Flexible spending
accounts, or, cafeteria plans, offer employees a menu of
services they pay on a pre-tax basis. Authorized under
Section 125 of the Internal Revenue Code, cafeteria
plans allow employees to set aside money throughout the
year to use toward medical or dependent care expenses
not covered by health insurance benefits, including
co-payments and deductibles.
By setting aside money during the year for medical or
dependent care services before taxes, employees are able
to reduce their taxable income, which increases their
take-home pay. Taxes are not paid on claims paid to
employee from the account either.
When you sign up for a cafeteria plan, it is
important to know that the money deducted from your pay
throughout the year must be used or they will lose it.
Therefore, deducting too little is better than too much.
A cafeteria plan is not a savings account – the funds do
not build up year after year.
The federal government allows two types of spending
accounts. One is for medical reimbursement and the other
is for dependent care spending, whether it's for child
care or care for an elderly family member.
The IRS does not set limits on the amount of medical
and dental expenses that can be reimbursed by a spending
account, buy your plan may establish annual maximums. Be
sure to check to find out what yours are.
When filing income taxes, you must complete the IRS
Form 2441 if you participate in a dependent-care
spending account. Dependent-care contributions are
reported in Box 10 of the W-2 forms.
Sometimes your cafeteria plan administrator will
provide a worksheet to help you determine how much money
you should set aside for medical and dependant care
expenses. Here are some questions to ask yourself to
help determine an amount:
- How much did I spend in child care or care for an
elderly parent last year? Are those costs expected to
increase or decrease this year?
- How much did I pay in co-payments this year for
prescriptions and doctor’s visits?
- Will I or someone in the family need eyeglasses or
contacts this year?
- Is it likely someone will need surgery?
- What did my family spend last year in trips to
emergency room?
- Are there other expenses, like therapy,
chiropractic treatment or orthodontia that someone in
my family may need?
- Do I have vision and dental benefits? What do they
cover?
Be sure to review your health care plan before you
finalize an amount to be paid into your cafeteria plan,
even if you opt to stay with the same plan you had the
year before. Co-payments may have increased or benefits
reduced.
You can change the amount of allocations to your
cafeteria plan if you have what the IRS calls a
"qualifying event." A qualifying event would include the
birth or adoption of a child, death of a spouse or
dependent, marriage, divorce or change your job status
or that of your spouse. Most changes have to be made in
writing within 31 days of the event.
Plan wisely when determining your cafeteria plan
benefit. Ask your benefits administrator if you have any
questions.
