Employee Flexible Spending Account Cafeteria Plan

The way this plan works is that you elect to have a predetermined amount of your gross pay set aside (before taxes are calculated) and put into the flexible spending account. It can be used for major medical health insurance premiums, unreimbursed (out-of-pocket) medical expenses such as deductibles, co-payments, vision and dental expenses, or for child and dependant care expenses.

Since the money is set aside before both FICA and federal taxes are taken out the savings can be significant. The Kiplinger's article points out that if you are in the 28% tax bracket, together with the 7.65% social security tax, $1000 in medical bills costs you only $643.50. At first glance you might think that is a savings of 35.65% (28 + 7.65), but it is actually a lot better than this. Guess what, in order to have $1000 to pay for medical expenses after taxes, you have to earn $1554 before taxes! ($1554 x .3565 = $554). To me that is a savings of 55.4%.

The draw-backs to this plan are: there are maximum amounts that you can put in (depending on your filling status); for dependant care expenses it will affect your dependant care tax credit (figure it both ways yourself or check with your tax advisor); and most importantly, if you don't use all of what you elect to have set aside in the plan year you forfeit the unused portion.

If your employer offers such a plan you really should take advantage of it. It's not that hard to estimate your typical non-reimbursed medical expenses especially if you use your computer to track expenses (Quicken or Money). If you work for a company that doesn't have such a plan, perhaps you could ask the person in charge of employee benefits to look into Section 125 of the IRC to find out if such a plan could be offered. Note: the employer benefits as well as the employee.

Over the last five years we have used the "Flexible Spending Cafeteria Plan" to set aside over $10,000 which paid for nearly two thirds of our medical, dental, and vision care expenses. With our particular tax situation this saved us nearly $4000 which would otherwise have gone to pay taxes. It has also saved our budget a number of times when we have had a particularly large expense (one not covered by another health plan) because we were able to pay for it out of the "Cafeteria Plan" even before we had accumulated enough money in it to pay for the expense. For example, in January this year I had to have over $500 worth of dental work done. Our contributions to the "Plan" were only $105 to date. I paid for it with my credit card, then submitted the receipt with my "Cafeteria Plan Claim Form", and by the time I paid the credit card bill in February I already had a reimbursement check from the "Plan" administrator!

I highly recommend this plan. Everyone who is employed and who is looking for ways to "stretch their dollars" should seriously consider it.

Karen is a former computer systems analyst programmer, the wife of an ordained minister, and an at-home-mother of two teenage daughters. Over the past few years Karen has contributed to the "Dollar Stretcher" a number of articles on the subjects of budgeting and Quicken. She claims to have a few more ideas on saving money and will write again, from time to time. You can contact her at jjones@xtalwind.net.

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