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During Benefits “Open Season” All Employees Should Consider Contributing to a Health Care FSA

Today is the start of the benefits “open season” in which employees have to decide about their health, dental, and vision insurance for 2018 and whether to enroll in the flexible spending accounts. In the first of four columns discussing issues related to the benefits “open season”, this week’s column discusses health care flexible spending accounts (HCFSA) and how they work.

Although employees enrolled in the Federal Employees Health Benefits (FEHB) program will see an average increase of only 6.2 percent in their premiums for 2018, most FEHB plans are increasing the amount that employees are paying in “out-of-pocket” expenses. These expenses include deductibles, copayments, and co-insurance and expenses their health insurance plans do not cover. Those employees who are not enrolled in the FEHB program and enrolled in other group-sponsored plans most likely also have increasing out-of-pocket expenses. The question for all employees: What is the best way to pay for out-of-pocket medical, dental and vision expenses? The answer is a health care flexible spending account, or HCFSA, which is discussed in this column.

An HCFSA allows eligible employees to pay for certain out-of-pocket medical, dental and vision expenses with before-taxed dollars. The emphasis here is employees, and not annuitants who are not permitted to participate in an HCFSA. These out-of-pocket expenses are not covered by health, dental and vision insurance plans. In particular, these expenses are: (1) Potentially tax-deductible as medical expenses on one’s federal income taxes as an itemized deduction and related to treatment of a medical condition; and (2) paid to alleviate or prevent a physical or mental defect or illness. These expenses are incurred by the employee or any dependent the employee can claim on his or her federal income tax return as a tax dependent. The following expenses are not eligible for reimbursement from a HCFSA: (1) insurance premiums of any individual or group-sponsored health insurance plan; (2) Long-term care insurance premiums; (3) TriCare insurance premiums; and (4) Medicare Parts B and D monthly premiums.

All funds set aside to an employee’s HCFSA via payroll deduction are before-taxed monies. Before-taxed means before federal and state income taxes, Social Security (FICA) and Medicare Part A (hospital insurance) are withheld. To illustrate how an employee saves on taxes through an HCFSA, consider the following example:

An employee is in a 40 percent combined tax bracket. The employee is enrolled in a HMO and incurs a $12 copayment. If the employee is enrolled in a HCFSA, then the $12 will be withdrawn from the employee’s before-taxed HCFSA. If the employee was not enrolled in an HCFSA, then the employee would have to earn:

$12/.60 or $20

In order that 40 percent of taxes, or .40 times $20 or $8, is withdrawn from the $20 to “net” $12 for the employee to pay his or her copayment. Note the $12 is added to the employee’s other medical, dental and vision expenses and the employee can deduct the medical expense that exceed 10 percent of the employee’s adjusted gross income (AGI), assuming the employee itemizes.

The HCFSA is one of three FSAs offered in the federal flexible spending account programs called FSAFEDs. Information about the FSA as well as enrollment information can be obtained at www.fsafeds.com.

Participation in the HCFSA is voluntary. Employees who want to enroll in a HCFSA must do so during the annual “open season”. For 2018, the “open season” for the HCFSA is from Nov. 13 through Dec. 11, 2017. Those employees who are enrolled in the HCFSA for 2017 must reenroll for 2018. An employee enrolls or reenrolls in the HCFSA by going onto the FSAFEDS Web site between Nov. 13 and Dec. 11, 2017.

During Benefits “Open Season” All Employees Should Consider Contributing to a Health Care FSA

Employees have to make two decisions annually regarding the HCFSA for the 2018 plan (calendar) year, namely: (1) Do they want to enroll or reenroll; and (2) how much of their gross salary do they want to set aside during 2018 into their HCFSA?

During 2018, an employee can set aside a minimum of $100 and a maximum of $2,650 into his or her HCFSA deducted evenly over 26 pay dates. Once an employee decides how much to set aside, the election becomes effective the following January 1st. The election is irrevocable unless the employee experiences a qualifying life event (QLE) resulting in a change to the amount that can be set aside to the HCFSA. These QLE’s include: (1) Legal marital status (marriage, divorce, legal separation, or death of spouse; (2) change in the number of tax dependents; and (3) change in employment status, for the employee or the employee’s spouse that affects eligibility for health insurance.

If an employee leaves federal service or retires, then any unused funds in the HCFSA will be forfeited. Since 2015, OPM has allowed HCFSA owners to elect to carry over as much as $500 of unused HCFSA funds to the new plan year. To do so, the employee would have to reenroll in the HCFSA for the new plan year even if no additional HCFSA funds will be withheld from the employee’s pay check during the new plan year.

All HCFSA’s are funded entirely with employee contributions made via payroll deduction with no federal government (agency) contributions. Employees should use their 2017 out-of-pocket medical, dental and vision expenses as a basis for determining how much they should set aside to pay 2018 qualifying out-of-pocket expenses.

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