Question

The smith family has a basic health insurance plan that pays 80% of out of hospital expenses after a deductible of $250 per person. If 3 family members have doctor and prescription drug expenses of $877, $1,659, and $192 respectively, how much will the smith family and the insurance company each pay? How could they benefit from a flexible spending account established through mr.smith's employer? What are the advantages and disadvantages of establishing such an account?

Answer 1

SOLUTION

CALCULATION OF AMOUNT TO BE PAID BY SMITH FAMILY

TOTAL OUT OF HOSPTAL EXPENDITURE $877+1659+192	$2,728
20% TO BE PAID BY SMITH FAMILY $2,728*20%	$545.60
DEDUCTABLES TO BE PAID BY SMITH FAMILY $250*3	$750
TOTAL AMOUNT TO BE PAID BY SMITH FAMILY $545.60+750	$ 1295.60

CALCULATION OF AMOUNT TO BE PAID BY INSURANCE COMPANY

TOTAL OUT OF HOSPITAL EXPENDITURE $877+1659+192	$2,728
INSURANCE COVERAGE 80% OF $ 2728	$2,1482.40
LESS DEDUCTIBLES $250*3	$750
CLAIM TO BE PAID BY INSURANCE COMPANY $21482.40-750	$ 20,732.40

BENEFIT THROUGH FLEXIBLE SPENDING ACCOUNT ESTABLISHED BY SMITH EMPLOYER

One of the key benefit of such account is that the fund contribution made to the account by employee are deducted from employee earnings before taxes hence this will lower the taxable income of employee .

ADVANTAGE OF ESTABLISING SUCH FUNDS

The fund could be used in payment of certain authorised vision ,dental and medical expenses including dependents and spouse .. The amount in the funds can be used in payments of deductables and co-payments when medical services are rendered . Medical equipment purchases can be covered in FSA. Drugs prescribed by doctor are also covered .

DISADVANTAGES OF FSA

The money set aside in an FSA should be used by employee by the end of the plan year or grace period provided by the employer which could not be more than two and half month . When the time mentioned above get over the money that left in FSA is lost .

FSA could not be ustilised for paying insurance premiums .

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