Friday, June 6, 2008

Don't be intimidated...

Let's talk about Medical Flex Spending (MFS) and Dependent Care Flex Spending (DCFS) accounts. Many people are afraid of the "use it or lose it" rule around these, and some people have never even heard of them. Well, let me tell you...they are a fabulous "hidden" way of saving moulah.

For those who don't know what these are, here's a brief synopsis. These are only available to those whose employers offer as part of their benefit plan. During the open enrollment period, you designate an annual amount, which will be split evenly across the year and withheld from your (or your spouse's paycheck)...don't stop here...the good part is coming. As you incur either medical (for MFS acct) or dependent care (for DCFS acct), you submit for reimbursement and you get the $$$ you paid out of pocket back, up to the amount that you designated for the year. Sound complicated? Well, it's really quite simple, but I won't go into tremendous detail. It is important to know that each account is separate.

How do these accounts save you money? Well, instead of just paying your out of pocket expenses with post-tax money, your designated amount is withheld as pre-tax dollars and reduces your taxable income. Then, when you are reimbursed, you are reimbursed with money that hasn't been taxed. So you are saving the taxes. Depending on how much is withheld under the plans and on how close you are to a specific tax bracket, there is a potential that by having the account(s), you could even potentially be bumped into a lower tax bracket.

So what do you get reimbursement on? Here's the low-down on each:

MFS - Every plan is different but most plans allow for reimbursement for the following patient out of pocket expenses (not covered by insurance): co-pays, eye exams, contacts and eyeglasses, necessary dental expenses, necessary medical expenses, perscriptions, and many OTC meds.

DCFS - I'm not as familiar with this since I don't have any dependents myself (and pets don't count) but I do know that it counts for child and adult dependents.

I have saved lots of $$$ over the years through the MFS account because I have a good deal of expenses not covered by insurance, some of which are: contacts ($480/yr); a couple perscription co-pays (~$350/yr); and OTC meds (which on my plan cover saline solution btw). Just so you can see how this might work, let's look at an example. Let's say someone makes $50,000/year pre-tax, estimates $500/yr in out of pocket medical expenses, and $200/mo in childcare ($2400/yr). Since I don't know the tax percentages, let's just say it's taxed at 25% for sake of this example. Here's the comparison:

without MFS and DCFS:
Pre-tax Income: $50000
Post-tax Income: $37500 (subtracted $12500 - tax on $50000)
After med & cc exp: $34600 (subtracted $500 and $2400)

with MFS and DCFS:
Pre-tax Income: $50000
MFS & DCFS w/h: $47100 (subtracted $500 and $2400)

Post-tax Income: $35325 (subtracted $11775 - tax on $47100)

Annual savings = $725

You can see the benefit but just be aware of the following:
  • There is a "use it or lose it" rule; however, with good estimating and making sure to get your reimbursements in, this is easy to avoid. Also, most plans now have a 3 month grace period in which to submit for reimbursements. If you find at the end of the year you have $$$ left in your account and nothing to submit for reimbursement? Get perscriptions filled, stock up on OTC meds, fill that contact perscription. Some plans even have a card that you use so you don't even need to submit for reimbursement for some items.
  • If you use a private person for day care, make sure you talk with them first. You do need to disclose their SS# or EIN on the election form. If they are private you will need to make sure they are reporting the income they make from you. If they don't and you put in for DCFS, they will get in trouble for not reporting the income. This is not a concern if you use a facility, but you will need to get the EIN.
  • Both of these accounts must be re-elected every year. Unlike insurance, which will just renew if you don't change anything, if you do not select an amount to be withheld, you will not have the benefit.

Okay, so that's my extensively long Frugal Friday tip. I hope you've found it helpful. I'm a huge advocate for this benefit which takes very little effort to save literally hundreds of $$$ each year.


Dirkey said...

Hmm I've never done it cause I was a skeptic. Maybe the hubs and I will work on our numbers for next year.

Em said...

Let me know if you have questions. There is plenty additional info that I didn't include in the blog. I'd be happy to answer Q's, as I started out a skeptic and now I'm SOLD!