Tax free is easy to understand when put into everyday language. We all earn gross income. But, your gross income is not the amount of money you take home. Take-home pay is the amount of money you actually get to put into your checking account. Take-home pay is what is left over and can be used to buy groceries, make your car payment, and buy everything else. You spend your entire life buying things from this bottom number.
To take home $1.00, you actually have to earn about $1.30 because you have to pay Federal, State, Local and Social Security income taxes before you take any money home.
Being able to pay for expenses before you pay taxes is known as tax free. What if you could pay for things before you paid Federal, State or Social Security taxes? What if there was a bank account that you could use to legally pay for expenses from your gross income...before you had to pay income taxes? What if there was a way you only had to earn $1.00...to pay $1.00?
It’s known as a Flexible Spending Account and it is approved by the IRS.
A Flexible Spending Account permits you to spend money right off the top...not off the bottom. A Flexible Spending program allows you to put money into your Flexible Spending Account and make withdrawals to pay for eligible expenses...before you pay income taxes. It allows you to pay for many things you are already buying anyway...out of your gross income...not out of your take-home pay. There is not another bank account like it!
With Flex you only have to earn $1.00 to spend $1.00 because you do not have to pay income taxes first. You don’t have to earn $1.30 to spend $1.00.
Tax Advantage – Helps budgeting in two ways!
As an employee benefit, you will be permitted to make deposits to your new Flexible Spending Account each pay period through payroll deduction. It’s a lot easier to accumulate money if it is withheld from your paycheck before you see it. In this next year, let’s say you know you are going to continue to take medication for high blood pressure. In addition, you know your daughter will be seeing the doctor for her allergies and, oh yes, you really should get that tooth crowned before you lose it altogether. Sound familiar? These are things you are already going to spend money on. What if the total of these expenses was $520? Your Flexible Spending program allows you to deposit money each week through payroll deduction so that you will have enough money to pay for all these expenses. Budgeting $10.00 through payroll deductions each week is a lot easier than coming up with $520 all at once.
With any other bank account you can only withdraw what you have deposited. A Health Care Flex Account, however, is not a normal bank account. This account is unique. IRS rules say that for the Health Care Account, your employer must make your entire annual election available for withdrawal any time during the year. This means that, if you went to the eye doctor for new eyeglasses in July, you would be reimbursed for the full cost even though you may not have deposited the entire amount of that expense by that time. Read this last statement and believe it! It’s true. There is no other bank account like it. The full amount of Health Care expenses will be reimbursed even though you may not have deposited the entire amount by that time. It’s a lot better than making minimum monthly payments on credit cards like many people use to budget. See FAQs for rules regarding reimbursement of Work-Related Dependent Care.