Question

The Baulding family has a basic health insurance plan that pays 80 % of​ out-of-hospital expenses after a deductible of​ $250 per person. If three family members have doctor and prescription drug expenses of $ 993​, $1,419, and $201 ​respectively, how much will the Baulding family and the insurance company each​ pay? How could they benefit from a flexible spending account established through Mr.​ Baulding's employer? What are the advantages and disadvantages of establishing such an​ account?

Answer 1

The Baulding family has an embedded deductible plan, i.e. a plan wherein each family member will be required to meet their individual deductible limit before the insurance coverage kicks in. After each family member meets their individual deductible limit, they will only be required ot make co-payment of 20% of the expenses while 80% of the expenses will be paid by the plan.  

Since the question does not offer any specification, in this case we assume Deductiible covers all doctor and prescription drug expenses the family incurs (some plans may restrict what categories of prescription drugs are covered or what type of doctor visits are covered). The family's payments will be as follows:

Family Member 1:

Self Payment = $250 + 20% of ($993 - $250) = $398.60

Payment by Iinsurance Company = 80% of ($993 - $250) = $594.40

Family Member 2:

Self Payment = $250 + 20% of ($1,419 - $250) = $483.80

Payment by Iinsurance Company = 80% of ($1,419 - $250) = $935.20

Family Member 3:

Self Payment = $201

Since the expenses are less than the deductible limit, the insurance company will not make any payments yet.  

In a nutshell, a flexible spending account (FSA) helps the assessee reduce their taxable income thereby reducing the income tax liability and in turn helps the assessee save more of their hard earned money. The contributions made to the FSA are deducted from the assessee's income before any Federal, State, or Social Security Taxes are computed. In effect, when FSA contributions are as per the sppecified limits, it does not come under the scanner of the IRS. However, the assessee should be prudent and use the FSA balance on eligible expenses to prevent disallowance.  

An FSA must be set up through the employer and allows the employee to set aside contributions from their pay in line with the contribution limit specified. Spending from the FSA is also very convinient since the person may use the forms or linked debit card to pay for FSA eligible expenses directly at the time of sale/payment.  

Benefits:

Tax Savings for the Employee - FSA contributions are directly deducted from periodical pay even before computation for taxes, i.e. on a pre tax basis. This lowers the employee's taxable incomeand also the tax liability. Thus, employees have more to spend on medical care since this is a pre tax amount.  

Savings fr Medical Care and Expenses - The designed contributions allow employees to save throughout the year for any foreseen unforeseen medical expenses. This eases the spending burden of an individual or a family at any given point as they call fall back on the FSA balance.   

Full Balance - For a Health FSA, the employee’s full annual contribution amount is available from the first day itself. Employees may use these funds for payment and gradually place the amount in the account. However, this isnot applicable to all tyes of FSAs.  

Tax Savings for the Employer - Employers are not required to pay any wage taxes on the employee's FSA contributions.  

Disadvantages:

Limits on Annual Contribution - The FSA contributions are restricted. Hence, this allows the employee to save money and stay financially ready for medical expenses only to an extent. It is not foolproof. It is not very effective in times of very high cost medical emergencies.  

Not Transferable - The FSA is linked to the employee's current employer. The FSA cannot be transferred to another employer. It effectively Stops being maintained if the employee no longer works for that employer.  

Very Limited Rollover Amount / Short Grace period - The employer may choose between a rollover of $500 to the next financial period or a grace period of 2.5 months after completion of the current financial year to spend any balance unspent amount in the FSA. Beyond this, the employee forfeits the balance in the FSA. This is not beneficial to employee with little to no health concerns or emergencies in a a year.