• What Is A Flexible Spending Account?
• How Does A Flexible Spending Account Work?
• What Are Healthcare Flexible Spending Accounts?
• How Do I Submit My Medical Account Claims?
• What Do Healthcare Flexible Spending Accounts Cover?
• What Equipment and Supplies Do Healthcare Flexible Spending Accounts Cover?
• What Medical Treatments Do Healthcare Flexible Spending Accounts Cover?
• What Miscellaneous Items Do Healthcare Flexible Spending Accounts Cover?
• What Is The Orthodontics Reimbursement Policy?
• What Are The Items That My Healthcare Reimbursement Account Do Not Cover?
• What Is A Dependent Care Reimbursement Account?
• Which Is Right For You – The Dependent Care Reimbursement Account Or The Tax Credit?
• Dependent Care Expense Worksheet:
• Flexible Spending vs. Tax Credit:
• How Do I Submit My Dependent Care Claims?
• What Do Dependent Care Accounts Cover?
• What Are The Items A Dependent Care Account Do Not Cover?
• How Do Flexible Spending Accounts Affect Your Spendable Income?

What Is A Flexible Spending Account?

Your employer has established a program to assist you in paying for certain medical, dental, and other expenses on a pre-tax basis. This program lets you make certain contributions to a Medical Reimbursement Account or a Dependent Care Reimbursement Account. The following provides an overview of the rules regarding your program and identifies certain administrative practices that are followed in accordance with several plan documents.

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How Does A Flexible Spending Account Work ?

A cafeteria or flexible spending account plan (a Flex Plan) is an arrangement whereby employees may be entitled to use a percentage of their compensation to purchase certain benefits elected by each employee. This ability to choose among several benefit programs, including additional cash compensation, resulted in the label “cafeteria” plans.

The advantage of a Flex Plan is that employees may elect to receive the benefits that will have the greatest value for them. In addition to the employer contributions that may be applied to purchase benefits under a Flex Plan, employees may also be given an opportunity to reduce their salaries in order to purchase benefits. The amount by which an employee’s income is reduced, under a salary reduction agreement, is not subject to federal income tax. Salary used by an employee to purchase nontaxable benefits under a cafeteria plan is also not subject to either FICA or FUTA taxes. Therefore, salary reduction elections result in savings for both employers and employees. For example, a Flex Plan may be established that lets each employee elect to reduce his or her salary to purchase medical or other benefits. If an employee elects benefits totaling $2,000, the employee may be given an opportunity to purchase these benefits on a pre-tax basis. This approach will save the employee federal income tax on his or her $2,000 contribution (to the extent nontaxable benefits are selected), and will also save the employer and employee FICA and FUTA taxes.

In order for Flex Plans to receive the above favorable federal tax treatment, however, several statutory rules must be satisfied. These rules include the following:

• All elections must be made prior to the payroll period to which a specific election relates.
  
• An election of benefits must remain in effect for an entire plan year. However, a participant may revoke or modify an election if both the revocation and the election are made on account of a change in “family status” (for example: marriage, divorce, death of a spouse or child, birth or adoption of a child, and termination of a spouse’s employment).
  
• A Flex Plan must also incorporate a concept known as the “use it or lose it” rule. Under this rule, if the amount by which an employee’s salary is reduced exceeds the cost of his or her benefits selected for a plan year, the excess must be forfeited at the end of the plan year, if not spent on benefits.
  
• Medical Flexible Spending Accounts may reduce an employee’s Social Security benefits. Also, when participating in a flex account, Social Security (Medicare) becomes secondary to benefits provided under the Medical Spending Account.
  
• COBRA rights exist for Medical Flexible Spending Accounts, though all COBRA payments are paid on an after-tax basis.
  

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Healthcare Flexible Spending Accounts:

Medical reimbursement accounts let you establish a pre-tax account for planned out-of-pocket medical expenses, such as deductibles, copayments, and services that your insurance doesn’t cover.

To set up a medical reimbursement account:

1. Estimate the medical expenses that your insurances will not pay.
2. Divide this amount by the number of paychecks you receive during the year.
3. Your employer deducts that figure from each paycheck during the year, up to the yearly maximum your employer sets.

Once you enroll, you usually cannot change your deduction during the year. Only a change in your family status, your work status, or your spouse’s work status may allow you to make a change. Your employer must approve all deduction changes.

If you leave the plan due to status change, you may claim reimbursement only for expenses you incurred while you were enrolled in the plan. If you leave the plan, you can not re-enter during the same plan year. This applies even if another status change occurs. You must wait until the new plan year begins to re-enter the plan.

Contributions to your account are not subject to federal income tax, state unemployment tax, or FICA (deductions are subject to state income tax in NJ). So your real cost for out-of-pocket expenses can decrease.

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How Do I Submit My Medical Account Claims?

To obtain reimbursement from your account, send copies of the following items to your FSA Vendor (forms can be found on this website):

1. Reimbursement form.
2. Debit Card (if used by your company)
3. The provider’s bill.

For services covered by your health insurance - -

A copy of your Explanation of Benefits (EOB) showing the amount your insurance did not pay. If your EOB has all the data we need, you can omit the provider bill.

Predeterminations of benefits are not eligible.

For expenses not covered by your health insurance - -

A copy of the itemized bill and a copy of the benefit book page showing the expense is not covered or the EOB showing the expense was rejected.

For prescription expenses - -

The prescription label (not cash register receipt) showing the prescription number, patient’s name, prescribing doctor, date received, amount received, and your copayment amount when applicable. If you are not enrolled in a prescription drug plan, include a copy of your major medical EOB.

Your FSA vendor may ask you for additional documentation for certain services (for example, we need documentation from a physician for domestic aid claims). Your claims can not be processed without all needed documentation.

You will receive a check for the amount of the eligible expense, even if the amount currently in your account is less than the expense. However, the total reimbursement you receive for expenses incurred during the account year cannot exceed the amount you pledged for that year. Your plan specifies the last date on which you can submit claims under your account. By federal law, you forfeit any contribution that you do not use for medical expenses incurred during the account year: (Use it, or lose it!)

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What Healthcare Flexible Spending Accounts Cover?

In general, eligible expenses include charges for the diagnosis, cure, mitigation, treatment, or prevention of disease for the employee, spouse, and eligible dependents you claim on your income tax returns. Charges are eligible only if your medical benefits do not cover them and do not reimburse you for them.

The following list of eligible expenses is not complete. Call your FSA provider if you have any questions about a service that this document does not list. Your employer may limit the types of services that are eligible under your flexible spending plan.

• Deductibles and coinsurance.
• Differences between the provider’s charge and the insurance company’s payment.
  • a. This amount may not be eligible if the provider participates with your insurer. Participating providers accept the plan allowance as full payment.
  • b. The insurer may label these amounts “over the UCR” or “over the reasonable and customary rate”.
• Dental fees
  • a. If your group does not offer dental coverage or you do not elect dental coverage - - The entire charge may be eligible.
  • b. If you have dental coverage - - The amount that your dental insurer does not pay may be eligible.
  • c. For orthodontics (braces) - - Include a copy of the contract showing the total charge, the insurance payment, your balance, and the monthly payment amount. Include your paid receipt and dental EOB, if applicable.
• Vision care expenses including exams, glasses, contact lenses, and the cost of laser vision correction surgery (only the amount your insurance company does not pay may be eligible).
• Contact lens maintenance (drops, solutions, etc.)
• Routine checkups and physicals (only the amount your insurance company does not pay may be eligible).
• Routine foot care.
• Services for alcoholism or drug addiction performed outside of a hospital or a skilled nursing facility.
• Medically necessary cosmetic surgery.
• Hearing Aids/batteries.
• Birth control pills, devices and procedures (only if not covered under your medical insurance program).
• Private duty nursing services.
• Well baby care and immunizations.
• Smoking and Tobacco cessation programs and prescriptions prescribed by your physician (not including over the counter programs).
• Laser eye surgery.
• Chiropractor expenses for medical care.
• Infertility treatments.
• Psychology and Psychoanalysis medical expense amounts.
• Massage therapy used to treat injury or trauma (must document condition and length of treatment).
• Weight-loss program prescribed to treat an existing disease (must document condition).
• Speech therapy.
• OTC medicines and drugs that are used for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body are reimbursable. This includes, but is not limited to, items such as antacid, allergy medicine, pain reliever, and cold medicine. Various levels of proof of need will be required depending upon each situation.

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What Equipment and Supplies do Healthcare Flexible Spending Accounts Cover?

• Back support devices.
• Cost of installing stair-seat elevator for person with heart condition.
• Elastic hosiery.
• Specialized chairs or apparatuses adapted for use by individuals with physical disabilities.
• Orthopedic shoes (excess cost over normal shoes).
• Special mattress for relief of arthritis of spine.
• Reclining chair if prescribed by a doctor.
• Repair of special phone equipment for the deaf.
• Wig advised by doctor as essential to mental health of person who has lost all hair from disease.

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What Medical Treatments Do Healthcare Flexible Spending Accounts Cover?

• Acupuncture or related procedures.
• Healing services.
• Sterilization.
• Vasectomy
• Whirlpool baths.
• Prescription drugs.

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What Miscellaneous Items Do Healthcare Flexible Spending Accounts Cover?

• Braille books (excess cost of Braille books over cost of regular editions).
• Convalescent home (for medical treatment only).
• Fees paid to health institute for exercises that are prescribed by a physician.
• Kidney donor’s or possible donor’s expenses.
• Nurse’s board and wages, including Social Security taxes you pay on wages.
• Remedial reading for child with dyslexia.
• Guide dog and its maintenance.
• Special school costs for physically and cognitively handicapped children.
• Telephone/teletype costs and television adapter for closed-caption services of a deaf person.

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What Is The Orthodontics Reimbursement Policy?

When the treatment begins, the orthodontist normally sends a bill to the dental carrier for the determination of payment. Next, the orthodontist requires that the patient make a down payment (which is usually $700 - $1,000). The patient makes scheduled monthly payments for the balance.

Initial Down Payment – Eligible for reimbursement during the plan year in which you make the payment. This usually coincides with the time that the braces are placed.

Scheduled Monthly Payments – You are eligible for reimbursement for the monthly payments that you make during that plan year. You are not eligible for scheduled payments that were supposed to be made in a previous plan and not paid for until the following year. (For example, if you had six scheduled payments past due from the 2002 plan year and you pay the orthodontist in 2003, you can not get reimbursed out of available 2003 funds.) Be sure to submit your paid receipt with your Reimbursement Request form.

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What Are The Items That My Healthcare Reimbursement Account Do Not Cover?

• Diaper service.
• Athletic club expense to keep physically fit.
• Babysitting fees enabling you to make doctor’s visits.
• Bottled water bought to avoid drinking fluoridated city water.
• Cosmetic surgery that is not medically necessary.
• Cost of trips for a change of environment to boost morale of ailing person, even if prescribed by a physician.
• Deductions from your wages for sickness insurance under state law.
• Domestic help-even if recommended by doctor because of spouse’s illness (but part of the cost attributed to any nursing duties performed by a domestic is deductible).
• Funeral, cremation or burial, cemetery plot, monument or mausoleum.
• Health programs offered by resort hotels, health clubs and gyms.
• Health club dues not related to a particular medical condition.
• Marriage counseling fees.
• Maternity clothes.
• Patent medicine.
• Premiums for medical or dental insurance for spouse or dependents paid with either before or after tax dollars.
• Special foods or beverage substitutes – but excess cost of chemically uncontaminated foods over what would have ordinarily been spent on normal food was deductible for allergy patients.
• Transportation costs of disabled persons to and from work.
• Tuition and travel expenses to send problem child to a particular school for a beneficial change of environment.
• Veterinary fees for pet.
• Weight reduction programs undertaken for general health, not for specific ailments.
• Electrolysis or other types of hair removal.
• Missed appointment charges.
• Herbs.
• Naturopathic visits and treatments.
• Teeth bleaching and bleaching supplies.
• Hair growth medications or hair replacement treatments.
• Cosmetic and hygiene products and similar items.
• Massage therapy to treat stress or not prescribed for a specific medical condition.
• Items used to promote the general good health of an individual or which are not medicines or drugs are not reimbursable. This includes, but is not limited to, dietary supplements, vitamins, toiletries (e.g., toothpaste), cosmetics (e.g., make-up and face creams) and sundry items.

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What Is A Dependent Care Reimbursement Account?

Dependent care accounts let you put money into a fund for day care, nursery school, baby-sitting costs, or expenses for the care of a mentally or physically handicapped dependent or elderly parent. To qualify, the costs must result from your work or search for work. If you are married, your spouse must also work.

To set up a dependent care account:

• Estimate your dependent care expenses for the year.
• Divide that amount by the number of paychecks you receive in a year. (Your annual deduction must be evenly divisible by the number of paychecks you receive per year.)
• Your employer deducts that figure from each paycheck during the year.

You can deduct up to the yearly household maximum your employer sets. Suppose your employer chooses $5,000. A single head of household can deduct up to $5,000. Or, if a husband and wife each have an account, the combined maximum for both accounts is $5,000.

Deductions are not subject to federal income tax, state unemployment tax, or FICA, so your real cost decreases. (Deductions are subject to income tax in PA and NJ.) However, using a Flexible Spending account for dependent care costs may reduce or remove your eligibility for a Federal Child Care Tax Credit. And it affects your Social Security. You must decide which method, Flexible Spending or Tax Credit, is better for you.

Once you enroll, you usually cannot change your deduction during the year.* Only a change in your family status, work status, or spouse’s work status may allow you to change it. Your employer must approve all deduction changes.

If you leave the plan due to a status change, you may claim reimbursement only for expenses you incurred while you were enrolled in the plan. If you leave the plan, you cannot re-enter during the same plan year. This applies even if another status change occurs.

*This applies even if your dependent reaches “school age” during the plan year and is no longer receiving child care. You must take this into consideration when calculating your payroll deduction amount.

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Which Is Right For You – The Dependent Care Reimbursement Account Or The Tax Credit?

You have dependent care expenses; you may be familiar with the tax credit that you can take for these expenses on your federal tax return. The Flexible Spending account is an alternative to the tax credit. You cannot use the same expenses for both the tax credit and Flexible Spending. This section briefly compares these alternatives.

Here’s How The Tax Credit Works – Multiply your expenses up to $3,000 if you have one eligible dependent, or $6,000 if you have two or more eligible dependents) by the percentage on the tax credit for your family’s combined adjusted gross income. Subtract the product from the amount of tax you owe.

If your income is over $24,000, then you may benefit from using the Flexible Spending account versus the tax credit. However, before you make any decision, we recommend you discuss your options with your personal tax advisor.

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Dependent Care Expense Worksheet:

To determine whether you would benefit by using a Flexible Spending account (FSA) or a tax credit:

1. Estimate your savings if you use Flexible Spending.

a. Decide how much you would like reimbursed for the remainder of the year, up to the maximum your employer sets. Payroll deductions applied to your FSA $________

b. Multiply (1a) by the effective percentage of federal income taxes you pay on your household income.

Federal income taxes reduced by $____________

c. Multiply (1a) by the effective percentage of Social Security taxes you pay on your household income.

Social Security taxes reduced by $____________

d. Multiply (1a) by the effective percentage of state income taxes that you pay on your household income unless you live in PA or NJ.

State income taxes reduced by $______________

e. Add your estimates from (1b), (1c), and (1d).

Total estimated tax savings using FSA $________

2. Estimate your savings if you use a tax credit.

a. Estimate the amount that you will spend on eligible dependent care expenses during the calendar year – up to $3,000 for one eligible dependent or $6,000 for two or more eligible dependents.

Eligible dependent care expenses $____________

b. Estimate your household’s adjusted gross income.

Adjusted gross income $ _____________

c. Look at the tax credit percentage that corresponds to your household’s adjusted gross income.

Your tax credit percentage __________%

d. Multiply (2a) by (2c).

Estimated tax savings with a tax credit $_______

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Flexible Spending vs. Tax Credit:

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How Do I Submit My Dependent Care Claims?

To obtain reimbursement, send a request form and paid receipt from your care provider to your FSA vendor.

Each receipt must show the following:

1. Care provider’s tax ID or Social Security number.

2. Care provider’s address.

3. Care provider’s signature.

4. Child’s name.

5. Itemized bill with the dates on which the care provider cared for your child.

You will receive a check from your account to reimburse you, or you may elect direct deposit into a bank account of your choice. If your account balance is less than the expense ---

1. You will receive a check only for the amount in your account.

2. As you make more contributions to your account, you will get additional checks until you receive the full amount that you previously requested.

Services are eligible for reimbursement only after your dependent actually received them, even if you prepaid.

Your plan specifies the last date on which your FSA vendor can accept claim forms for your account. For example, if you set up an account for 2003, it covers expenses that you incur during 2003. If your plan lets you submit claims up to three months after the end of the account year, your FSA vendor will accept 2003 claims it receives by March 31, 2004.

If you submitted a claim with any information missing, and you later resubmitted the claim, we could not accept that claim after March 31, 2004.

By federal law, you forfeit any contributions that you do not use for dependent care expenses incurred during the account year. (Use it, or lose it!)

Whether you choose Flexible Spending or the Child Care Tax Credit, include the provider’s name, address, and tax ID number (or baby-sitter’s Social Security Number) on your tax return.

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What Do Dependent Care Accounts Cover?

• Care at licensed nursery schools*.
• Before and After School care for children under age 13*.
• Day camps*.
• Child care centers that provide day care*.
• Services from individuals who provide care in or outside your home while you work. Dependents of you or your spouse and children under age 19 are not acceptable.
• Household services (related to the care of the elderly or disabled adults or children who live with you) provided by a housekeeper, maid, cook, etc., as long as the individual is partly responsible for the well being and care of your qualified dependents.

* To qualify, the school or center must comply with state and local laws, serve at least seven individuals, and receive a fee for its services.

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What Are The Items A Dependent Care Account Do Not Cover?

• Services provided by your spouse.
• Services provided by a child of yours younger than 19.
• Services provided by a dependent that you claim as an exemption for federal income tax purposes.
• Nursing home or custodial care.
• Overnight camp expenses.
• Baby-sitting expenses for time when you are not working.
• Tuition expenses for schooling.
• Expenses claimed under the Dependent Care Tax Credit.

Please Note: If you use the Dependent Care Flexible Spending Account, or take a federal income tax credit for your dependents, the IRS requires that you provide the name, address, and social security/tax identification number for your provider.

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How Do Flexible Spending Accounts Affect Your Spendable Income?

Here are two examples:

Example # 1 – Dependent Care and Medical Care Reimbursement accounts

Denise is a married, full-time employee earning $33,000 per year. Her husband, Tom, earns $26,000. Their household income is $59,000. They spend $2,500 per year for daycare for their pre-school child. They anticipate $1,800 in out-of-pocket expenses during the year for Tom’s dental work.

Married $59,000 combined gross salary one child

Savings with Flexible Spending Dependent Care and Medical Reimbursement Accounts $1,264

Example # 2 – Dependent Care account only

Mary earns $22,000 per year. She spends $315 per month for nursery school for her pre-school child. Mary has decided to deduct $315 per month from her salary to cover her dependent care expenses.

$22,000 gross salary one child

Annual savings with a Flexible Spending Dependent Account Are $924.

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This information is intended to be general and informational in nature, and is not intended to
provide you with legal, medical, tax, financial planning or other professional advice.