Before there were HDHPs (High Deductible Health Plans) and HSAs (Health Savings Accounts), the only way to pay for out-of-pocket medical expenses in pre-tax dollars was through a “Cafeteria Plan” – a special tax provision of IRC Section 125 sometimes referred to as a Flexible Spending Account or FSA. If you’ve been offered an opportunity to participate, this may be your best choice.
HSAs have been in the news because they are portable and don’t expire. So if you leave your job or do not spend all the money in the account by the end of the year, you can carry the money over. But they are only available if you enroll in a HDHP – which means that your plan’s “deductible” (what you pay out-of-pocket before the plan pays expenses) must be at least $1,300 for individual coverage or $2,600 for family coverage (for 2015). If you qualify, you can deposit up to $3,350 in an HSA if you have individual insurance and $6,650 if you have family coverage.
To qualify for an HSA, the HDHP cannot be supplemented by another medical plan. Sometimes your employer will offer to pay part of your out-of-pocket expenses by putting money into your HSA. But your employer might instead establish a Medical Reimbursement Account (MSA) under which the employer agrees to reimburse you for part of your out-of-pocket expenses after you submit a bill. In that case, you can’t establish an HSA because the MSA is considered a second medical plan. (An FSA is too.)
You may be offered a Cafeteria Plan FSA and not an HSA because:
- Your company offers a group plan that has a lower deductible than is required for an HSA
- Your company offers an MSA to pay part of your costs
If you have the opportunity to use a Flex Account, here’s what you need to know for 2015:
- You can contribute up to $2,550, but if you don’t use it in the plan year, it will revert to your employer, but…
- Employers are permitted to help employees by adding a “grace period” of up to 2.5 months at the end of the year for incurring eligible expenses
- Employers also can allow employees to roll over up to $500 into the next plan year
- Your Plan has to include these provisions as they are options so be sure to check with your employer for specific plan details
Despite the “use it or lose it” aspect of FSAs, they are a great benefit, so do some calculations and fill out that election form. Throughout the year, you are likely to have co-pays, deductibles, prescription costs, co-insurance or non-covered expenses like orthodontia and eyeglasses, and all of them can be paid in pre-tax dollars. The IRS requires that the full amount you elect must be available any time during the Plan Year. This means that you don’t have to be out-of-pocket for a $1,000 expense paid in January.
Many employers now offer a debit card so that eligible expenses (up to the maximum contributed for the year) may be paid at the time of service rather than reimbursed. So calculate what you typically pay in health care expenses and elect accordingly. A typical employee contributing $2,550 will save $850 in federal and state taxes, and others may save even more.
Claudia Allen’s practice is concentrated in the areas of employee benefits, qualified retirement plans and employment law. She is a frequent lecturer and author of many articles in areas of qualified retirement plans, deferred compensation, employment law and other employee benefits. You can contact her with your legal questions about employee benefits at cgallen@strausstroy.com or call 513-629-9462.