Take Open Enrollment as Chance to Save Money
Open enrollment season -- the once-a-year chance to change employee benefit elections -- kicks off this week. If you want to save some easy money on your taxes, now’s the time.
“Tax-saver” accounts, which include health savings accounts, dependent-care accounts and flexible spending accounts, are offered by about 80% of the nation’s largest employers, according to Mercer Human Resource Consulting. But less than 20% of the employees who have access to the accounts enroll in them. That’s a costly mistake, consultants contend.
“I can’t think of an easier way to give yourself a raise than to participate in these plans,” said Jon Kessler, chairman of WageWorks, a San Mateo, Calif.-based benefits firm.
“A flexible spending account is a no-brainer,” added Tom Billet, senior consultant with Watson Wyatt Worldwide in Stamford, Conn. “Absolutely everybody should participate because everyone who uses one would save money.”
Why are they so underutilized? A combination of confusion and inertia. Few people realize how much the plans have changed in recent years and how much they can save workers who use them, so employees fail to do the work required to make the wisest choices, Billet said.
“A lot of people put open enrollment on auto pilot and just sign up for what they had last year,” Billet added. “But these plans are dynamic. Things also change in your life. It makes sense to take an hour to look at the options again.”
What are the options and what might they do for you?
There are four types of tax-saver accounts -- dependent-care accounts, flexible spending accounts, commuter benefit programs and health savings accounts. The limits and particulars of the different accounts vary. But all of them do one compelling thing: They allow workers to pay regular expenses for things like day care, dental work and bus passes with pretax dollars. For the average worker, that spells huge savings -- usually 30% to 40% of the cost.
Consider, for example, a two-income couple with two children and $5,000 in annual day-care expenses. They pay 28% of their income in federal tax; 5% in state tax; and 7.65% in employment taxes for Social Security and Medicare. If they pay their day-care provider through a dependent-care account, their taxable income drops by $5,000. That saves them $2,032.50 in tax. Or, to look at it another way, although their day-care costs amount to $96 a week, by paying from a dependent-care account, their after-tax or “out-of-pocket” cost is just $58.
Most big companies offer at least one type of tax-saver account, although some offer many and some just a few. Here’s a brief overview of what’s available and how the plans work.
* Dependent-care accounts. These generally allow employees to set aside as much as $5,000 annually to pay day-care expenses for young children. The employee elects the amount to save. That amount is divided by the number of pay periods and is deducted in equal increments throughout the year. The employee then submits invoices from day-care providers, and the plan either will pay the provider directly or reimburse the employee for qualified expenses.
The one caveat: “Use it or lose it.” Money can’t be carried over from year to year and workers generally are given just one chance to decide how much to save for the year. But since day-care bills are usually predictable, few people forfeit dependent-care funds, experts said.
* Flexible spending accounts. Also known as healthcare reimbursement accounts, these cover medical, dental and psychiatric bills not covered by insurers.
Like dependent-care accounts, the money set aside must be used during the year or lost, so you need to be careful in estimating expenses. This is one reason why some employees have been reluctant to use these accounts, since medical expenses are generally harder to predict than day-care bills.
Last year, however, the IRS tweaked the rules and said it would allow people to use FSA dollars to buy over-the-counter medications. In other words, anyone who has unspent funds in December can load up on aspirin, cough syrup and band-aids, Kessler said.
The accounts are also ideal for those with big and predictable medical needs, from laser eye surgery to orthodontia.
* Commuter plans. These newer accounts allow workers to buy bus, train, subway and parking passes through their employee benefits departments.
Like the dependent and health reimbursement accounts, the money for the pass is taken out of the employee’s pay before taxes are computed, reducing taxable income and income taxes. But, unlike the other accounts, workers generally do not need to make irrevocable, year-long commitments with these accounts, Kessler said. They’re usually able to stop buying their commuter passes by simply giving the benefits department a few weeks’ notice. About one-third of big companies offer this benefit, he added.
* Health savings accounts. These are the newest, and among the most complicated, type of tax-saver accounts. Authorized just since January, these accounts were designed for the self-employed and people working for small businesses who might have trouble finding affordable health insurance.
HSAs have two parts. One is a health insurance plan, which -- to keep it affordable -- has a high deductible. The second part is a savings account that can be used to pay those deductibles, as well as other unreimbursed medical expenses.
A big selling point for HSAs is that the money in the savings portion does not have to be spent within the year, but can be rolled over year after year. At the same time, employees cannot use the savings account portion of the HSA without accepting the high-deductible insurance. As a result, Billet thinks the plans are best for those who are healthy and wealthy -- those who can pay their deductibles out of pocket and leave the savings portion of the HSA to accumulate tax-free over time.
Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For past columns, visit latimes.com/kristof.
