This is the time of year when the subject of Health Care Spending Accounts, also known as Flexible Spending Accounts, comes up. Even our clients who have implemented FSAs have not generated substantial participation, probably because most employees don’t really understand them or are frightened off by the “use it or lose it” information.
Suze Orman is a respected financial consultant and columnist and wrote the accompanying piece for Sunday’s Philadelphia Inquirer. If you already have an FSA, you might consider circulating this article to your employees during the open enrollment period. If you have not set up an FSA, it’s a virtually no-cost benefit to offer your employees. Feel free to contact BMC with questions or to assist in setting up a Health Care Spending Account.
Women & Money | An FSA Could Help Pay Rising Health-Insurance Cost
By Suze Orman, Inquirer Columnist
How – and, most important, how much – Americans will pay for health care is getting plenty of attention these days on the presidential campaign trail. Even if a major health-care initiative gains traction during (and after) the election, it will probably be close to two years at least before any meaningful legislation is passed. And no one has a clue what it could ultimately mean for consumers.
It pays to be flexible. If you work for a firm that provides health insurance coverage, you’re probably about to endure the annual push to get you to decide which benefits to sign up for in 2008.
I urge you to give serious thought to signing up for a flexible spending account (FSA) if your company offers such a plan. Employers are coping with their rising health insurance costs by shifting more of the bill to employees in the form of higher employee-paid premiums, higher co-pays and reduced benefits. (Translation: You pay for some procedures that years ago were covered by the plan.) And chances are your share of health-care costs is going to continue to rise.
FSA 101
Preliminary results from a recent Mercer survey report that 56 percent of employers plan to require employees to cover more of their health-care costs in 2008. Rising costs can come from any number of changes in your plan: requiring you to pay more of the premium, imposing higher deductibles, boosting the employee co-pay, and raising the annual out-of-pocket maximum for which you’re liable. Given the trend toward pushing costs onto employees, using an FSA has never been more valuable, given the tax advantage offered in most such plans.
With an FSA you can have money deducted from your paycheck on a pretax basis, which you can then use to cover many health-care costs for which you (rather than your plan) are responsible. That includes your deductible, any co-pays, and a plethora of “other” types of costs not typically covered by insurance, from eyeglasses to orthodontia to over-the-counter medicines.
Though health-care insurance premiums aren’t payable through an FSA, you can typically lower your premium cost by increasing the deductible you’re willing to pay. If you then set aside money in an FSA to cover that deductible, you’ll be able to pay it with pretax dollars.
Tax advantages abound. I realize the last thing many of you can afford is to have yet more money deducted from your check. But step back and realize that you’re stuck paying for these health-care costs regardless, and an FSA provides a tax break that can save you from 20 percent to 40 percent or so.
For example, if you’re in the 28 percent federal tax bracket, setting aside $4,000 in an FSA to pay for your family’s uncovered health-care costs nets you a tax savings of $1,120. Add in the fact that you’re shielding that $4,000 from FICA tax (the tax that funds Social Security and Medicare) as well, and your savings will be even more.
Obviously, if you’re hit with state income tax, too, using an FSA reduces the state’s bite of your paycheck. (And if you have young children in day care, or an adult who lives with you and you claim as a dependent, check whether your employer offers a dependent-care FSA. Just as with the health-care FSA, you can use pretax dollars to pay for qualified dependent-care costs.)
Rethinking flexibility. While it’s still true that any money left in your FSA at the end of the year is forfeited to your employer, the IRS changed its definition of a plan-year for FSAs: Instead of the standard 12 months, most plans now give you 14.5 months to use your FSA money.
For instance, your 2008 FSA that starts on Jan. 1, 2008, can be used through March 15, 2009. Even if you get to December 2008 and realize you still have money in the account, you have another 2 1/2 months to drain the account.
It only takes a little bit of planning to get a conservative estimate of your out-of-pocket health-care costs. Take a look at what you spent in the last year. Then think through any new costs you can anticipate, such as orthodontia or elective surgery.
You may be surprised at the types of charges that are FSA-eligible. You may be able to use your FSA to cover costs associated with fertility treatments, acupuncture, and LASIK eye surgery.