M E M. TO: Flex Plan participants FROM: Mindy Brown RE: Health Spending Account (HSA) & Flexible Spending Account (FSA)

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1 M E M O TO: Flex Plan participants FROM: Mindy Brown RE: Health Spending Account (HSA) & Flexible Spending Account (FSA) With the growing popularity of Health Savings Accounts, for those with a High Deductible Health Plan, we feel it is necessary to inform Flexible Spending Account participants, and prospective Flexible Spending Account participants, of an important fact. If you contribute to a Health Savings Account (HSA) and also have a Flexible Spending Account (FSA) YOU CAN ONLY CLAIM VISION EXPENSES, DENTAL EXPENSES, AND PREVENTATIVE MEDICAL EXPENSES FOR YOU AND YOUR DEPENDENTS THROUGH YOUR FLEXIBLE SPENDING ACOUNT (FSA). Please keep this in mind when deciding your annual Flexible Spending Account (FSA) contribution amount. Contact your Health Savings Account (HSA) trustee for further clarification.

2 ORTHODONTIC ALERT According to the Internal Revenue Code Section 125 (IRC 125) regarding Medical Reimbursement Plans: Medical services must be PROVIDED prior to claiming and receiving payment from a Flex Plan. For Orthodontia, many Orthodontists offer a pre-payment plan for patients including a discount when a full payment for the entire expense is made prior to starting treatment. Flex Plan Problem A claim CANNOT be made for services which have not been provided. You have the personal option to pay your orthodontist any way you wish; however, you can only claim under a Flex Plan the service that has already been provided. Orthodontic Service Example : Records/Molds taken in January $250 - $300 Braces Application in February $850 - $ Months of Service on a payment plan $135 per month Since not all service is provided the day the braces are applied, the service becomes on-going. The IRS considers the on-going visits as part of the future service to be provided. Therefore, use caution when paying all orthodontia up front. It CANNOT all be claimed at once on your Flex Plan. Example continued: First Flex Plan year claims submission: 1st claim Records (January) $ 260 2nd claim Braces Application (February) $1,000 3rd - 10th claims $135 x 10*(March to Dec.) $1,350 * Remaining months of service in current plan year Total first year claims $2,610 Second Flex Plan year claims submission: 8 months remaining in contract Monthly claim filed $ 135 Total second year claims ($135 x 8 Months) $1,080 In this example the total orthodontia claimed over a two year service period and a two year Flex Plan is $3690. There will be variances on the dollar amounts and months of service but there will still need to be a similar breakdown in order to put this through your Flex Plan. Please contact our office to discuss your situation and we will be glad to help you calculate your orthodontic expense for your Flex Plan.

3 \ **NEW** FLEX PLAN ALERT MEDICAL REIMBURSEMENT PLANS HEALTH CARE REFORM IS IMPACTING FLEXIBLE BENEFIT PLANS. PLEASE MAKE NOTE OF THE FOLLOWING CHANGE. Effective January 1, 2011, your Flexible Spending Account CANNOT be used for ANY over-the-counter items unless accompanied by a doctor s letter of medical necessity. If you utilize a Flex Plan debit card you CANNOT use the card for ANY over-the-counter items. A letter of medical necessity must be obtained for these items from your doctor and then you must turn in a paper claim, along with the doctor s letter, in order to be reimbursed. A current prescription from your doctor must be provided each new Flex Plan year. The following items are still qualified medical expenses and may be claimed: Non-prescription Medical Equipment, Supplies, and Diagnostic Devices. Costs of crutches, other medical equipment, and diagnostic devices such as blood sugar test kits qualify as medical expenses, even without a doctor s prescription. Laser Eye Surgery. Costs of laser eye procedures such as LASIK and radial keratotomy to correct defective vision are qualified medical expenses. Reconstructive Surgery. Purely cosmetic surgery doesn t qualify as a medical expense. However, the cost of cosmetic surgery or other similar procedures necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease is deductible. Reconstructive work necessitated by a mastectomy qualifies as a deductible medical expense. Weight-loss Programs. Amounts paid to participate in a weight-loss program as treatment for a specific disease or ailment (including obesity, hypertension, and heart disease), and as diagnosed by a physician, are deductible medical expenses. The IRS does not allow the amounts paid to join a gym, health club, or spa to be claimed as a medical expense even if the exercise is doctor recommended. Travel and Lodging. Mileage expenses for travel to doctor offices, hospitals, etc. are eligible as long as the travel is primarily for a medical visit. The IRS sets the mileage rate each year. Also, amounts paid for lodging while away from home to seek medical care normally can be reimbursed up to $50 per person per night. April 2010 Page 1 of 1

4 Revised Almquist, Maltzahn, Galloway & Luth, P.C. CERTIFIED PUBLIC ACCOUNTANTS SIGN UP NOW FOR A PAY INCREASE Through a Flex Plan FLEX PLANS are an innovative way for you to save tax dollars while receiving the best in fringe benefit plans. By participating in your Company s FLEX PLAN, you can Pay for health, dental, and group term life insurance premiums. Use pre-tax dollars to pay for out-of-pocket medical, dental, and vision expenses. Pay child dependent care expenses pre-tax. Save substantial tax dollars. Increase Your Net Take Home Pay. HOW A FLEX PLAN WORKS FOR YOU By electing to redirect a portion of your salary to your Company s Flex Plan, you essentially bank your money in a TAX-FREE account. The money is used to pay for all those expenses and insurance premiums that formerly ate away at your take-home pay. You still receive excellent fringe benefits but you are also saving tax dollars because you are paying for the benefits through the FLEX PLAN. Here is how one employee increased his monthly take-home pay by $445 through participation in a FLEX PLAN. Without a With a Flex Flex Benefit Plan Plan Bank Salary $ 10,000 $ 10,000 To Flex Plan - (1,500) $ 1,500 Taxable Salary 10,000 8,500 Income Tax (15%) (1,500) (1,275) Social Security Tax (7.65%) (765) (650) State Tax (7%) (700) (595) Salary after Taxes 7,035 5,980 Medical Expenses (1,500) (1,500) Take-Home Pay 5,535 4,480 From Flex Plan - 1,500 (1,500) Net Take-Home Pay $ 5,535 $ 5,980 Net Savings With a Plan $ 445 1

5 QUALIFYING DEPENDENT CARE EXPENSES Expenses necessary for you and your spouse (if married) to be gainfully employed: Expenses paid to a dependent care center or care provider. Expenses paid for care of a dependent under age 13. Expenses paid for care of another dependent who is physically or mentally incapable of caring for himself. QUALIFYING HEALTHCARE EXPENSES Only expenses not reimbursed by insurance can be claimed. Alcoholism treatment Ambulance Artificial limbs/teeth Chiropractors Christian Science practitioner s fees Contact lenses Co-payments Costs for physical or mental illness confinement Crutches Deductibles Dental fees Dietary supplements with doctor s letter of medical necessity Drug and medical supplies (i.e. syringes, needles, etc.) Eye examination fees/eyeglasses Eye surgery (cataracts, lasik, etc.) Hearing devices Hospital bills Insulin Laboratory fees Obstetrical expenses Oral surgery Orthodontic fees (12 months of service) Over-the-counter items with doctor s letter of medical necessity Physician fees Prescribed medicines Psychiatric care Psychologist s fees Routine physicals Vitamins with doctor s letter of medical necessity Weight-loss programs with doctor s letter of medical necessity X-Rays HEALTHCARE EXPENSES THAT DO NOT QUALIFY Cosmetic surgery and procedures Dental bleaching Marriage and family counseling Over-the-counter items, drugs, or medications that are not prescribed by your physician Weight-loss programs for general health or appearance WHAT IS A FLEX PLAN? It is a voluntary plan that allows you the choice of paying your income tax burden as you always have OR converting part of your income into tax-free benefits. Use these tax-free dollars to pay for specific medical expenses and babysitting expenses you already incur. IF I ELECT TO REDIRECT MY COMPENSATION, HOW CAN THIS BENEFIT ME? The biggest advantage is the tax savings. Since a Flex Plan uses pre-tax dollars for reimbursement of qualifying expenses, you reduce your income taxes, social security tax, and state tax by reducing your taxable salary. WHY SHOULD I PARTICIPATE IN THE MEDICAL REIMBURSEMENT PLAN IF I ALREADY HAVE MEDICAL INSURANCE? The Medical Reimbursement Plan offers reimbursement of medical care expenses NOT reimbursed by insurance. For example, expenses for annual physicals, eye exams, glasses, deductible and coinsurance. CAN I CHANGE OR REVOKE MY ELECTIONS DURING THE PLAN YEAR? In general no. However, there is an exception for a change in family status. This includes marriage, divorce, death of a spouse or child, birth or adoption of a child, termination or commencement of a spouse s employment, and other events that the Administrator determines will permit a change or revocation of an election during a plan year. WHAT DOCUMENTATION DO I NEED TO PROVIDE THE FLEX PLAN ADMINISTRATOR TO BE REIMBURSED FOR EXPENSES I INCUR? The company will provide you a reimbursement request form. You will be required to attach a copy of an invoice, insurance statement, or other written document from a third party that supports each reimbursement request. WHAT IF I DON T USE ALL OF THE MONEY I REDIRECT? By accurately determining your allowable expenses for the plan year, you can avoid having unused benefits at the end of the year. However, if you do have funds remaining in your account at the end of the year, that amount will be forfeited. ARE THERE ANY NEGATIVES THAT I SHOULD KNOW ABOUT? Yes, because you are not paying social security tax on that portion of your income that has been redirected, your social security benefits may be slightly reduced. Almquist, Maltzahn, Galloway & Luth, P.C W. 2 nd Street flexplan@gicpas.com 2