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Oct. 30, 2014 Volume 36, No. 10

Reduce taxable income with flexible spending accounts

The accounts require proof of prescription for certain products


iStock photo

Enrollment for 2015 health benefits remains open through Friday. Employees must choose a medical plan or waive coverage. Friday is also the deadline to make changes to the plan chosen.

The University of Missouri System offers MU workers the Healthy Savings Plan, the Custom Network Plan and the PPO Plan. The plans go into effect Jan. 1, 2015. 

If you choose the Custom Network Plan or the PPO Plan, you can also enroll in the Flexible Spending Account (FSA), Dependent Care FSA or both. FSAs require re-enrollment each year. Deadline for choosing is Friday.

Health Care FSA is an IRS-approved account used to pay annual health expenses, which includes out-of-pocket medical, dental, vision and prescription drug expenses not covered or partially covered by a system health plan. The Dependent Care FSA is a similar fund but used to pay dependent care expenses. Purchases through these accounts are paid with pre-tax dollars.


How does an FSA work?

When enrolled in an FSA, you first choose how much money to budget for you and your family’s annual out-of-pocket expenditures for health and day care needs. 

For 2015, your Health Care FSA contribution must be between $300 and $2,500, the IRS annual limit. For Dependent Care FSA, the IRS annual contribution limit is $5,000 and $2,500 if married and filing separate tax returns. Each pay period, a deduction is made from your paycheck to pay for the annual FSA cost. 

As medical or dependent care expenses mount during the year, you request withdrawals from your account for reimbursement. Reimbursements are deposited directly into your checking account. 

It's important to estimate yearly out-of-pocket expenses accurately. “Both accounts are ‘use or lose it,’ meaning that if you have funds in your account at the end of the plan’s year, you will forfeit the funds,” said Kelli Holland, a UM System manager of communications and education. 

However, FSAs include a grace period, Holland said. Unused 2015 FSA funds can be used between Jan. 1, 2016, and March 31, 2016. 

Estimating day care costs is easier than estimating health care costs. To help with the latter, you can use the myBenefit Decision Center in myHR as an aid. The myBenefit Decision Center helps you compare plans and out-of-pocket expenses. 


Over-the-counter purchases

Using FSA funds to purchase over-the-counter medical products was simpler before January 2011. That month, a federal regulation went into effect that parsed medicines and medical aids into two categories. Both categories are FSA eligible, but one requires proof of a prescription.

• A doctor’s prescription is required for medicines and drugs, such as pain relievers and cold and allergy medicines. 

• A doctor’s prescription is not required for medical aids, such as diabetes test strips, contact lens solutions and bandages.


Pre-tax or after-tax?

Let’s make a U-turn back to the three health plan options for 2015. 

The UM System has received a lot of queries about the difference between pre-tax versus after-tax premium deductions in the plans. Based on the volume of confusion, one might think the tax choice was new for 2015. 

Not so. 

In a nutshell: If you choose a pre-tax premium, the premium will be excluded from taxable income: federal income tax, Social Security tax, Medicare tax, and usually state and local income taxes. Choosing pre-tax premiums reduces taxable income. This keeps more money in your paycheck. 

Choosing to pay premiums after-tax does not reduce an individual’s taxable income. But if total medical expenses for the year reach an IRS-required level, some employees choose to file a tax schedule (i.e., Schedule A) to report those expenses.          

Want further advice? Consult a tax professional to discuss your specific needs.

“The UM System cannot provide individual tax advice,” Holland said. “However, we are attempting to make people aware of the explanation of pre-tax versus after-tax premiums so that they can determine which option is best for them.”

For more information, see the online UM System myTotal Rewards booklet Your 2015 Annual Enrollment Decision Guide.