Although your health care benefit plan offers you and your familyconsiderable protection against the high cost of health care, you probably havea number of ordinary health care expenses that are not covered under any benefit plan.
Typical out-of-pocket costs that most people incur include insurancedeductibles and copayments. Also, there are the costs of health care expenses,such as routine physical exams or orthodontia — which may not be covered underyour benefit plan. Health care costs such as these may add up to a significantpart of your yearly expenses. By enrolling in the health care spending account,you’ll be better able to manage these expenses and gain real tax savings as well.
A spending account allows you to direct a part of your pay, on a pretaxbasis, into a special account that can be used throughout the year to reimburseyourself for certain out-of-pocket health care expenses. Because this money goesinto your health care spending account before federal income or Social Securitytaxes are withheld, you pay less in taxes and, ultimately, have more disposableincome.
In some cases, your money is exempt from state and local taxes as well. Checkwith your tax advisor to find out whether this tax exemption applies in yourstate. Because spending accounts allow you certain tax advantages, they aregoverned by specific federal regulations.
For example, once you enroll, you cannot change your election during the planyear unless your family status changes. Federal regulations also require thatany money you deposit in a spending account that is not used to cover eligibleexpenses incurred that same year will be forfeited.
This memo will help you to understand your health care spending account anddecide whether the tax advantages it offers are right for you.
Who Can Enroll?
You are eligible to participate in the health care spending account if youare a regular employee working 20 or more hours a week.
How the Account Works
Each plan year you decide whether you want to participate in the health carespending account. Once you’ve made that decision, you then estimate the amountof eligible expenses you are likely to have during the year and decide how muchof your salary you want to set aside to help pay for them.
The amount you elect will be deducted automatically from your paychecksduring the year and credited to your spending account, As you incur eligibleexpenses during the year and pay for them out of your own pocket, you reimburseyourself from your account with tax-free money.
Eligible Expenses
Money set aside in this account can be used to reimburse only those healthcare expenses that are not covered under any other plan. These expenses mustalso be considered tax deductible by the Internal Revenue Service (IRS).Insurance deductibles and copayments are just two examples of the kinds ofexpenses that can be reimbursed through the health care spending account.
Other examples, according to the IRS, include, but are not limited to:
- Reimbursement Accounts
- Chiropractors’ services
- Contact lenses
- Dental fees
- Doctors’ fees
- Eyeglasses
- Laboratory fees and
- Prescribed medicines.
Contributions
You will be informed of the maximum annual amount you can set aside in youraccount during the open enrollment period each year.
Tax Deduction vs. Health Care Spending Account
If you use money from your health care spending account for a health careexpense, you cannot claim that same expense as a deduction on your income taxreturn.
In deciding whether to reimburse your health care expenses through a spendingaccount or claim them as deductions on your tax return, keep in mind that onyour tax return you can claim only those expenses that exceed 7.5 percent of your adjusted gross income. Therefore, the likelihood of the tax deduction being moreadvantageous is remote.
If, for example, your adjusted gross income is $28,000, your eligible healthcare expenses would have to be greater dm $2,100 (.075 x $28,000) to claim adeduction. Also, if you had $2,200 in eligible health care expenses, you coulddeduct only $100 on your tax return. With the health care spending account, youcould reimburse yourself with tax-free dollars for any portion of thatexpense–up to the amount of your annual contribution.
Unused Funds
Money you put into your health care spending account that is not used tocover expenses incurred during the plan year will be forfeited. You can reducethe risk of losing unused by careful planning. Many out-of-pocket health careexpenses can usually be budgeted ahead of time.
Also keep in mind that any forfeiture of funds may be offset by your totaltax savings. Remember, a portion of any money would have been paid in taxes.
Effect on Other Benefits
Your health care spending account contributions will not affect any companybenefits that are based on pay. These benefits will continue to be based on yoursalary before any amount is deducted. Because you don’t pay Social Securitytaxes on spending account contributions now, however, those benefits may beslightly less when you retire or if you become disabled. It will depend on thelength of time between now and when you retire or become disabled and on whetheror not your taxable income exceeds the Social Security maximum wage level.
Reimbursement From Your Account
To receive reimbursement from your health care spending account, submit aHealthcare Reimbursement form, along with evidence of your incurred expense, tothe Plan Administrator. Evidence of your expense, such as a copy of your paidbill or an explanation of benefits statement, is necessary to claimreimbursement. You will receive an explanation of payment for each claimsubmitted. The explanation of payment will explain your account transactions andbalances.
With a health care spending account, you cart receive reimbursement up to the total amount of your annual contributions, regardless of the amount in your account at the time you request payment.
Assume, for example, that you elect to set aside $50 a month, or $600 for the year, in your health care spending account. Suppose that in April, aftercontributing a total of $200 ($50 x 4 months) to your account, you incur aneligible medical expense of $500 that you pay out of your own pocket. You couldrequest reimbursement for the full amount of your expense, even though thebalance in your account would not be sufficient to cover it at that time.
For the rest of the plan year, your salary deductions would continue. In thisexample, of the total annual amount of $600 you had elected to set aside, $100would remain available to you for reimbursing further expenses incurred thatyear.
How to Enroll
If you decide to enroll in the health care spending account, you mustcomplete and sign the enrollment form. During the enrollment period each year,you should consider what your eligible expenses are likely to be for the comingyear. It may be helpful to review your health care costs for recent years. Alsoconsider any changes that may occur during the coming year that may affect yourexpenses, such as marriage or the birth or adoption of a child.
Next, decide how much of your salary you want to set aside. Remember, thetotal amount you determine will be deducted automatically from each paycheck, inequal amounts throughout the year, and credited to your spending account. It isimportant to plan carefully. Federal regulations require that once you’vedesignated the contribution amount, you cannot change your decision during theyear unless your family status changes. Check with the Human Resources Department for a full list of family status changes. The following are examples of family status changes:
- Marriage
- Divorce
- Death of child or spouse
- Birth or adoption of a child
- Termination of spouse’s employment
- Commencement of spouse’s employment
- Transition from part-time to full-time work or from full-time to part-timework by employee or spouse
- Employee or spouse taking an unpaid leave of absence or
- Any significant change in health coverage of employee or spouse due tospouse’s employment.
Enrollment in the health care spending account is possible only at adesignated time each year. Newly hired employees may be able to enroll at othertimes. Only those expenses you incur on or after the effective date of this planwill be eligible for reimbursement.
Current Rules
This health care spending account is offered on the basis of a currentunderstanding of the provisions of the IRS. Since the current rules are subjectto change, the plan may be amended or discontinued if regulations or changes inthe law make it advisable to do so.
This memo describes the health care spending account in general terms. If anyconflict arises between this description and the plan document, or if any issueis not covered, the terms of the plan document will govern in all cases.
Any determination as to qualification of an expense under the health carespending account is subject to review by the Internal Revenue Service (IRS).Should the IRS take a position contrary to that applied under the plan, the planwill be governed by IRS instructions. Employees who disagree with the IRSposition and wish to appeal that decision must obtain their own legal counsel.
Reprinted with permission from “Exhibit Book of Benefit CommunicationPrograms,” Watson Wyatt Data Services, 2000. For more information, visit www.wwdssurveys.com or call (201) 843-1177 and ask for Customer Service.
The information contained here is intended to provide useful information onthe topic covered, but should not be construed as legal advice or a legalopinion.
Workforce Online, March 2002
