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Health Care Flexible Spending Account

A plan that enhances your benefits

Would you be interested in a plan that helps pay out-of-pocket medical costs while increasing your spendable income? Your employer is offering such a plan - it's called a health care flexible spending account. This benefit qualifies under Code Section 125 of the IRS. Code Section 125 was created by the United States Congress to make benefits more affordable for you.

How it works

If you participate, you will elect to have a specified amount of pretaxed money deducted from your paycheck each pay period. These dollars are set aside in a reimbursement account and subtracted from your gross earnings before any taxes are taken out. After you submit a receipt for a qualifying health care expense, you will be reimbursed from this account.

How it benefits you

The advantage of participating is that when you contribute pretax dollars to a reimbursement account, you lower your taxable income; therefore, you pay less in taxes and increase your spendable income!

For example…

John has a daughter who needs braces that will cost $1,200 next year. John also has a $200 major medical coverage deductible. Plus, he needs glasses costing $212.

John knows he'll be spending at least $1,612 on non-covered medical expenses over the course of the year.

John's non-covered medical expenses:
Major Medical deductible	$200
Dental care	$1200
Vision care	$212
total	$1,612 a year or $31 a month

Now let's look at how a health care FSA can increase John's spendable income.

Health Care FSA illustration:
John's status: Married, three fed/state exemption
Weekly salary: $500
Qualified benefits: Health Care FSA/ $31

After being reimbursed from the health care FSA, John's spendable income increases $8.97 per week. Annually, he has increased his spendable income by $466.44

	Without FSA	With FSA
Gross Pay	$500	$500.00
Pretax Health Care FSA	0	-31.00
Taxable Gross	500	469.00
FICA, Fed/State taxes	-86.85	-77.88
Net Pay	$413.15	391.12
Health Care FSA reimbursement	0.00	+31.00
Spendable Income	$413.15	$422.12

Eligible Expenses

A health care FSA may be used to pay health care expenses not covered under any other plan. Qualified expenses may include:

• Deductibles and co-payments you must make under your medical plan
• Charges that may not be covered by your medical plan, such as:
  • Dependent physicals
  • Hearing aids
  • Birth Control Pills
  • Braces
  • Well-baby care
  • Dental care
  • Routine Exams
  • Eyeglasses/contact lenses
• Miscellaneous expenses, such as:
  • Individual psychiatric or psychological counseling
  • Special education devices for the blind (such as a typewriter)
  • Special instructions or training for the deaf (such as lip reading)
  • Cost of acquiring and training a dog for the deaf or blind
  • Public transportation to receive medical care (must provide receipt)
• Other healthcare services that qualify as medical deductions under IRS rules:
  • Special medical equipment
  • Qualified medical products or services prescribed by a doctor for which you must pay out-of-pocket

How much should I contribute?

Now that you have a better idea of what qualifies, try to determine how much you might spend on these types of expenses during the next plan year. To be safe, be conservative in your estimates. Use the worksheet included in this booklet. And remember, the expenses you choose cannot be covered by any other medical plan.

The "Use it or lose it" rule

If you contribute dollars to a flexible spending account and do not use all of the monies you deposit, you will lose any remaining balance in the account at the end of the plan year.
A very important thing to remember…the rule exists because the IRS has established strict guidelines on plans with tax advantages. Estimate carefully the amount you want to contribute, and only contribute dollars that you're confident will be used before the end of the plan year.

What if the tax laws change?

Tax advantages currently available are based on the law as it stands today. If a change in the law takes place, you will be notified.

Will pretaxing have an impact on Social Security benefits?

Any reduction in your taxable pay may also lead to a reduction in your Social Security benefits; however, for most employees, the reduction in Social Security benefits is insignificant compared to the value of paying lower taxes today.

Will I be able to change my election?

The latest set of cafeteria plan regulations develops a process for determining if a participant is allowed to make a change in election during the plan year. The two-step process is:

1. A change in status must have occurred. A change in status has occurred if the event falls into one of the categories below:
   • Legal marital status
   • Number of dependents
   • Employment status
   • Dependent satisfies (or ceases to satisfy) eligibility requirements
   • Change of residence
2. The participant's election change must be consistent with the status change event. In order to be consistent, a requested change must be on account of and correspond with a change in status that affects eligibility for coverage under an employer-sponsored plan.

The value of additional benefits

During enrollment, you can take advantage of your increased spendable income by adding other benefits. Through your employer's flexible benefits plan, you'll be able to pay the premiums for qualifying benefits with pretax dollars, making your benefits even more affordable.

Let's take another look at John's situation. If John chooses to deduct $20 per week in qualified premiums from his gross pay, along with his $31 health care FSA deduction, here's how it affects his paycheck:

Health care FSA and pretax premiums illustration

John's status:

Married, Three federal/state exemptions, Weekly salary: $500
Eligible expenses: Health care FSA: $31/Colonial pretax premium: $20

John's taxes are even lower - $72.09 versus $77.88. He has purchased $20 in additional benefits, but his spendable income is only $14.21 lower than before.

	W/ Health care FSA	W/ FSA & Pretax premiums
Gross Pay	$500.00	$500.00
Pretax Health Care FSA	-31.00	-51.00
Taxable Gross	469.00	449.00
FICA, Fed/State taxes	-77.88	-72.09
Net Pay	$391.12	$376.91
Health Care FSA reimbursement	+31.00	+31.00
Spendable Income	$422.12	$407.91

_{All illustrations based on 2002 South Carolina tax tables}

Examples of Eligible FSA Expenses

Please contact your Flexible Spending Account Administrator for more information on whether an expense is covered.

ELIGIBLE EXPENSES
Pain relievers - Tylenol, Advil, Motrin, Aspirin, Goody's Antacids - Pepcid AC, Tums, Rolaids, Mylanta, Maalox, Pepto-Bismol, Zantac, Alka Seltzer First Aid - Rubbing Alcohol, Hydrogen Peroxide, Bactine, Bandages, Band-Aids Enemas, Laxatives, and Stool Softeners Children's Medications - Dimetapp, Children's Advil and Tylenol, Pedialyte, Desitin Anti-diarrhea medication - Imodium AD	Sinus & allergy Medication - Claritin, Benadryl, Sinutab Topical anesthetics - Lanacaine, Neosporin, Calamine Lotion, Hydrocortisone, Preparation H Cough & Cold - Robitussin, Nyquil, Dayquil, Vick's Vapor Rub, Tylenol Cold, Formula 44 Pregnancy Tests Physician Recommended Minerals - Calcium, Zinc, Iron Anti-Fungal Medication - Tinactin

ELIGIBLE MEDICAL EXPENSES
Prescription medication Drug & medical supplies Physician's fees and co-pays Chiropractic treatments Psychological fees Psychoanalysis Laboratory fees Insulin Nurses' fees (RN and LPN) Diagnostic fees Oxygen Hormone Therapy	Doctor Prescribed Weight Loss Artificial Limbs or Prosthesis Organ Transplants Massage therapists Learning Disability associated costs Braille books, magazines, etc. Guide Dog Hearing devices & batteries Crutches Sterilization Ambulance costs Diabetic Testing Supplies	Co-pays & Deductibles Obstetrical expenses Expenses for handicapped dependent Psychiatric care Drug & alcoholism treatment X-Rays fees MRI charges Fertility Treatments Operations if medically necessary Wheelchairs Orthopedic shoes Blood Pressure Testing

ELIGIBLE MEDICALLY NECESSARY TRAVEL EXPENSES
Meals if incurred at a hospital while seeking treatment Transportation to healthcare facility ($.14 per mile) Bus, taxi, train or plane fare to healthcare facility Transportation expenses of a nurse or other person who can give injections, medications or other treatment required by a patient who is traveling to get health care and is unable to travel alone	Lodging (maximum of $50 per night & must be related to treatment in a hospital or equivalent) Parent's transportation expenses if needed to go with a child who needs health care Associated parking fees and tolls Transportation expenses for regular visits to see a mentally ill dependent if these visits are recommended as part of treatment.

ELIGIBLE DENTAL EXPENSES
Exams, prophylaxis (cleaning) Dentures, artificial teeth, bridges X-rays Fluoride treatments	Extractions, fillings Root Canals Orthodontia Oral Surgery

ELIGIBLE VISION CARE
Eye examinations Eye Glasses (including prescription sunglasses) LASIK Surgery	Contact lenses Contact lens solution Photo Refractive Keratotomy (PRK)

EXAMPLES OF INELIGIBLE FSA EXPENSES

Any expenses incurred in an illegal operation or treatment Cosmetic Surgery Automobile insurance premiums Funeral & burial expenses YMCA dues Maternity clothing, diaper service, etc. Over-the-Counter smoking cessation programs (such as Nicoderm CQ) Cellulite treatments Expenses incurred as or to a surrogate mother Sunscreens Dancing or swimming lessons Tattoo removal Minoxidil or Rogaine Contact lens insurance contracts(for replacement of damaged/lost lens)

Bleaching of teeth Bottled water Cosmetics, toiletries, toothpaste, etc. Health Club dues/personal trainer fees Marriage or family counseling Low "carb" foods Treatment for varicose veins Vacuum cleaners, pillows or filters (in the case of allergies) Household help Chemical peels Breast implant repair Purchase of tanning bed (for a skin condition) Breast pumps Safety glasses

Health Care Flexible Spending Account Worksheet

Estimating Your Eligible Medical Expenses
Complete the following chart to estimate your health care expenses for last year and this year. This chart will help you determine how much of your salary you may want to contribute to a health care reimbursement account

Medical	Last Year	This Year
Deductibles, plus 100% of out-of-pocket expenses not covered by medical plan	$___________	$___________
Doctor's office visits	$___________	$___________
Well-baby care	$___________	$___________
Pap-smear	$___________	$___________
Physicals	$___________	$___________
Immunizations	$___________	$___________
Prescription drugs	$___________	$___________
Others	$___________	$___________
Dental
Fillings	$___________	$___________
Bridges	$___________	$___________
Crowns	$___________	$___________
Dentures	$___________	$___________
Orthodontia	$___________	$___________
Braces	$___________	$___________
Exams	$___________	$___________
Vision
Exams	$___________	$___________
Lenses	$___________	$___________
Frames	$___________	$___________
Contact Lenses	$___________	$___________
Hearing
Exams	$___________	$___________
Hearing Aids	$___________	$___________
Miscellaneous
Total Eligible Medical Expenses	$___________	$___________

Please refer to Section 213(d) of the Internal Revenue Code of the IRS definition of deductible medical expenses that are eligible for reimbursement. Note: An expense is not eligible if it is for cosmetic reasons only. Also, premiums for health coverage are not eligible for reimbursement. A Colonial Representative can help you estimate your tax savings based on the amount you contribute to the health care reimbursement account.