FSA. for Health Care and Dependent Care. Pay for expenses not covered by your health plan. Pay for dependent care expenses and save on taxes.

Transcription

1 FLEXIBLE SPENDING ACCOUNTS FSA for Health Care and Dependent Care Pay for expenses not covered by your health plan. Pay for dependent care expenses and save on taxes /01

2 Flexible Spending Accounts In today s society, the need for dependent care and the high cost of medical care have become facts of life. Both can add up to a significant part of our yearly expenses. You may rely on day care services to care for dependent children or elderly parents so you can work. Although your health care benefits plan offers you and your family considerable protection against the high cost of health care, you probably have a number of ordinary health care expenses that are not covered under any benefit plan. Aetna U.S. Healthcare s Health Care and Dependent Care Flexible Spending Accounts offer a way to better manage these expenses and gain real tax savings as well. Health care and dependent care flexible spending accounts are two separate benefit plans that allow you to direct a part of your pay, on a pretax basis, into special accounts that can be used throughout the year to reimburse yourself for certain out-of-pocket health care expenses or work-related dependent care expenses. Because this money goes into your health care or dependent care flexible spending account before federal income or Social Security taxes are withheld, you pay less in taxes and, ultimately, have more disposable income. In most cases, your money is exempt from state and local taxes as well. (Check with your tax advisor to find out whether or not this tax exemption applies in your state.) Depending upon your tax bracket and residency, using a flexible spending account can be worth the equivalent of receiving a 20 percent to 50 percent discount on eligible services. This brochure will help you to better understand Aetna U.S. Healthcare s Health Care and Dependent Care Flexible Spending Accounts and to decide whether the tax advantages they offer are right for you. How the Accounts Work Each year you decide whether or not you want to participate in a health or dependent care flexible spending account. If you do, estimate the amount of eligible medical/dental or dependent care expenses you are likely to have during the year and decide how much of your salary you want to set aside to help pay for each. The amount you elect will be automatically deducted from your paychecks during the year and credited to your health care or dependent care accounts. As you incur eligible expenses during the year and pay for them out of your own pocket, you reimburse yourself from your flexible spending account with tax-free money. Keep in mind that health care and dependent care flexible spending accounts are two separate benefit plans. Therefore, money cannot be transferred between accounts. 1

3 Eligible Expenses Money set aside in these accounts can be used to reimburse health care expenses not covered by any other plan or dependent care expenses necessary because you, or if you are married, you and your spouse, work. Health care flexible spending account expenses must also be considered tax-deductible by the Internal Revenue Service (IRS). According to IRS Regulations (IRS Publication 502), eligible medical expenses include, but are not limited to: Deductibles Routine physicals Copayments/coinsurance Hearing exams Eye exams Hearing aids Eyeglasses Doctors fees Contact lenses/saline solution Laboratory fees Chiropractic treatment Dental work/orthodontia Prescribed medicines Psychiatric treatment Lasik surgery The work-related dependent care expenses you can be reimbursed for through a dependent care flexible spending account include: Wages paid to a baby-sitter or companion in or outside your home, as long as the person providing care is not someone you also declare as a dependent. Services of a day care center and/or nursery school if the center complies with all state and local laws. Cost for care at facilities away from home, such as family day care or adult day care centers, as long as your adult dependent spends at least eight hours a day at home. Wages paid to a housekeeper for providing care for an eligible dependent. Eligible dependents include: Your dependent children under age 13, and Any person living with you whom you claim as a dependent and who is physically or mentally incapable of self-care. Money set aside in these accounts can be used to reimburse health care expenses not covered by any other plan or dependent care expenses 2

4 Your health care and dependent care flexible spending account contributions will not affect any company benefits that are based on pay 3 Contributions Health Care Although the Internal Revenue Service (IRS) does not currently set specific limits on the amount of medical/dental expenses that can be reimbursed with a health care flexible spending account, federal regulations require each employer offering this plan to establish annual health care flexible spending account maximums. You will be informed of the maximum annual amount you can set aside in your account during the open enrollment period each year. Dependent Care The IRS does, however, limit the maximum amount you can deposit in your dependent care flexible spending account to $5,000. If you are married and file a separate income tax return, the maximum annual contribution is $2,500. If either you or your spouse earns less than these amounts, then your maximum annual contribution would be limited to the amount of your earned income or that of your spouse, whichever is less. If your spouse has no earned income for a plan year, you cannot use this account unless your spouse is disabled or a full-time student for at least five months during the year. Tax Deduction vs. Health Care or Dependent Care Flexible Spending Accounts Health Care If you use money from your health care flexible spending account for a health care expense, you cannot claim that expense as a deduction on your income tax return. In determining whether a tax deduction or reimbursement through a health care flexible spending account is better for you, keep in mind that according to the IRS, only medical expenses that exceed 7.5 percent of your gross adjusted income can be deducted from your income taxes. Most people do not have expenses high enough to qualify for this deduction. For example, if your adjusted gross income is $28,000, your eligible health care expenses would have to be greater than $2,100 (.075 x $28,000) to claim a deduction. Also, because you can only declare expenses over 7.5 percent of your adjusted income, if you had $2,200 in eligible health care expenses, you could only deduct $100 on your tax return. With a health care flexible spending account, you could reimburse yourself with tax-free dollars for any portion of that expense, up to the maximum amount of your yearly contribution. Dependent Care The IRS allows you to claim work-related, dependent care expenses for credit when you file your income tax return. The tax credit amount is determined by applying a percentage to your total work-related dependent care expenses. These expenses may not exceed $2,400 for one eligible dependent or $4,800 for two or more. You can use both a dependent care flexible spending account AND a tax credit, provided you do not claim the same expenses for both. If you do plan to use both, federal regulations require that whatever amount you have directed into a spending account be subtracted from your tax credit. According to the current tax structure, in most cases (depending on your filing status) the tax credit is more beneficial than a dependent care flexible spending account if your family income is under $24,000. By selecting the dependent care flexible spending account, your income is

5 not reduced for the purposes of calculating the federal Earned Income Tax Credit (EITC). But, keep in mind that contributions for flexible spending accounts are taken out of your pay before taxes are applied, thus reducing your gross salary and your taxable income. You need to determine which is better for you. If you elect to take advantage of a dependent care flexible spending account, you must complete IRS Form 2441 when filing your income taxes for the year. Your employer will assist you with this requirement by reporting all dependent care contributions in Section 10 of your W-2 form(s). Unused Funds If you have not used all of the money deposited into your flexible spending account for expenses incurred during the plan year, IRS regulations dictate that these remaining funds must be forfeited. Because many out-of-pocket health care and dependent care expenses can usually be budgeted ahead of time, careful planning of your yearly expenses will help reduce the risk of losing unused funds. If you are aware of your account balance and filing deadline, you will use your flexible spending accounts to the maximum potential. You will receive account activity statements during the year to remind you of your balances and important claim filing information. Keep in mind that any forfeiture of funds may be offset by your total tax savings. Remember, a portion of any money would have been paid in taxes. Effect on Other Benefits Your health care and dependent care flexible spending account contributions will not affect any company benefits that are based on pay. These benefits will continue to be based on your salary before any amount is deducted. However, because you don t pay Social Security taxes on your spending account contributions, those benefits may be slightly less when you retire or if you become disabled. It will depend on the length of time between now and when you retire or become disabled and on whether or not your taxable income exceeds the Social Security maximum wage level. Reimbursement From Your Account It is important to note that IRS regulations determine that qualified expenses must be incurred in order to claim reimbursement from your account. Expenses are considered to be incurred when the service is rendered and not when you are billed, charged or pay for these services. Therefore, reimbursements made during a plan year are only made for eligible expenses incurred during that same plan year. Claim payments will be made at least once a month. An Explanation of Payment (EOP) will be sent with each payment. Health Care When you submit a claim for your health care flexible spending account, you will be reimbursed up to the full amount of your annual contribution, regardless of the amount of money that has been deposited into your account. Contributions will continue throughout the year and claims will continue to be paid until your annual maximum is met. 4

6 For example, assume that you are paid monthly and elect to set aside $50 a month or $600 for the year in your health care flexible spending account. Suppose that in April, after contributing a total of $200 ($50 x 4 months) to your account, you incur a medical expense of $500 that you pay out of your pocket. You could request reimbursement for the full amount of the expense, even though the balance in your account is not sufficient to cover it at that time. For the rest of the plan year, your salary deductions would continue. In this example, of the total amount of $600 you elected to set aside, $100 would remain available to you for reimbursing further expenses incurred that year. Dependent Care Dependent care flexible spending account claims are paid a little differently. If you submit a claim and your balance is less than the amount of the claim, you will only be reimbursed for the amount of money available in your account. The remainder will be reimbursed once the money is deposited into your dependent care flexible spending account. This enables you to submit a claim only once and receive funding on an ongoing basis, rather than be denied payment or be forced to resubmit the claim until it can be paid in full. Eligibility You are eligible to participate in a health care or dependent care spending account if you are an active employee as defined by your company s policy. Expenses can be incurred for any member of your family who is considered your legal dependent when you file your taxes. How to Enroll If you choose to enroll in a health care or dependent care flexible spending account, your employer will provide you with the necessary enrollment procedure. Only those expenses you incur on or after the effective date of your enrollment in this plan will be eligible for reimbursement. Estimate expenses During the enrollment period each year, you should estimate what your expenses are likely to be for the upcoming plan year. For health care accounts, consider last year s medical and/or dental care expenses and any medical/dental costs you foresee that might not be covered under your medical or dental plans. For dependent care flexible spending accounts, review your dependent care costs from recent years. To most accurately estimate your health care and dependent care costs, please keep in mind any changes in your family status that might have an impact on your expenses, such as marriage or the birth or adoption of a child. 5

7 Determine contributions Decide how much of your salary you want to contribute to your flexible spending account(s) to fund these health care or dependent care expenses. Remember, the amounts you elect will be deducted automatically from your paychecks and credited to your spending account(s). Plan carefully It is important to plan carefully. According to federal regulations, once you have designated the contribution amounts for a plan year, you cannot change your decision during that plan year unless your family status changes. Check with your company s benefits area for a full list of family status changes. Following are examples of family status changes: Marriage. Divorce. Birth or adoption of a child. Death of a child or a spouse. Termination of spouse s employment. Commencement of spouse s employment. Transition from part-time to full-time work or from full-time to part-time work for employee or spouse. Employee or spouse taking an unpaid leave of absence. Any significant change in health coverage of employee or spouse due to spouse s employment. Current Rules Health care and dependent care flexible spending accounts are offered on the basis of the current understanding of the provisions of the Internal Revenue Code and regulations. Because the current rules are subject to change, the plans may be amended or discontinued if changes in the law or regulations make it advisable to do so. This brochure describes Aetna U.S. Healthcare s Health Care and Dependent Care Flexible Spending Accounts in general terms. If any conflict arises between these descriptions and the plan documents, or if any issue is not covered, the terms of the plan documents will govern in all cases. Any determination as to qualification of an expense under Aetna U.S. Healthcare s Health Care or Dependent Care Flexible Spending Accounts is subject to review by the Internal Revenue Service (IRS). Should the IRS take a position contrary to that applied under the plan, the plan will be governed by IRS instructions. Employees who disagree with the IRS position and wish to appeal that decision must obtain their own legal counsel. During the enrollment period each year, you should estimate what your expenses are 6

8 Health Care Flexible Spending Account Expenses Worksheet This worksheet will help you to think about your health care expenses for the coming year and to estimate the amount you should put in your health care flexible spending account. As you think about what your expenses might be, it would be helpful to review your health care expenses for recent years. Do you tend to have certain recurring, predictable expenses? Also consider any anticipated changes that might affect your expenses during this year, such as marriage or a new baby. The following list will give you some ideas about the types of out-of-pocket expenses you might have that could be reimbursed with tax-free dollars from your health care flexible spending account. Remember, these expenses must not be payable by any other plan. Covered Health Care Expenditures Deductible Coinsurance Dental work (fillings, orthodontia, dentures) Routine health examinations Charges in excess of reasonable and customary Routine eye exams, eyeglasses, contact lenses Hearing aids Other eligible expenses Total estimated out-of-pocket health care expenses 7

9 Health Care Flexible Spending Account Savings Worksheet With Flexible Spending Account Without Flexible Spending Account 1. Annual Income 2. Spending Account Contribution Taxable Income = 4. Estimated Federal Income Tax 5. Total = 6. Social Security Tax 7. Total = 8. Health Care Expenses Net Pay = Instructions 1. Enter your annual gross income. 2. Enter your estimated contribution into the health care account based on your estimated out-of-pocket expenses from the worksheet provided. 3. Subtract item #2 from item #1 for your total taxable income. 4. Using the chart provided, estimate your federal income tax. 5. Subtract item #4 from item #3. 6. Using the chart provided, estimate your Social Security tax. 7. Subtract item #6 from item #5. 8. Enter estimated out-of-pocket expenses from the worksheet provided. 9. Subtract item #8 from item #7 to find your estimated net pay. 8

10 Dependent Care Flexible Spending Account Expenses Worksheet This worksheet will help you think about your dependent care expenses for the coming year and to estimate the amount you should put in your dependent care flexible spending account to reimburse yourself for them. As you think about what your expenses might be for the coming year, it could be helpful to review your dependent care costs for the past year. Also consider any anticipated changes that might affect your expenses, such as marriage or a new baby. In estimating your expenses, keep in mind that any dependent care expenses you reimburse with a dependent care flexible spending account may not be claimed for tax credit when you file your income tax return. The maximum amount you may contribute to your dependent care account is $5,000 or $2,500 if you are married and file a separate income tax return. See the chart on the next page for additional details about federal income tax credit savings. Your eligible dependents include: Your dependent children under age 13, and Any other person living with you whom you claim as a dependent and who is physically or mentally incapable of self-care. Types of Dependent Care Expenses Wages or salary paid to a baby-sitter or companion in or outside your home. These expenses are not covered if the care is provided by someone you claim as a dependent. Services of a day care center and/or nursery school, if the center complies with all state and local laws. Costs for adult care at facilities away from home, such as family day care or day care centers, as long as your adult dependent spends at least eight hours a day at home. Wages paid to a housekeeper for providing care for an eligible dependent. Other dependent day care services considered tax-deductible by the Internal Revenue Service (IRS). Total Estimated Dependent Care Expenses 9

11 Federal Income Tax Credit Savings With a Dependent Care Flexible Spending Account Eligible Dependent Care Expenses (maximum $2,400 for one dependent, $4,800 for more than one) Multiplied by tax credit percentage (from the table below) x Equals federal income tax credit = Adjusted Gross Income Tax Credit Percentage $0 $10, $10,001 $12, $12,001 $14, $14,001 $16, $16,001 $18, $18,001 $20, $20,001 $22, $22,001 $24, $24,001 $26, $26,001 $28, Above $28,

12 Compare your estimated tax savings (using the Dependent Care Savings Worksheet) to your estimated federal income tax credit to see which approach may be better for you. Because the tax credit reduces your federal income taxes on a dollar-for-dollar basis, it is a very attractive feature for many taxpayers. However, the maximum annual dependent care tax credit available is $2,400 for one dependent and $4,800 for two or more. A dependent care flexible spending account may reimburse more than $4,800 in expenses, regardless of the number of dependents. And in addition to federal tax savings, dependent care accounts also offer potential state and Social Security tax savings. Please note that the choice between selecting the dependent care flexible spending account and the tax credit does not affect the size of your Earned Income Tax Credit (EITC). By selecting the dependent care flexible spending account, your income is not reduced for the purposes of calculating the EITC. Therefore, as noted above, for those families earning less than $24,000 annually, the dependent care tax credit is probably a better choice than the dependent care flexible spending account. NOTE: This is only a worksheet to help you think about a dependent care flexible spending account it provides only tax information but NOT TAX ADVICE. Please consult a tax advisor to determine what is best in your individual situation. 11

13 Dependent Care Flexible Spending Account Savings Worksheet With Flexible Spending Account Without Flexible Spending Account 1. Annual Income 2. Spending Account Contribution Taxable Income = 4. Estimated Federal Income Tax 5. Total = 6. Social Security Tax 7. Total = 8. Dependent Care Expenses Total (Before Dependent Care Tax Credit) = 10. Dependent Care Tax Credit Net Pay = Instructions 1. Enter your annual gross income. 2. Enter your estimated contribution into the dependent care account based on your estimated out-of-pocket expenses from the worksheet provided. 3. Subtract item #2 from item #1 for your total taxable income. 4. Using the chart provided, estimate your federal income tax. 5. Subtract item #4 from item #3. 6. Using the chart provided, estimate your Social Security tax. 7. Subtract item #6 from item #5. 8. Enter estimated dependent care expenses from the worksheet provided. 9. Subtract item #8 from item #7 to find your estimated total pay before the dependent care tax credit. 10. Enter your estimated dependent care tax credit from the worksheet provided. 11. Add item #10 to item #9 to find your estimated net pay. 12

14 FLEXIBLE SPENDING ACCOUNTS Please note that these rates are subject to change. Final rates will be available in December Tax Rates Single Filer If your taxable income is: Your tax is: Up to $27,050 15% $27, $65,550 $4, % of the amount over $27,050 $65, $136,750 $14, % of the amount over $65,550 $136, $297,300 $36, % of the amount over $136,750 Over $297, $94, % of the amount over $297,300 Head of Household If your taxable income is: Your tax is: Up to $36,250 15% $36, $93,600 $5, % of the amount over $36,250 $93, $151,600 $21, % of the amount over $93,600 $151, $297,300 $39, % of the amount over $151,600 Over $297, $91, % of the amount over $297,300 Married People Filing Jointly or Surviving Spouse If your taxable income is: Your tax is: Up to $45,200 15% $45, $109,250 $6, % of the amount over $45,200 $109, $166,450 $24, % of the amount over $109,250 $166, $297,300 $42, % of the amount over $166,450 Over $297, $89, % of the amount over $297,300 Married People Filing Separately If your taxable income is: Your tax is: Up to $22,600 15% $22, $54,625 $3, % of the amount over $22,600 $54, $83,225 $12, % of the amount over $54,625 $83, $148,650 $21, % of the amount over $83,225 Over $148, $44, % of the amount over $148,650 Social Security Tax Social Security tax rate is: 7.65% up to $80, % above $80,400

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