Prepare Now for 2003 Health-Care Expenses

It’s too late for workers to do much about the latest increases in their out-of-pocket health-care costs. But they can start planning now to ease the pain in 2003.

By laying the groundwork this year, workers can position themselves to take advantage of a widely offered but little-used employee benefit called health-care spending accounts.

The accounts, which allow employees to set aside part of their pretax wages to pay their share of medical and dental bills, may grow in popularity as employers respond to rising health-care costs by shifting more of the burden to their employees.

“A lot of these spending accounts allow you to get certain elective treatments that might not be covered by your health plan, so you even broaden your coverage somewhat,” said Johan Dekeyzer, a health-care consultant with Hewitt Associates in Newport Beach. “But you have to be cognizant of what your needs are going to be.”

Medical spending accounts, offered by about 85% of large employers, can provide substantial savings for families that require frequent health-care services.

Because the money deposited in the account is taken out of a paycheck before taxes, each $1,000 saved in an account costs a middle-income worker about $600. (That assumes a 27% federal tax, 5% state tax and 7.65% employment tax--or FICA--rate.) That means employee-paid expenses such as co-payments, deductibles and out-of-network charges are cut about 40% when they’re paid from these accounts.

There’s a catch, however. Money that’s put into an account but not spent during the year is lost. And employees get just one chance each year to declare how much they want to save--during a company’s open-enrollment period, which is usually in the fall--and that amount generally can’t be changed until the following year. If you save too much, you lose the unspent amount. If you don’t save enough, you miss a chance to pay necessary medical expenses with tax-free income.

The possibility of losing a portion of the savings is a key reason that only about 10% of eligible employees use medical spending accounts.

The solution: Keep track of your health-care spending now so you can make an educated estimate of how much to set aside for your 2003 medical expenses.

Many employers provide worksheets and booklets to help workers estimate expenses that aren’t reimbursed in any given health insurance plan. If you still have the worksheets from your last open-enrollment period, use them to note medical expenses throughout 2002.

Health-care spending accounts can be used to pay a variety of medical costs that may not be covered by your health plan, such as orthodontia, the extra cost of a private hospital room, private duty nursing or medical expenses of a dependent who is not covered by your plan, such as a dependent parent.

In addition, money in the accounts can be used to pay for special schooling for a child with mental or physical disabilities, treatment of psychological or nervous conditions, chiropractic expenses, laser eye surgery, glasses or contact lenses, guide dogs, Braille books and magazines and even special equipment to modify a house or car to accommodate a family member with a disability, according to CCH Inc., a Riverwoods, Ill.-based publisher of tax and benefit information.

Here’s how the spending plans work:

A family of four typically has half a dozen doctor visits with a co-payment of $10 a visit, for a total of $60. Prescription drug costs that aren’t reimbursed amount to $200 annually. Dentist visits, not covered by the family’s health plan, cost $400. And the dentist recommends braces for both children, which will cost more than $1,500 a child.

This family should put $2,160, or $180 a month, into a health-care spending account to pay medical and dental expenses, plus the cost of the oldest child’s braces. Next year, they’d do the same, setting aside money for the younger child’s braces.

The after-tax cost of the $2,160 the family put in its medical spending account is about $1,300--a savings of $850.

On the downside, the accounts require paperwork. Medical bills must be paid upfront and forms must be filled out to get reimbursement from the savings account. But the savings are worth the extra effort.