A Flexible Benefit Plan creates additional take-home pay by converting common after-tax expenses to a pre-tax status. MONEY magazine called it "The Tax Break You Can't Ignore."
Converting a taxable expense to a non-taxable expense saves you about 30%, considering federal, state, and FICA taxes. In other words, for every 3 dollars of taxable expense converted to a non-taxable status, you can take home a free dollar to spend.
A Flex Plan (also known as Section 125 Plan or Cafeteria Plan) gives preferential tax treatment to three types of expenses which otherwise are paid with after-tax dollars. These "out-of-pocket" expenses are: employer-sponsored insurance premiums, eligible medical/dental/vision expenses, and work-related dependent care (child care).
To estimate how much you can save by participating in a Flex Plan, try out our FSA Savings Calculator.
To enroll in the plan, you must carefully estimate anticipated expenses for the coming year and authorize your employer to withhold an appropriate salary reduction. Medical/Dental/Vision and Dependent Care expenses are withheld from your paycheck and used to create a flexible spending account (FSA). Insurance premiums are simply converted from a 'post-tax deduction' to a 'pre-tax reduction' and remitted to the insurance carrier.
Once you have incurred an eligible expense for the Medical FSA, you submit the provider's receipt along with a simple claim form and you'll receive a tax-free reimbursement from the flexible spending account. Similarly, when child care expenses have been incurred for the month, you must follow the same procedure and you'll receive tax-free reimbursement from your Dependent Care FSA.
Like other qualified plans, there are several rules to observe and follow. You'll want to pay special attention to these rules which will be outlined in your Enrollment Guide ().
Take time to learn about your Flexible Benefits Plan. It may pay off handsomely with a nice take-home pay increase!