Have you signed up for employer-provided benefits for 2018? November is open enrollment season at most offices.
Benefits enrollment is a little trickier this year, because it’s uncertain how tax reform legislation that could be enacted soon will change the tax rules starting in 2018. Some employer-provided benefits might be repealed. But there are two open enrollment options that apparently won’t be on the chopping block.
- Health Care FSAs
Under a health care flexible spending account (FSA) plan, you make an election near the end of this year to contribute a designated amount of next year’s salary to your health care FSA. The maximum amount you can contribute for next year is $2,650.
Contributions will be withheld in installments from your 2018 paychecks. You can use the FSA to reimburse yourself for uninsured medical expenses, such as:
- Insurance deductibles and copayments,
- Prescriptions, and
- Dental and vision care costs.
The total amount withheld from your paychecks during the year is treated as a salary reduction for purposes of your federal income tax, Social Security tax, Medicare tax and state income tax (if applicable). Reimbursements from the FSA to cover qualified health care expenses are tax-free.
A health care FSA allows you to pay for all or a portion of next year’s out-of-pocket medical costs with pretax dollars. That’s the same as getting an income tax deduction — plus a reduction in your payroll tax withholding.
Those savings add up. For example, if you’re in the 25% federal income tax bracket next year, you could save up to $865 in federal income and payroll taxes by contributing the maximum $2,650 in 2018. People in higher brackets could save even more. And these savings are permanent — not just a timing difference.
Important note: Health care FSA plans will become particularly attractive for families with high medical costs if Congress passes tax reform legislation that would eliminate itemized deductions for medical expenses starting in 2018. Under current tax law, if you itemize deductions, you can deduct out-of-pocket medical expenses for you, your spouse and your dependents to the extent the expenses exceed 10% of adjusted gross income (AGI).
There is one downside to health care FSAs: If you don’t incur enough qualified expenses to drain your FSA each year, any leftover balance generally reverts to your employer. Thankfully, there are two helpful exceptions to the “use-it-or-lose-it” rule:
- A 2 1/2-month grace period for unused FSA balances. If your company’s plan offers a grace period, you’ll have until March 15, 2019, to use up your 2018 contribution.
- A carryover of unused health care FSA balances of up to $500. If your company’s plan includes a carryover provision, you can carry over up to $500 of any remaining balance on the books at the end of 2018. Then you can apply that amount to expenses incurred in 2019.
An employer can offer either the 2 1/2-month grace period or the $500 carryover, but not both deals. Management (not individual employees) decides whether to include an exception to the use-it-or-lose-it rule.
- Retirement Plan Contributions
Does your company have a salary-reduction retirement savings plan? If so, open enrollment is a good time to review your contribution amount for 2018. The maximum salary reduction contribution to 401(k), 403(b) or 457 plans for next year is currently scheduled to be $18,500 — or $24,500 if you will be age 50 or older by the end of 2018.
Important note: These limits aren’t expected to change under recently proposed tax reform legislation.
Although 401(k) contributions will reduce your monthly cash flow, your retirement nest egg will be increased. In addition, salary-reduction contributions will reduce your taxable salary for federal income tax purposes and possibly state income tax purposes (if applicable). However, withholding from your paychecks for Social Security and Medicare taxes will be unaffected.
Be smart. All too often, employees procrastinate and fail to participate in employer-sponsored tax-saving arrangements. If you have questions or want more information contact your tax advisor.