money more than you fear paying unnecessary taxes, underestimate; if you are less risk-averse, pull out the calculator and figure out how much you will save on taxes – at what point will your tax savings and your loss of money not used become “even.” Stop at that point if you do not see any additional expenses. If your company gives you the extra 2 ½ months, add additional money that you might find you actually do use during the calendar year.
What happens if you are wrong: if you underestimate, you waste money on taxes. If you overestimate, you waste money paying for services and products that you do not get. However, you can manipulate the final months of the plan to make sure you use any money left in the account. In fact, you can decide to put off non-necessary medical treatments now if you have no money in the flex savings account left. Not all health care decisions are emergencies. If you are thinking of scheduling a doctor’s visit or loading up on cold medication, and either or both can wait until next year, wait if you have used your flex plan. If, on the other hand, you have money left, go for those new glasses you were looking at, or see the dentist now, schedule the mammogram, load up on over the counter medications that will not expire in the next year. Try to quit smoking, attempt acupuncture, see a chiropractor for that nagging tooth pain, and fix the ugly tooth that’s been bothering you for years. Massages to fix a problem may be covered, find out and go get one. (You’ve already paid for it). If you have set aside money this year and it is gone, maybe you can wait to get new glasses or to do some work on your teeth. Incurring medical expenses while you have plan money to spend makes sense: so, if you have leftover money now, go out and spend it on medical needs that you may have. In other words, plan your health care spending just like anything else except true emergencies about which you have no control. And, let’s say you go to the dentist who plans to do three things. The first costs what is in your plan. Do that before the end of the year, and the rest after the New Year.
You will not be sorry if you put money aside for health care reimbursement and you actually have health care expenditures: the amount you shell out of your pocket will be returned to you very soon after you spend it, and you will save actual money by paying for one of your expenses: health care, with pretax, rather than after-tax dollars. We underestimated for this year: thus, we continued to incur reimbursable medical expenses without having any more money in our flexible savings account. We are going to try to avoid that by keeping in mind our tax savings and the many “unexpected” medical expenses that we can cushion against. We were in the masses of people who feared that we might leave money over in the account. After all of my research, I feel like that attitude has actually cost me money in taxes: we are definitely planning to set aside the amount we believe we will spend in 2007, plus about 10-20% as a cushion for unexpected expenses. If worse comes to worse, we will spend next December taking care of all health-related issues that are still reimbursable. If we use it up, we will wait to schedule appointments that can wait for the following year.
So, if you want to get the most out of this benefit: plan now. Get your plan documents from your employer. Think about what your family spends on health care expenses and have that amount deducted from your salary. Then, spend the money as you need it, and put in the claims for reimbursement. If the end of the year comes and you have money left, make some appointments and buy some over-the-counter items that you’ll need for the following year. If you plan well this year, and keep good records, next year you should be able to know almost exactly what you spend on reimbursable expenses and set aside the exact right amount. That will get you the most out of this important benefit without causing you to lose your money.