Cafeteria plan / Section 125

A gentle reminder that November marks the month that most companies start the sign ups for their 2010 cafeteria or section 125 plans. If you are diabetic (or most any other disease) signing up can produce real savings. Here is how it works. Suppose for instance you are in the 15% federal tax bracket and you estimate that you will have $1,000 of medical expenses in 2010. By setting that $1,000 inot a section 125 account, you will save $150.00. This is how it works.

The amount you set aside is diverted into an account that only you can draw on. This is done pretax, so you will not pay federal and in many states state tax on the amount you set aside. This means you save. at the very least, the amount of the federal taxes you would have paid on the amount set aside.

Once you set these funds aside, you may draw on them immediately. If for instance you have an early bill like many of us do, for prescriptions, you can get immediate reimbursement even if the full amount has not yet been withdrawn.

You may seek reimbursement for almost any treatment which requires a doctor or medical providers intervention. For instance dentistry claims are eligible, so are eye exams and glasses, doctors visits, prescriptions, medical devices, in short the cost of almost any medical procedure, visit or prescription that is ordered by a physician.

In addition two years the IRS added certain non prescription items to the those eligible for reimbursement. For a full list ask for a eligible items at the time of sign up.

No so you know, this is a use or lose benefit. So if you set aside $1,000 and you claim only $900 then you lose the $100 not claimed. However, you may all claim the expenses of all dependents and co wage earners. So, lets say you sign up for a $1,000 deduction, you may claim the medical expenses of your spouse, and children to full fill this $1,000. This amount is available for all medical expesnes incurred in your plan year. Generally January 1, 2010 to December 31, 2010.

One other thing, deductions will be throughout the plan year. So you pay gradually, but the full amount is available for your reimbursement for expenses incurred starting the first day of the plan year.

Some practical tips:

If you need glasses, or the kids need braces, you might consider putting off the procedure until the start of the plan year. Remember eligible expenses are for procedures undertaken int he plan year. So if you have braces put on on December 30, but the bill arrives on January 2, the payment on January 2 is not eligible for reimbursement. Dentists, eye doctors, and most medical providers are well aware of the requirements for section 125 reimbursement and will assist with the plan rules.

If for instance you have a large initial payment for drugs that occurs in the beginning of the year. you should likely go ahead and file for reimbursement even if the amount has not been fully withdrawn.

I suggest if this is your first year you start slow. Withhold a few dollars, try it out and get used to the plan rules, before you fully invest in it. You will have the opportunity to change your withholding again at about this time next year.

rick phillips