How Does a Flex Plan Work? An Overview for Employees Flexible benefit plans (or flex plans) take advantage of paying for selected items on a pre-tax basis. Before you pay taxes on your income, money is deducted to help pay for allowed expenses. Some of the funds go to pay group health, dental or vision insurance premiums. Some of the funds are deposited into spending accounts. The spending accounts can help pay these expenses, if allowed by your flex plan:
Health, dental, vision expenses not paid by an insurance plan Dependent/day-care expenses Transportation expenses Privately purchased insurance premiums Adoption expenses
By using pre-tax dollars to pay for any of these items, you save federal, state, FICA, and FUTA taxes, in most cases. This means your take-home pay may increase.
The Flex Plan Advantage Flex plans are designed to help you pay less tax and give you more take home pay!
Annual Income Pre-Tax Expenses (For example, medical/dependent care expenses to be reimbursed through flex plan.)
Taxable Income Estimated Taxes @ 25% Rate After-Tax Expenses (For example, medical/dependent care expenses.)
Net Take-Home Pay Take-Home Pay Increase
Without a Flex Plan
With a Flex Plan
All figures are annual
All figures are annual
$40,000
$40,000
$0
$3,000
$40,000
$37,000
($10,000)
($9,250)
($3,000)
$0
$27,000
$27,750
$0
$750
Flex Plan Accounts If allowed by your flex plan, you can use pre-tax dollars to help pay: Group Insurance Premiums The expenses which can be paid pre-tax from this component include your payrolldeducted premiums for health, dental, or vision insurance. Health Expenses (Medical FSA) See IRS Section 213(d) attached for a list of allowed expenses. These are expenses not covered by your health, dental, and vision plan, other insurance plans, or your spouse’s insurance plans. Eligible expenses include deductibles, coinsurance, copays, orthodontia, contact lenses, eyeglasses, dental expenses, and some over the counter drug expenses. You may be reimbursed for eligible expenses with your spending
account pre-tax dollars up to a maximum determined by your employer and your own contribution amounts. If you have a Health Savings Account (HSA), your medical FSA may be limited to reimbursing eligible dental and vision expenses only, until your health plan deductible is satisfied. After satisfying the deductible, your medical FSA may reimburse you for any eligible expense until a new deductible year begins if you have an HSA. Dependent/Day-Care Expenses (Dependent Care FSA) If you purchase daycare, before or after-school care, nursery school, or elder care, you may be reimbursed for them on a pre-tax basis through this component. Amounts up to $5,000/year per family may be deducted from your check for dependent care. (If filing singly, the maximum is $2,500/year.) Transportation Expenses 2009 regulations allow for pre-tax deductions for transit passes and commuter highway vehicle expenses up to $120/month, qualified parking expenses up to $230/month, and qualified bicycle expense up to $20/month. These allowable transportation expenses must be substantiated within 180 days of their occurrence in order to be valid. Privately Purchased Insurance Premium Expenses Premiums which may be paid pre-tax through this component include privately purchased health, disability, cancer, and term life insurance. Group insurance premiums deducted from your paycheck for employer-sponsored plans do not qualify. Insurance premiums deducted through a spouse’s employer are also not eligible. Adoption Assistance You may make pre-tax contributions to an adoption assistance spending account (if allowed by your plan) to help pay adoption expenses. Reimbursements are still subject to FICA and FUTA taxes, but not federal income taxes. Unlike other spending accounts, changes are permitted for adoption assistance contributions upon the commencement or termination of an adoption proceeding.
Use It or Lose It This is the rule when it comes to your flex plan money. If you do not file a claim for all the money you have contributed to your spending accounts by the pre-selected “runout” date, it will be forfeited. This means the service or expense must have occurred during the flex plan year. You can still submit your claims, though, until the end of the run-out period (usually 60-90 days after the end of the flex plan year). Some plans offer a grace period (an extended plan year) which may allow an additional 75 days to use any prior year’s balances.
Plan Carefully Because unused money in your flex plan can be forfeited, the amount you deduct from your paycheck should be a conservative amount. Also, your deductions may not be changed during the plan year unless you have a qualifying event. By reviewing last year’s expenses, you can get a good idea of what you may spend during a full flex plan year. Please note unused money may not be carried over to the next plan year and it may not be used for an expense for which it was not originally intended. (For example, if
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you decide to set aside $2,000 in the Dependent/day-care account, it may not be used to reimburse you for medical expenses). However, there are certain qualifying events which will let you change how your money is deducted from your paycheck during the plan year. These events include marriage, divorce, death of spouse or dependent, birth or adoption, changing from full-time to part-time or vice versa and others.
Getting Your Money When you enroll in a flex plan, the administrator of your plan may send you a claim form to submit in order to get money from your spending accounts. Some plans provide debit cards for convenient payment of eligible expenses. Claims are normally processed by the administrator daily, weekly, biweekly, or some other selected frequency. Just email, mail, or fax your claim forms (with supporting receipts) to your administrator. Plans differ, so you will want to understand all the ways you may receive your plan reimbursements. Most administrators have comprehensive web sites to help you track your flex plan money. These sites may also include access to claim forms. Toll-free customer service numbers and 24-hour interactive phone numbers also provide quick and convenient information about your flex plan accounts. Some flex plan administrators offer “cross-over”. This is a paperless way to pay medical expenses directly to your provider. When you have an eligible expense and you have chosen the cross-over feature, your administrator will automatically send the payment from your medical FSA to the provider (if there are enough funds in your FSA). Flex spending account reimbursements may also be deposited directly into your savings or checking account. Not all plans may offer this option, however.
Your employer will choose a reputable third-party administrator to manage your flex plan. Administrators must follow all IRS rules for flex plans. However, processes and procedures within each administrator may differ slightly.
IRS Code Section 213(d) Eligible Medical Expenses An eligible expense is defined in Section 213 (d) of the Internal Revenue Code. Below are two lists which may help determine whether an expense is eligible. For more detailed information, please refer to IRS Publication 502 entitled, “Medical and Dental Expenses.” If tax advice is required, you should seek the services of a competent professional.
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Reimbursable Medical Expenses • Abdominal supports • Abortion • Acupuncture • Air conditioner (when necessary for relief from difficulty in breathing) • Alcoholism treatment • Ambulance • Anesthetist • Arch supports • Artificial limbs • Autoette (when used for relief of sickness/disability) • Birth Control Pills (by prescription) • Blood tests • Blood transfusions • Braces • Cardiographs • Chiropractor • Christian Science Practitioner • Contact Lenses • Contraceptive devices (by prescription) • Convalescent home (for medical treatment only) • Crutches • Dental Treatment • Dental X-rays • Dentures • Dermatologist • Diagnostic fees • Diathermy • Drug addiction therapy • Drugs (prescription)
• Elastic hosiery (prescription) • Eyeglasses • Fees paid to health institute prescribed by a doctor • FICA and FUTA tax paid for medical care service • Fluoridation unit • Guide dog • Gum treatment • Gynecologist • Healing services • Hearing aids and batteries • Hospital bills • Hydrotherapy • Insulin treatment • Lab tests • Lead paint removal • Legal fees • Lodging (away from home for outpatient care) • Metabolism tests • Neurologist • Nursing (including board and meals) • Obstetrician • Operating room costs • Ophthalmologist • Optician • Optometrist • Oral surgery • Organ transplant (including donor’s expenses) • Orthopedic shoes • Orthopedist • Osteopath
• Oxygen and oxygen equipment • Pediatrician • Physician • Physiotherapist • Podiatrist • Postnatal treatments • Practical nurse for medical services • Prenatal care • Prescription medicines • Psychiatrist • Psychoanalyst • Psychologist • Psychotherapy • Radium Therapy • Registered nurse • Special school costs for the handicapped • Spinal fluid test • Splints • Sterilization • Surgeon • Telephone or TV equipment to assist the hard-of-hearing • Therapy equipment • Transportation expenses (relative to health care) • Ultra-violet ray treatment • Vaccines • Vasectomy • Vitamins (if prescribed) • Wheelchair • X-rays
Non-reimbursable Medical Expenses • Advancement payment for services to be rendered next year • Athletic Club membership • Automobile insurance premium allocable to medical coverage • Boarding school fees • Bottled Water • Commuting expenses of a disabled person • Cosmetic surgery and procedures • Cosmetics, hygiene products and similar items • Funeral, cremation, or burial expenses • Health programs offered by resort hotels, health clubs, and gyms • Illegal operations and treatments • Illegally procured drugs • Maternity clothes
• Non-prescription medication • Premiums for life insurance, income protection, disability, loss of limbs, sight or similar benefits • Scientology counseling • Social activities • Special foods and beverages • Specially designed car for the handicapped other than an autoette or special equipment • Stop-smoking programs • Swimming pool • Travel for general health improvement • Tuition and travel expenses a problem child to a particular school • Weight loss programs
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Reimbursable Over-the-Counter (OTC) Drugs • Antacids • Allergy Medications • Pain Relievers • Cold medicine • Anti-diarrhea medicine • Cough drops and throat lozenges
• Sinus Medications and Nasal sprays • Nicotine medications and nasal sprays • Pedialyte • First aid creams • Calamine lotion
• Wart removal medication • Antibiotic ointments • Suppositories and creams for hemorrhoids • Sleep aids • Motion sickness pills
Non-reimbursable Over-the-Counter (OTC) Drugs • Toiletries (including toothpaste) • Acne treatments • Lip balm (including Chapstick or Carmex) • Cosmetics (including face cream and moisturizer) • Suntan lotion • Medicated shampoos and soaps
• Vitamins (daily) • Fiber supplements • Dietary supplements • Weight loss drugs for general well being • Herbs
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