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Jewish World Review Feb. 7, 2001 / 14 Shevat, 5761

Teresa F. Lindeman

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Consumer Reports


Workers wary of flexible spending plans

http://www.jewishworldreview.com -- Flexible spending accounts, created in the late 1970s, have won wide acceptance among employers. In 1999, a Hewitt Associates survey of more than 1,000 large employers found 90 percent offered the pretax benefits.

Employees have been much slower to use the shelters. The same survey found fewer than 14 percent use the health-care version, with 3 percent using pretax dollars to pay for the care of children or other dependents.

But if medical costs continue to rise - and employers pass along the increases - more people should probably take a second look, said Joe Kennedy, manager of the Pittsburgh office of Hewitt, a global management consulting firm that specializes in human resources.

"This is a way to actually save some of the expense," Kennedy said. People in the 28 percent federal tax bracket, for example, can save that much on money in their accounts plus Social Security taxes and possibly state taxes.

Novices should be aware that since the government is involved, the process is a bit complicated.

The first thing to do is determine if your employer offers the programs, which come under Section 125 of the federal tax code. Companies have discretion in offering them and in how they set them up.

Usually, although not always, the accounts are run on a calendar year, meaning the worker needs to decide by November how much he or she expects to spend next year. Once the decision is made, the worker is basically committed to maintaining that level for the year.

There are two types of accounts: health care and dependent care. Health care is the most popular since almost everybody has medical costs.

To figure out if it makes sense, employees should add up what they spend on medical and dental expenses not covered by insurance. Eligible expenses include deductibles and co-payments, prescription drugs such as birth control pills, contact lenses and solution, smoking cessation programs prescribed by a doctor, orthodontia expenses and hearing aid batteries.

For most people, the bills add up, but not quite enough to qualify for a health-care tax credit when they're itemizing their deductions. In that case, they usually save money by going the pretax route.

Dependent care accounts tend to be used by fewer people. To be eligible, employees must be unable to care for their dependents because of work. Qualifying dependents include children under 13 and any family member physically or mentally incapable of caring for himself.

People should look at their expenses for day care, nursery programs, elder care services or the money spent having someone come into the house to take care of an ailing parent.

The government limits these accounts to $5,000 annually.

Hewitt Associates estimates an individual earning less than $25,000 per year would probably be better served taking the federal child-care tax credit. Most people earning more would do better with a flexible spending account.

Kennedy said sometimes people decide not to participate because they're worried about anything that appears to lower their weekly paycheck. "The argument is, 'I need those dollars now,' " he said. He counters that if money is tight, saving as much as possible is important, too.

The main risk for employees is that any money not used is lost. This rule was set up by the IRS as a trade-off for the obvious advantages of avoiding the usual taxes.

So people who have excess health-care funds toward the end of the year often schedule dental checkups or stock up on qualifying medical supplies.

Government planners give employers the carrot-and-stick treatment, too. They can save on payroll taxes by offering the accounts. On the other hand, they can lose money if employees incur a large health-care expense and then leave the company before contributing enough to pay it off.

Teresa F. Lindeman writes for the Pittsburgh Post-Gazette. Comment by clicking here.

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