Employee Health Care
New Limits Coming on Flex-Account Contributions
The 2009 open-enrollment season may be your last chance for big breaks.
By Kevin McCormally, Editorial Director, Kiplinger.com
October 2009
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We always advise employees to be aggressive when it comes to setting aside cash in flexible spending accounts at work -- those wonderful fringe benefits that let you pay medical and child-care bills with pretax dollars. That recommendation is more important this year than ever because 2010 is likely to be the last year that full-powered tax savings are available.
Congress is taking aim at medical flex plans as a way to pay for health-care reform. There’s no legal limit now on how much employees can set aside in such plans each year (although firms often impose a limit of $4,000 to $5,000 or so). But legislation making its way through Congress would slap a $2,500 cap on annual contributions. (Update: The health care reform bill that passed the House of Representatives on November 7 includes this $2,500 limit, effective for 2011.)
Related Links
- 7 Smart Uses for Your Flex-Account Money
- Make the Most of Your Benefits
- 5 Things to Do During Open Enrollment
- SPECIAL REPORT: Open Enrollment 2009
The change, the Joint Committee on Taxation says, would save the government $14.6 billion over ten years. Another way of putting that, of course, is that the limit would cost workers $14.6 billion ... in lost tax savings.
But here’s the good news: The crackdown won’t occur until 2011. That means the amount you decide to set aside in your flex plan for 2010 won’t be crimped.
We put together a SLIDE SHOW as a reminder of the kind of expenses you can pay with medical flex-plan dollars and to encourage you to make the most of this benefit while you can.
Before you begin, though, a quick reminder of the money-saving power of a flex plan.
The part of your salary you divert to the plan dodges federal income and Social Security and Medicare taxes, and, in nearly all states, avoids state income taxes, too. Here’s the tax math: If you’re in the 25% federal income-tax bracket and face a 7% top state tax rate, money that goes into the flex plan avoids both those levies, plus the 7.65% Social Security and Medicare tax -- for a total savings of nearly 40%. So, putting $5,000 into the flex plan cuts your take-home pay by just $3,000. That means that using the flex plan lets you pay $3,000 out of pocket for $5,000 worth of medical bills. If the crackdown goes into effect in 2011, as we expect, your savings in this example would be cut in half.
Use it or lose it. The big bugaboo about FSAs is the use-it-or-lose-it rule. Basically, you have to decide during open season how much to divert to your FSA for the upcoming year. And if you don’t spend all the money on qualifying expenses, you forfeit what’s left in the account (see our calculator for help). The threat of losing money scares far too many employees away from FSAs.
The truth is, the power of the FSA is so great that you can afford to lose a big chunk of your set-aside and still come out ahead. Remember: In the example above, you could pay $5,000 worth of medical bills for just $3,000 out of pocket. So, even if you wound up forfeiting $2,000 to the use-it-or-lose-it rule, you’d be in no worse shape than if you had paid the $3,000 of medical bills with after-tax dollars.
Of course, you don’t want to forfeit a dime, so be careful when you make your estimate. But don’t shortchange yourself by being too conservative.
Start by toting up your expected out-of-pocket costs, such as insurance deductibles and co-pays that you can run through your FSA. Then, get creative and determine what other medical expenses you might want to incur in 2010. See our slide show for seven kinds of expenses that Uncle Sam will help you pay if you use a medical flex plan.
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