The federally regulated cafeteria plan lets you contribute some of your salary to an account established to pay for qualified expenses. The deduction occurs before the income is taxed, reducing your tax liability. A flexible spending arrangement -- or flexible benefits plan -- is a type of cafeteria plan in which you incur a valid expense and are later reimbursed with the pretax money you set aside. Despite the tax benefit, the plan has its flaws.
Under a flexible benefits plan, you indicate the amount you want your employer to deduct from your paycheck annually. You may use the money you set aside to pay medical expenses for yourself and dependents, to cover adoption assistance costs, to pay your group term life insurance premiums and to make deposits into your health savings account. A potential drawback is that you lose any of the reserved money you do not spend in the year.
Initial High Output
Your initial cash output is high. Your employer takes the designated deduction from your earnings under the flexible benefits plan, thus reducing your take-home income. Then, you must pay for qualified expenses out of your pocket first before you may apply for a reimbursement from your benefits account.
In comparison to a standard group health insurance policy, the flexible benefits plan requires more maintenance. While employers sponsor an enrollment period annually for both types of coverage, you only need to fill out new paperwork if you need to make changes to your group health insurance coverage. If you have a flexible benefits plan, you have to renew your options every year, even if your paycheck contribution remains the same. It is also common for medical offices to bill the insurance company first and invoice you for any balance that remains after the policy has paid. If you have a flexible benefits plan, you have to pay the doctor upfront and fill out the necessary forms to get reimbursed.
Your boss also takes a risk by offering a flexible benefits plan. According to an information sheet published by the accounting firm Davis & Hodgdon Associates, while your contribution is divided among all of your paychecks for a year, the employer is required to have the full expected amount in reserve from day one. Should you opt to contribute $3,000 in the year divided in $250 monthly payroll deductions, for example, you are allowed to spend your anticipated $3,000 deposit within the first few months of the plan. If you quit before you make your full contribution for the year, the employer incurs a loss.
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