Perhaps Benjamin Franklin said it best in 1789: "In the world, nothing is certain but death and taxes." Surely Mr. Franklin would have been pleased with a change in the tax code nearly 200 years later that helps reduce income tax. But unfortunately, nearly 85 percent of Americans aren’t taking advantage of a provision that allows you to maximize your income by reducing your state and federal income tax (FICA and Medicare taxes, too!) At BYU we call it the Flexible Spending Account program, or FSA.
A Flexible Spending Account Can Save You Money
Your Flexible Spending Account is like a personal savings account held for specific purposes. Money is deposited into your account throughout the year by payroll deduction; but it is unique because:
- You decide before the beginning of each year how much your total deposit will be for the year.
- You use the money only to pay for your eligible medical/dental costs not covered by your insurance and/or for dependent child care costs.
- The money that you deposit into your account is deducted from your salary before it is taxed, giving you the benefit of immediate tax relief.
What is a Flexible Spending Account?
- It is an account at DMBA initiated by an annual contract that runs from January 1st through March 15th of the following year.
- It accepts tax-exempt monies sent in through payroll deduction (No Federal, State or FICA taxes).
The money in the account may be used to pay for:
- Out-of-pocket medical and dental expenses
- Dependent child care if you are working or attending school
- It applies only to family members who qualify as dependents under IRS rules for income tax purposes.
Simply put, FSA allows you to pay your share of medical and dental costs with tax-free money! Expenses for things like prescription drugs, office visit co-payments, therapy treatments, dental care, orthodontia/braces, eyeglasses, contact lenses, hearing aids and even LASIK eye surgery are all eligible expenses. If you have children in daycare, you can also set up a separate dependent care account and pay your daycare provider with tax-free money.
As you can see, you may be paying hundreds of dollars in unnecessary income tax each year if you’re not participating in FSA! If you are in a 15% tax bracket you could be saving up to 29.65% (15% federal tax, 7% Utah state tax and 7.65% Social Security and Medicare taxes) (for 2010 only FICA taxes are 5.65%) on each dollar in FSA. If you are in a 25% tax bracket, savings increase up to 39.65%. So when it comes to your hard-earned income, you can "max it or tax it."
How Does It Work?
- You estimate the anticipated amount of out-of-pocket medical and dental expenses and/or dependent child care expenses.
- You set up a contract each year in October for the following calendar year.
- You receive the services between January 1st and March 15th of the following year.
- You request reimbursement for your out-of-pocket expenses.
- You may also choose to use the Benny Card (MasterCard). If you do, please save ALL receipts as you may be audited.
How to File for Reimbursement?
- Online at www.dmba.com, then click on Resources, Forms, Library, and print out the Flexible Spending Account Medical/Dental Claim Form or the Flexible Spending Account Claim Form for Dependent Care.
- Send a reimbursement form to DMBA
Include an Explanation of Benefits from the insurance company for medical/dental claims such as:
- Co-pays for doctor/dental visits
- Emergency room services
- Medical equipment
- Surgery or maternity or hospitalization
- Emotional illness services
- Radiology (X-Rays)
- Dental work
- Include receipts for prescriptions, glasses, contacts, contact lens solutions, hearing aids, etc.
- For dependent child care include receipt from care giver with tax number of day care provider.
- Submit reimbursement claims any time during the contract year and before April 30th of the following year. (DMBA processes claims weekly.)
- Claims can also be filed online through Deseret Mutual's website
What are the Advantages?
- Tax savings on the money put into the account as no Federal, State or FICA taxes are imposed on it.
What are the Disadvantages?
- You are required to set up a new contract each year during Open Enrollment, usually held in October of each year.
- You must file a claim form for reimbursement.
- You must USE IT OR LOSE IT!! Unused money will not be returned to you.
What if I pay little or no income tax already?
FSA may still give you a significant advantage even if you don’t pay income tax! How? Deseret Mutual can advance you your money before it’s deducted from your salary. For example, many providers will write off as much as 10 or 15 percent if you pay your portion of the bill up front and in full. For medical and dental expenses, FSA allows you to do just that.
Is it safe?
Yes, as long as you’re conservative when you estimate your expenses for the coming year. Be sure to estimate wisely because Deseret Mutual can only reimburse you for expenses you incur during the coming calendar year. You have through April of the following year to request reimbursement.
Use it or lose it? Perhaps. But we say, “max it or tax it!”