What are pre-tax dollars?

Pre-tax dollars are those that are reduced from your gross earnings before any taxes including FICA are computed. Because your taxable income will be lower, your Federal, State (if applicable) and Social Security taxes will also be lower. The net effect is more spendable income and in some cases more take home pay as well.

What types of expenses are eligible through Section 125?
There are three separate areas that are eligible:

• Payroll Deducted Premiums; Section 125 allows for payment of these premiums with pre-tax dollars. Nothing will change as far as your coverage, only how it is deducted from your salary. This benefit will reduce the net cost of your insurance premium.

• Unreimbursed Health Expense Account; This part of the plan allows you to reduce your gross salary to pay for health care expenses that are either not covered or only partially covered by your insurance plan. The account works similar to a payroll savings for health care. As you know there are risks involved with this portion of the plan. Those risks will be covered in more detail in the following questions.

• Dependent Care Expense Account; The most common expense is child care. The Section 125 plan allows daycare expenses to be deducted from the employee's paycheck before tax. In many cases this will be more advantageous than the federal tax credit. Again, there are some risks in this type of plan. If you pay for child care then you need to seriously consider using this benefit. Talk with your tax advisor as to which way is better for you.

How much will I save in taxes?

The following example illustrates the effect of a Flexible Spending Account (FSA) for an employee who pays $200/month for health insurance:

By taking the insurance premium as a pre-tax payroll reduction, the employee in this example has increased their take home income by $60 per month and $720 each year.

This sounds too good, what are the risks?

There are IRS regulations to follow if you elect to participate in the Unreimbursed Health or Dependent Care Expense Account.

• One option per plan year. Once you’ve made your election to the Spending Account you cannot change the amount until the next Plan Year. For the Payroll Deducted Premium and Dependent Care Accounts you can make a change if you experience a qualified change in status as outlined in the Summary Plan Description.

• Use it or lose it. This is the rule that scares the most people. If you allocate money to one of the spending accounts and then do not use the money during the Plan Year the money is then forfeited back to your employer. Amounts do not carry over to the next Plan Year. Be conservative in your estimates. This rule should not stop you from participating. It should make you cautious as well as cause you to evaluate your health care needs for the coming year.

• Expenses must be incurred within the Plan Year. To be eligible for reimbursement a Health or Dependent Care Expense must be incurred during your Plan Year. This is not when you pay the bill, this is when the service was rendered.

• Expenses paid for through the Section 125 program can not be used as a tax deduction at the end of the year.

What documentation is needed when sending in the Request for Reimbursement?

To be reimbursed the participant must submit documentation of their expenses along with the request form. Documentation can include a copy of the bill or Explanation of Benefit form from the insurance carrier. Documentation must include the cost and date of service. Canceled checks, past due notices or receipts are not acceptable documentation.

Can I participate in the Spending Account if I'm not on the health plan?

You can if you're eligible for benefits. Your employer has certain eligibility requirements for all benefits. Your Human Resource person can assist you.

How soon must I submit claims?

You may submit requests for reimbursement at any time during the year, and have until 90 days after the plan year to make requests.

How long does it take to be reimbursed from the Unreimbursed Health Account?

Approximately one week from request.


How long do I have after the end of the Plan Year to request money from my account?

You have 90 days following the end of the Plan Year to request for expenses incurred during the preceding Plan Year.

Do I have to claim any of my expenses on my year-end taxes?

Only the Dependent Care expenses must be reported to the IRS. This is done on the same IRS Form that is used for the Dependent Care Tax Credit. The Health Care expenses are not reported, however you may not claim health expenses that are run through the Section 125 Plan on your tax form.

Can I make changes during the plan year?

Changes to the dependent care account can be made if you experience a qualified event (marriage, divorce, birth, death, adoption, or a spouse changing employment). Changes to the unreimbursed health expense account are based on a more limited set of qualifying events, and can be made only if the plan your employer chose allows changes to the account.

What if I want to change my deduction amount?

With the healthcare FSA, the deduction amount may not be changed during the plan year unless your plan document allows for qualified changes. The deduction amount for dependent care may be changed during the plan year, but only if a qualified status change has occurred. To change your deduction, you simply complete a change form and submit it to your human resources department.

Can I be reimbursed before I have contributed the amount to the account?

It depends on the type of account. With a dependent care account, the eligible reimbursement amount is available only after the funds have been payroll deducted and those funds have been received by Manley. For the unreimbursed health expense account, the reimbursement process will start after the plan year is established and we have received the first payroll reduction of the plan year. You have access to your total annual election at that time.

What is the maximum allowable allocation for an FSA?

It varies by the type of account. For a dependent care FSA, the maximum is $5,000 per calendar year, or $2,500 if married filing separately. With a healthcare spending account, the maximum annual election is up to your employer. With a premium only plan, no such maximum applies as the premium is the only pre-tax deduction.

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Questions Regarding the Dependent Care FSA

How long does it take to be reimbursed from the Dependent Care Account?

Manley Services must wait for your contribution before reimbursing you. This means that the reimbursement check will come to your home in approximately one week from your payday.

What happens if I submit a claim for more money than I have in my Dependent Care Account?

Manley Services will reimburse you the funds that are in your account, and then hold the rest of the reimbursement until money has been deducted from your check. Manley will then automatically reimburse you the remaining balance.

Can I change my deduction for child care mid-year?

Only if you experience a qualified change in status. This includes marriage, divorce, death, birth, adoption, or a spouse changing employment. It would also include a job shift change for you or your spouse that directly affects your child care.

Can I pay my child to watch my other kids and claim it as an eligible expense?

The IRS does not recognize payments you make to dependents who live in your home. If your child was no longer a dependent, then, yes. Note: The rules that are applied to the Section 125 Dependent Care Plan are the same rules that are enforced when applying for a tax credit for dependent care.

Is this better than the tax credit?

In most cases yes. A general rule of thumb is that if your family taxable income puts you into the 28% Federal tax bracket this plan will save you more than twice what would be available through the tax credit. Also if you have only one child in daycare and pay more than $200 per month then the savings available to you would be greater than the credit. You may deduct from your taxable income up to $5,000 annually for dependent care through the Section 125 program. Consult with your personal tax advisor.

There are many regulations that deal with the Section 125 program. For more information, please refer to your Summary Plan Description.

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