One big issue in retirement planning is health insurance benefits. During the federal benefits open season that runs from Nov. 12 to Dec. 10, I’ll be addressing some insurance-related issues.
This week, I’ll focus on the flexible spending account program. FSAs offer employees (but not retirees) a way to set aside tax-free dollars to pay for a variety of eligible health care and dependent care expenses. But only about a third of eligible federal employees use it. Those who do can save an average of $30 for every $100 they spend for necessities such as medicines, eyeglasses, doctor or dental visits, day care and adult care expenses. If you are retiring sometime in 2013 or later, it makes sense to consider using this tax-saving program prior to your retirement.
Consider this:
- If you have $2,500 in eligible out-of-pocket health expenses, you could get a tax savings of $750 a year, or more than $60 a month. If your spouse also is eligible for the Federal Employees Health Benefits Program and establishes a health care FSA, this could double the savings if your family has $5,000 in out-of-pocket health care expenses throughout the benefit period.
- If you use the maximum dependent care FSA, which is $5,000 of income that you can shelter from taxes to pay for dependent care expenses, you can get an additional $1,500 a year, or $125 a month, in your pocket.
- FSAs also reduce state and FICA taxes for employers, resulting in a savings of approximately 7 percent to 10 percent to employers. As a result, there are no fees charged to federal employees to participate in the program -- the government covers the fees using the employer tax savings.
There are three types of FSA plans:
Health Care FSA
This can be used for out-of-pocket health expenses that are not covered by FEHBP, the Federal Employees Dental and Vision Insurance Program, or other insurance. The dollar limit for 2013 is $2,500. (Your spouse can have a separate account and fund it with an additional $2,500). The minimum amount you can put in an account for 2013 is $250.
Limited Expense FSA
The Limited Expense FSA (LEXFSA) is for eligible dental and vision expenses in connection with a Health Savings Account. This is available only to those who are enrolled in a high-deductible health plan. The LEXFSA dollar limit is $2,500 for 2013.
Dependent Care FSA
This can be used to pay for nonmedical day care expenses (such as child care and elder care) so you or your spouse can work, look for work, or attend school full time. The dollar limit is $5,000 per household.
Things to Remember
Here are some things to consider about the federal FSA program as you prepare to make your open season choices this year:
- Be sure that the expense you are planning to use your FSA to cover is eligible. Examples include contact lenses and solutions; chiropractic care; co-payments, co-insurance and deductibles (but not insurance premiums); dental care; flu shots; hearing aids and batteries; and over-the-counter and prescription drugs. Here’s a complete list of eligible FSA expenses.
- The benefit period to use the money allocated in your FSA account runs from Jan. 1, 2013, through March 15, 2014. Be aware that you must use the money before the end of the benefit period or risk forfeiture.
- You can budget your expenses while reducing your taxes. The yearly allocation of your HCFSA is available on Jan. 1. So if you incur a dental expense of $2,500 in January and submit the claim for that expense on Jan. 15, you will be reimbursed the full cost within about five to seven business days from the time you submit your claim. The deduction of the $2,500 will be spread over 26 pay periods, so the dental expense can be spread out throughout the year, as you reap the tax savings.
- Unlike with health care accounts, the current balance in your DCFSA account on the day your claim is processed is the maximum you can be reimbursed at that time. If your bill for day care exceeds what you have in your account, FSA administrators will process your claim and reimburse you the amount in your account on the day of processing. Any eligible claim amount that exceeds the balance in your DCFSA at the time your claim is processed is held over until your next allotment is received.
- For employees who are planning to retire in 2013, you only can be reimbursed for health care expenses incurred prior to your date of retirement, even if you accelerate your allotments. Any money remaining in your account after your separation will be forfeited if the expense wasn’t incurred before you retire.
- If you are a full-time re-employed annuitant, you may be eligible to participate in the FSA program if you are eligible for FEHBP coverage.
- If you used the entire amount in your HCFSA or LEXFSA before it has been deducted from your pay, you will not be responsible for the remaining allotments after you retire or separate from federal service.
Want more information about FSAs? Here are some answers to frequently asked questions.