Un-reimbursed (Out-Of-Pocket) Health Care Account

Out-Of-Pocket/Un-reimbursed medical, dental, or vision expenses can be reimbursed to the employee tax-free for themself or eligible dependents up to the limit established in the Plan (refer to the Plan Brochure or SPD). Expenses must be incurred (services rendered) during the employer's Plan Year (refer to the Summary Plan Description (SPD)). Eligible expenses include those listed in Section 213 of the Internal Revenue Code with the exception of insurance premiums. Some of the eligible expenses are included in the page Allowable Medical Expenses. A dependent does not have to be covered by the benefit plans for their expenses to qualify. Furthermore, reimbursements under this Flexible Spending Account are reimbursed as they are incurred (services rendered) up to the amount elected less reimbursements received to-date. This is a use-it or lose-it account--be conservative!! If an employee terminates employment and has amounts remaining in their account, they may continue participation if the employer is subject to COBRA.

Dependent Care Account

Dependent care expenses for dependent children or dependent adults may be reimbursed Tax-Free up to $5,000 per year. Employees can choose to pass these expenses through the Cafeteria Plan or the Federal Dependent Care Tax Credit (IRS Form 2441), but not both. Also the credit available through the tax credit is not additive to the Cafeteria Plan. The overall family maximum in the Cafeteria Plan is $5,000 ($2,500 if married filing separately). The daycare credit, beginning on January 1, 2003 is $3,000 with one dependent or $6,000 with more than one dependent. This means that employees with more than one eligible dependent could max out the Cafeteria Plan and may be eligible for an additional $1,000 through the Federal Tax Credit. Eligible expenses include daycare/eldercare centers, babysitters, daycamp, etc. Dependent care expenses are provided so you and your spouse (if applicable) can work. In order for your expenses to qualify, you and your spouse must work (full or part-time), be a full-time student (refer to your SPD for limits) or incapable of self-care. In most cases, the Dependent Care Account provides a tax savings greater than the Federal Dependent Care Tax Credit; however, single employees earning less than $28,000 or married employees earning less than $47,000 who reside in California (there is a limited credit available on California taxes) should speak to a tax advisor to determine whether they should participate in FlexChoice125.

Prior to kindergarten, eligilble expenses includes tuition for pre-school; however, once in kindergarten, only before and after-school expenses are eligible. Day camp expenses are eligible if the primary purpose is care. A program primarily educational in nature is not eligible. Also overnight camp expenses do not qualify. Other qualifications include that you dependent must be under age 13 or one who is mentally/physically incapable of self-care (including a spouse). If the employee is divorced, only the custodial parent can receive Tax-Free benefits. In order for the employee to receive Tax-Free benefits, the day care provider must report amounts received on their tax return; therefore, we need the Tax ID or Social Security number of the provider.

Reimbursements under this Flexible Spending Account may be made up to the amount deducted from the paycheck to-date less the amount already received. In many cases, the emplyee can submit claims in the beginning of the month so they can be reimbursed as they are deducted (provided expenses have been incurred at that point). This Flexible Spending Account is also subject to use-It or lose-It.

How A Flexible Spending Account (Un-reimbursed Health Care or Dependent Care) Works

The employee participant elects at what level they want to participate. Subject to the limits established by their employer, the employee chooses how much they want salary-reduced for the Un-reimbursed Health Care or Dependent Care Account. This amount is divided by the number of pay periods remaining in the Plan Year. This is the pay period deduction. This amount is deposited in the employer's Cafeteria Plan account. As employees incur expenses, they can submit vouchers for reimbursement. There is a block on the voucher for dependent care expenses and one for medical expenses. When employees incur medical expenses, they can submit a receipt, Explanation of Benefits (EOB), or a statement from the provider indicating how much of the charge the employee is responsible for. If the claim is for travel expense, the employee can record this on the un-reimbursed medical portion of the voucher indicating the date of service, who they went to see, and the round trip mileage.

FlexChoice125 Example

	Without FlexChoice125	With FlexChoice125
Annual Salary	$50,000	$50,000
Insurance Contribution (pre-tax)	-0-	($1,500)
Dependent Care Reimbursement Account	-0-	($5,000)
Out-Of-Pocket Health Care Reimbursement Account	-0-	($1,000)
Taxable Salary	$50,000	$42,500
Less Taxes (Federal, State, FICA)	($10,305)	($8,131)
Federal Day Care Tax Credit (assumes 2 children)	$960	-0-
Net Income	$40,655	$34,369
Insurance Contribution (after-tax)	($1,500)	-0-
Out-Of-Pocket Health Care Expense (after-tax)	($1,000)	-0-
Cafeteria Plan Reimbursement
Out-Of-Pocket Health Care	-0-	$1,000
Dependent Care	-0-	$5,000
Take Home Pay	$38,155	$40,369

This employee saved $2,214 by participating in FlexChoice125. This assumes the lowest tax bracket; those in higher brackers will save more!!