I recently started a job. My new employer offers a “tax-saver plan” as part of it’s benefits package. Essentially, this is a fund into which I can put a portion of my paycheck every two weeks, have the deduction come out Pre-Tax, and then be reimbursed for things such as medical expenses and medications out of this fund.
The snag, as I see it, is that the entire amount of the fund for the year comes available immediately. For example, if I choose to contribute $10 a month to the fund, for a total of $120 for the year (Assuming, of course, that I started work on Jan 1), that I could then at some point in January go to the doctor, get a receipt, submit the forms, and be reimbursed the full $120. In effect, an interest-free loan for 11 months.
To make matters worse, lets say (God forbid!) I get fired in February. I am not liable for the remainder of the $120 that I have not yet paid. I have contributed $20, received $120 in reimburses, and do not have to pay the “tax-saver company” any of the $100 difference.
Does anyone know anything about how these tax-saver planes/companies work? I can’t imagine a company basing its business plan around something as shaky as hoping most people won’t collect as much as they paid in, so I’m assuming my company is paying some set amount to provide this benefit to me. Can anyone hazard and educated guess as to what this benefit is costing my company?
I can’t see how anyone could make money the way you described it, so I’m guessing there’s more to it. Is the money being deducted really the your share of a health insurance premium for which the employer pays the remainder ? (my insurance premiums are deducted pre-tax, but it is insurance), Does it only cover certain expenses? And suppose you pay in $120, but don’t use any? What happens then ?(My employer has a plan like this for child care- but if for some reason, I have more deducted than I spent, I don’t get the money back)
It’s costing your company administrative fees. You can ask your HR person what happens to the money that doesn’t get spent.
I’ll try to explain the concept, but you’ll do better with a pencil, paper and calculator.
Using round numbers, let’s say you make $10,000, your Federal tax rate is 28%, and you expect to have $1,000 in medical bills.
Conventionally you would have 28% withheld from your paycheck, leaving you $7,200. After you pay your medical bills, that leaves you with $6,200.
Under the benefit plan, you will have $1,000 taken out of your paycheck, leaving you $9,000 in taxable income. After taking out 28% for taxes, that leaves you with $6,480. You gain, your company doesn’t pay anything out of its pocket (except for that administrative fee they pay) and the benefits management company makes its money off the administrative fees.
What you have to do is anticipate your expenses well enough so that you don’t overpay into the fund. Because once it’s paid, you don’t get it back. On the other hand, the funds are pretty flexible as to what consitutes a medical expense, including things like eyeglasses that a standard health plan doesn’t cover.
By the way, “hoping most people won’t collect as much as they paid in” is the business model for the insurance industry.
I understand how the insurance industry works, but its a little different betting on whether someone is going to die, and betting on someone having medical expenses during the year. The insurance industry also has the advantage of government- and bank-mandated coverage for such things like homes and cars, which basically ensures them a captive audience.
I guess the problem, as I see it, is that potentially I could get a job, sign up for this plan for 1200 dollars ($100/month), have major surgery, get reimbursed for my 1200 dollars, quit that job and go get a new one.
The tax-saver company is out 1100 bucks (1200 - 100 I put in for my first month), and I got something for basically nothing.
(PS: I got a couple emails about using the word ‘reimburses’ rather than ‘reimbursals’ in my original post… After looking it up, my dictionary has no entry for “reimbursals”, and it appears my original usage was correct.)
Potentially, you could, but how common is it that someone has major surgery after one month and then quits. BTW, I expect that it’s your employer who loses the $1100 dollars, not the company that administers the plan.If it doesn’t happen often they may live with it. If it starts happening too much, they change the rules.