Reference no: EM133096172

Understanding Your Employee Benefits: Managing Your Health-Care Expenses

It is currently the annual open enrollment period for employee benefits at your company, and you have several decisions ahead of you. You are reviewing the benefits offered by your company and note the flexible spending account (FSA) option. The information states that you are able to set aside up to $2,550 of your income on a pretax basis and use that money to pay for specific medical expenses. You have not participated in the past, but as you read more, you think that this option could save you some money. However, if you were to chose to participate in the FSA, you aren't sure how much income would be appropriate to set aside.

Under the plan, you would designate a monthly payroll deduction. These funds would be deducted from your pay before taxes are calculated. The funds would be held in an account for you, and as you incurred medical expenses, you would submit a request for reimbursement. Since you would contribute the funds on a pretax basis, you would gain savings as you would not pay taxes on the income you set aside. The more you set aside, the more you would save in reduced tax liability. However, the rules of the FSA state that, at the end of the year, you would lose any money that you set aside but didn't use. This makes the decision to participate a little more complex. In order to gain the tax advantage, you should set aside as much as possible, up to the maximum allowed. However, if you estimate incorrectly, you could end up with a loss if you don't submit enough expenses to receive reimbursement of all of the funds you set aside.

You recently started a family, and thus your medical expenses have increased, suggest- ing that the FSA is something you should consider. As you look at the enrollment information, you see that you must decide on the monthly deduction that you will make in order to enroll, so you start thinking about your medical expenses. You know that your health insurance plan has a deductible, coinsurance, and copayments for every doctor's visit. However, you have been surprised at how quickly your medical expenses have added up. While you are aware of the plan features such as the deductible, you aren't really sure how it works. Every time you receive a statement from your doctor that shows what your health insurance covered and what you owe, you aren't really sure how the charges are determined. For this reason, you aren't sure how to even start estimating your medical expenses.

The enrollment forms are due in a few weeks. The potential tax savings are attractive, but the need to make an accurate estimate of your medical expenses concerns you. You know that you will need to do some research before you make a decision, but at this point, you just aren't sure how to get started.

1. Should you participate in the flexible spending account?

2. How should you determine how much to set aside?