Tax-Free Spending Accounts
What is a Flexible Benefit Plan?
In today's workplace, it is virtually impossible for an employer to provide a benefit package that takes into account all the various needs of employees. Each employee has his or her own special needs. A Flexible Benefit Plan can help you increase your take-home pay by using pre-tax dollars.
While you reduce your taxes immediately by having your group insurance premiums paid with pre-tax dollars through the Premium Account option, you will need to give some careful thought to the other parts of the Flex Plan - the Medical Care Reimbursement and Dependent Care Reimbursement Accounts.
Under the Flexible Benefit Plan, you voluntarily redirect a portion of your gross pay to the plan as additional flex dollars. These dollars can then be used during the plan year to pay for the unreimbursed health care and dependent care expenses that you incur for you and your eligible family members.
Remember, these are pre-tax dollars and you will pay no federal or state income tax and no Social Security tax on the amount you redirect to the plan. This means you will have more spendable income.
The Flex Plan will not affect other pay-related benefits including retirement plans. These benefits will be figured on your base gross pay before any redirection to the Flex Plan.
Simply put, by saving income and Social Security taxes through the Flex Plan, you can give yourself a raise.
The amount of your salary that you redirect into Health Care and/or Dependent Care Spending Accounts is deducted from your paycheck before taxes are calculated and applied, thereby your income subject to taxes is lower.
For example, if you want to purchase contacts for $100 and you are in the 28% federal tax and 6% California state tax bracket, the chart below applies.
|With a tax-free account||Without a tax-free account|
|Cost of contacts||$100||$100|
|Taxes you pay on $100 of earnings||$-0-||$34|
|Total you must earn to purchase the contacts||$100||$134|
While the contacts cost the same, you save the $34 you would have spent on taxes by using the Spending Account.
Because amounts deferred under the Plan are not counted as wages when determining your Social Security benefit, it is possible that there may be a reduction in your Social Security benefits. You should consult your financial or tax advisor to determine the effects of electing to participate in the Plan.