Money-saving open enrollment tips

Millions of Americans will be receiving 2013 open enrollment materials. Although it’s tempting to simply check “same as last year,” that can be a costly mistake – especially if an employer is offering different benefit plans next year or one’s family or income situation has changed.

Plus, an important feature of health care flexible spending accounts, which many people use to reduce their tax bite, is changing next year (more on that below).

Here’s what to look for when reviewing benefit options. Many benefit plans – especially medical – change coverage details from year to year. If you’re offered more than one plan, compare features side-by-side (including plans offered by a spouse’s employer) to ensure choosing the best alternative.

Common changes include:

• Dropping or replacing unpopular or overly expensive plans.

• Increased monthly premiums for employee and/or dependent coverage.

• Increased deductible and/or co-pay amounts for doctor visits, prescription drugs, hospitalization, dental or vision benefits, etc.

• Revised drug formularies

• Doctors and hospitals sometimes withdraw from a plan’s preferred provider network.

• Raising maximum yearly out-of-pocket expense limits.

If offered by an employer, health care and dependent care flexible spending accounts (FSAs) can significantly offset the financial impact of medical and dependent care by letting you pay for eligible out-of-pocket expenses on a pre-tax basis; that is, before federal, state and Social Security taxes are deducted from one’s paycheck. This reduces a person’s taxable income and therefore, taxes.

It is possible to use a health care FSA to pay for IRS-allowed medical expenses not covered by a medical, dental or vision plan. Check IRS Publication 502 at http://www.irs.gov for allowable expenses. Dependent care FSAs let you use pre-tax dollars to pay for eligible expenses related to care for a child, spouse, parent, or other dependent incapable of self-care.

Example:

If one earns $42,000 per year and contributes $1,000 to a health care FSA and $3,000 for dependent care, his or her taxable income would be reduced to $38,000. Resulting net income, after taxes, would be roughly $1,600 more than if one had paid for those expenses on an after-tax basis.

FSA restrictions:

Effective January 1, 2013, employee contributions to health care FSAs are now limited to $2,500 a year; however, if a spouse has an FSA at work, one still may contribute up to $2,500 to each account. The dependent care FSA limit remains unchanged at $5,000. Health care and dependent care account contributions are not interchangeable.

Estimate planned expenses carefully because one must forfeit unused account balances. Some employers offer a grace period of up to 2 ½ months after the end of the plan year to incur expenses, but that’s not mandatory, so review enrollment materials.