Would you like Uncle Sam to help pay your day-care bill? How about getting him to pick up part of the tab for your medical expenses, such as deductibles or orthodontics?
If your employer offers flexible spending accounts, also called reimbursement accounts, you can do just that. But it takes careful planning, cautions Mark R. Topolski, a CPA with Hertzbach, Sapperstein and Sidle, because you forfeit any amount not used by the end of the plan year.
A flexible spending account allows an employee to use pretaxed money to help pay dependent and health care costs. Because no federal, state or Social Security taxes are withheld, Maryland residents save the entire tax bite on the money put into an FSA. The money put into an FSA is not reported to the IRS and does not appear on W-2 wage statements.
A flexible spending account works like this: You decide how much you want to deposit in your account at the beginning of the plan year. That amount is withheld from your paycheck on a pro-rated basis over the course of that year. You pay any bills for covered costs, and submit canceled checks or receipts. You are then reimbursed from your spending account.
Companies also save their share of the Social Security tax on the amount redirected to a reimbursement account, assuming the employee doesn't make more than the $53,400 wage base. And a worker making less than the maximum wage base should be aware that by reducing his wages, he could lower his eventual Social Security benefit, although Topolski says that's likely to be more than offset by the tax savings.
National surveys by A. Foster Higgins & Co. Inc. and Hewitt Associates, two big benefits consulting firms, found that more and more employers are offering employees the chance to pay dependent care and health costs with untaxed dollars.
Foster Higgins found that the number of employers offering reimbursement accounts increased from 41 percent in 1989 to 50 percent last year. Another 10 percent of those surveyed planned to begin reimbursement accounts by the end of this year.
Companies are finding that implementing a reimbursement plan can be an effective way to shift some of the rising health care costs to employees.
"If you're going to introduce an employee contribution and if you offer an FSA at the same time, it softens the blow considerably," says Jill Foley, a research analyst at the Employee Benefits Research Institute.
A Foster Higgins survey of 444 firms with FSAs in 1990 found that 19 percent of the eligible employees participated in the health care plan and just 4 percent in dependent care.
The especially low rate for dependent care, says John Welch of Foster Higgins' Washington office, is not surprising. First, he points out, only employees with dependents can use it, and only those who are using the "above-ground economy."
In addition, people on the lower end of the pay scale may be better off taking the child care credit on their income tax returns. The maximum credit of $1,440 for two or more dependents and $720 for one is available to families making under $10,000.
"It's not a hard and fast rule but the breakpoint is around $20,000," says Welch.
A Marylander in the 15 percent federal bracket who puts the maxi
mum allowed -- $5,000 -- in a dependent care account would save $1,450 in federal, state and Social Security taxes, says Topolski.
The maximum amount you can redirect to a health care account is up to the company. In fact, companies have lowered the limits from around $2,000-$3,000 to $500-$1,500 because of a change in IRS rules, says Welch. The change requires a company to fully fund the amount an employee designates for his account at the beginning of the plan year. If the worker uses the full benefit and leaves the company before he's paid in all his contribution, the company absorbs the loss.
Dependent care accounts have a legal limit of $5,000, and most companies allow contributions up to that amount.
Most workers, however, deposit amounts below the allowed limits. According to the Hewitt survey, the average participant put $594 into a health care account and $2,696 into a dependent care account.
It's fairly easy to project dependent care costs, Topolski says. Usually it's a matter of multiplying the weekly cost over the course of the plan year.
Health costs are harder to project.
"It's a use-it-or-lose-it situation," he says. "In doing your planning for the year, be very conservative."
IRS rules specify that any unused amounts are forfeited to the employer at the end of the plan year.
In figuring out how much to put into a health care account, Topolski says, first figure out your share of the cost for group health insurance.
Then try to project other costs.
"If you know you have to pay a deductible -- $150 or $200 -- and you know you'll meet it, put it in. If you think you're going to need a physical, plan for it -- the blood tests and so on. Anticipate events like the birth of a baby.
Here are some other expenses Topolski says to consider:
* Dental check-ups if not covered by insurance.
* Eye exams and glasses.
* Well visits for babies and children.
* Orthodontics costs.
"The people that get the most benefit are the people not in HMOs," Topolski says.