The University Record, October 7, 1998

Reimbursement accounts can save you money

Editor's Note: This is one in a series of articles from the Benefits Office on Open Enrollment, detailing changes to your benefits for 1999. Open Enrollment for 1999 benefits is Oct. 12-30.

Reimbursement Accounts-Health Care and Dependent Care-can help you save money in several ways. You can enroll in either or both types of accounts. It is necessary to re-enroll each year. Beginning Jan. 1, 1999, there is a $120 minimum contribution amount required for the year for Health Care Reimbursement Accounts. Contributions are spread evenly over all paychecks for the year. There is no minimum contribution requirement for a Dependent Care account.

 

How you save

• You save money on taxes. You never pay federal, state or FICA taxes on money you contribute to a reimbursement account, which totals between 27 percent and 40 percent savings.

• Your contribution is deducted from your gross salary before taxes are calculated, which lowers the amount on which taxes are calculated, so you pay less taxes overall.

• If you have a Health Care account, you can be reimbursed for small eligible expenses, such as office visit and prescription copays, as well as dental, vision and other expenses. Most people do not accumulate enough health care expenses in a year to exceed the 7.5 percent of income that is required to deduct the expenses on the federal income tax return, so they lose the savings. With a Health Care account, you get those savings.

• Save money as you go! You can receive your savings on health care and dependent care expenses up front, as expenses occur, rather than waiting until April 15 of the following year when you file your federal income tax return and get tax savings or a tax refund.

• Depending on your personal situation, Dependent Care savings through a Reimbursement Account can be greater than if you take the child care deduction on your federal income tax return.

 

Helpful hints

• Before you enroll in a Reimbursement Account, think ahead about the expenses you expect to incur during the coming year so you can more accurately determine the amount you wish to contribute to an account. Any amount contributed to an account but not used to pay eligible expenses will be forfeited.

• Some people avoid participating in a Reimbursement Account because they are afraid of losing their money, but with careful planning, you can reap the benefits of an account and not lose your money. For example, if you see your dentist during the weeks before Open Enrollment, you can plan for dental work for the coming year, get an estimate of the cost, and include that in your computation of your contribution amount. Do you need eyeglasses or contact lenses during the coming year? Get an estimate of those costs and include them also.

• For Health Care accounts only, it is not necessary to wait until all the funds accumulate in an account to purchase eyeglasses or schedule dental work, etc. Health care expenses can be incurred and reimbursed in full early in the year, then you continue to make contributions throughout the year.

• There are worksheets in the Reimbursement Accounts section of the Open Enrollment book that can help you calculate your savings and help you decide whether to enroll.

• Check the list of eligible expenses in the Reimbursement Accounts section in the Open Enrollment book or in the Reimbursement Accounts book. If you have an expense that is not listed, call the Benefits Office to see if it is eligible for reimbursement.

• Save your receipts and EOB forms for all health care expenses. You will need them to file your claim for reimbursement. (EOB forms are Explanation of Benefits forms, issued by health insurance plans, except HMOs, for any covered expense.)

When you enroll in a Reimbursement Account, you receive a Claims Kit that contains general information, claims due dates and forms you will need to manage your account. Use the kit folder as a file to organize your receipts.

• Claims are reimbursed in your monthly or last biweekly paycheck of the month.


How much can I save?

Note: These examples are for illustration only. Actual experience may vary.

Example 1

Ted is single, has no dependents and earns taxable income of $25,000 per year. He paid $2,000 for health care expenses in 1998, and saved $541 in taxes by using a Health Care Reimbursement Account. Jack's finances are identical to Ted's. Ted saves money but Jack does not. To calculate the savings, subtract the amount Ted pays for federal, state and FICA taxes from the amount Jack pays. To deduct his health care expenses on his tax return, Ted would need health care expenses exceeding 7.5 percent of his adjusted gross income.

Health Care Reimbursement Account

Ted Uses an Account

Jack Does Not Use an Account

Estimated annual taxable income

$25,000

$25,000

Less health care Reimbursement Account contributions

$2,000

$0

Adjusted taxable income

$23,000

$25,000

Less federal and state taxes (98 rate schedule)

$2,599

$2,987

Less FICA taxes

$1,760

$1,913

Less health care expenses after taxes

$0

$2,000

Disposable income

$18,641

$18,100

Savings

$541

Example 2

Carol is married and both she and her spouse work. They have two pre-school children, ages three and five. Carol's family salary income is $45,000 (one full-time income of $35,000 and one part-time income of $10,000). The family spends $7,500 per year on day care. If she puts the maximum of $5,000 in an account, she will save $393.

Dependent Care Reimbursement Account

If Carol uses an account

If Carol uses tax return

Adjusted gross income before reimbursement

$45,000

$45,000

Less dependent care pretax contributions

$5,000

$0

Adjusted gross income

$40,000

$45,000

Less federal tax

$2,348

$3.098

Less state taxes

$1,267

$1,487

Less FICA taxes

$3.060

$3,443

Less dependent care paid after taxes

$2,500

$7,500

Plus dependent care income tax credit

$0

$960

Income after dependent care expenses

$30,825

$30,432

Savings

$393


Dependent life insurance rates down

Dependent Life Insurance rates for 1999 are down 58 percent from 1998 rates. The rates were finalized, after the Open Enrollment book went to the printer, and are the result of favorable experience in the dependent life insurance program.

Dependent Life Insurance is available for your spouse or same-sex domestic partner, and for your children. All faculty and staff who are eligible for flexible benefits can enroll. The University employee is the automatic beneficiary.

1999 Rates Children

$ .10 per month for $2,000

$ .24 per month for $5,000

Spouse or same-sex domestic partner life

$1.20 per month for $10,000

$3.00 per month for $25,000

$6.00 per month for $50,000



You can always drop us a line: urecord@umich.edu.