Flex Plans in a Nutshell

By Kara Stefan

When my son was four, I got an emergency call from his kindergarten teacher. During a field trip, his bus was hit by another car, and all the children were taken to the hospital in ambulances for "precautionary measures." I had to pay $600 for that dramatic ambulance ride--which was better than the field trip in my son's opinion--but hardly worth the price in mine.

One week later, he slipped poolside during a swimming lesson and had to get stitches in his forehead. Another $1,000 gone.

Ages 5-7 garnered more trips to the emergency room than I can remember. And during all that time, my employers offered flexible spending plans, but I was too cheap or too busy or too preoccupied to find out what they were all about.

Well, here it is--for those of you too busy or too preoccupied to bother: flex plans in a nutshell.

HCRA
Let's start with the healthcare reimbursement account, affectionately called the "hecra." With a HCRA, up to $4,000 a year may be deferred from your adjusted gross income (before taxes) into an account that may be used exclusively to reimburse medical expenses not covered by your insurance plan.

You may request reimbursement for your spouse's or children's healthcare expenses as well as your own, and eligible expenses include many things your regular insurance doesn't cover, such as:

Acupuncture
Birth control pills
Chiropractics
Dental work and orthodontia
Infertility treatments
Legal abortion
Prescribed stop-smoking programs
Psychiatric care

DCRA
A "decra," on the other hand, is a dependent care reimbursement program. Up to $5,000 a year may be taken out in increments from each paycheck before taxes, so it's essentially tax-free money. Each time you pay your childcare provider, you send the receipt to your employer, who cuts a reimbursement check from your DCRA plan.

With both a HCRA and a DCRA, you reduce your current income taxes each paycheck, much like you do with a 401(k) salary deferral. In addition, this tax-free money is used to pay yourself back each time you pay qualifying expenses. Here's how it works:

If 30¢ is taxed out of each dollar you earn, you only have 70¢ left to pay uncovered medical or childcare expenses. With a flexible spending plan, each full dollar is available to reimburse qualified expenses. For example, an employee who puts $600 in a healthcare account would save roughly $200 in taxes.

A Plan that Requires Planning
Unfortunately, there are drawbacks to flexible spending plans. The main one is that whatever amount you don't use within one year's time frame is forfeited--the money does not rollover to the next year, and you cannot get it back.

So this requires accurate planning, which is generally a lot easier to do with a dependent care plan. On a positive note, the money in the account is accumulated gradually as you earn it, so if you leave your job midyear and stay home with the children, you'll be able to use all that you've contributed.

Another disadvantage is that with a DCRA, you must provide the tax ID number or Social Security number of your childcare provider. This presents a problem for anyone paying caregivers under the table and is one reason why only 3%-7% of employees choose to participate in these plans. Another reason, I suspect, is just plain ignorance.

Finally, if you use a DCRA, you're not allowed to use the standard childcare credit on your tax return. This isn't a big deal unless you earn less than $27,000 a year--in which case you're better off sticking with the credit. Most employers provide a worksheet in the initial enrollment kit to help you figure out which option works best for you.

While childcare expenses are easier to predict, if your children need braces or glasses, a HCRA may be a good idea in the years you expect to pay for them. Many people are using HCRAs to replace insurance plans for vision and dental plans, and they're becoming more popular due to the growing appeal of non-conventional treatment plans, a.k.a. alternative medicine.

So whether you visit the acupuncturist regularly or are scheduling your daughter for braces, check to see if one of your employers offers a flexible spending plan. It will help you enhance your family's well-being while improving your tax situation at the same time.