Health care flexible spending accounts
I’ve been trying to explain the benefits of a health care flexible spending account clearly, and haven’t had much success. So I’m going to give it a go here to see if writing it out helps me. (If anyone sees anything I’ve overlooked, or that’s wrong, please chime in.) As far as I understand it, the main benefits are that you:
1) Get to keep more of the money from your paycheck
2) Reduce your tax liability
For simplicity’s sake, here is a scenario based on the following assumptions:
Single person
Salary of $40,000 per year
26 pay periods per year
1 allowance
No deductions or other pre-tax contributions
$1000 in health care-related expenses for the year
Based on Yahoo’s salary calculator, this person would have $1,227 in take-home pay each pay period, or $31,902 per year. THEN they would pay the $1000 in health expenses, leaving $30,902 in their pocket.
On the other hand, if they contributed $1000 per year pre-tax to a health care flexible spending account ($38.46 per pay period), they would end up with $1202 in take-home pay each pay period, or $31,252 per year. They pay the $1000 in expenses, and are then REIMBURSED for them, leaving $31,252 in their pocket. Because they are taxed on a smaller gross amount, this gives them $350 more that year than they otherwise would have received.
So:
Without flexible spending: $30,902
With flexible spending: $31,252
Obviously things are different for every situation, but I think this is the gist of it. Participation = more money in your pocket in the end, as long as you don’t overestimate your health care expenses.
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December 19th, 2007 at 10:19 am
I think that’s a great breakdown. I normally just say that the account allows you to pay out of untaxed money, therefore saving you the percentage you’d normally pay in taxes. Your explanation lays it out much more precisely :)
December 20th, 2007 at 8:34 pm
That’s the key, right in the last sentence. As long as you don’t overestimate your health expenses, it leads to you doing OK on these plans. I love having my handy health spending account debit card handy for my health insurance co-pay, for example. I really do feel the hit a bit less, if only psychologically!
Jerry
http://www.leads4insurance.com
January 2nd, 2008 at 4:28 am
Flexible spending accounts are indeed helpful when it comes to paying for medical or childcare expenses . And just it involves pretax money, it helps you to save more in taxes.