The Health Care Spending Account that KEVBO is referring to is a Section 125 Cafeteria Plan or a Flexible Spending Account. The Internal Revenue Service permits these plans to operate because both parties, the employer and the employee take a risk on the deal. (more later)
You specify an annual amount that you will contribute to the plan and it is deducted tax-free (both for Social Security, Medicare, Federal and State Income Taxes) in equal amounts every paycheck during the year. If you are paid monthly, then it is 12 deductions, etc.
The minimum annual amount that you can contribute is $300. The maximum is usually set by the employer; $2.500 seems to be a common amount although my employer permits contributions up to $4,000 per year. The catch here is that once you sign up for the plan, those contributions are made every payday, without fail, and cannot be increased, decreased or cancelled except for “major life changes” such as marriage, divorce, separation, birth or adoption of a child, or G-d forbid, a death . So you take a risk that you might have contributed too much or too little and you can’t change during the year.
The employer administers the plan or hires a third-party administrator to service the plan
Once the year begins you can submit any medical, dental or health-related expense to the adminstrator for reimbursement. The IRS has expanded the types of purchases or services that are eligible for reimbursement to include anything health-related: even cough drops, band-aids, ace bandages aside from the usual physician and prescription co-pays. The only major restrictions are that the expense can not be cosmetic, such as plastic surgery unless for a medical necessity or nail polish,etc. Homeopathic and allopathic services quality as do medications for contraception or In-vitro fertilization.
The employer must reimburse you for anything you submit up to the amount of your annual contribution even if your expenses exceed the amount you have contributed. For example if yoiu are contributing $200 per month, you could submit $1300 worth of expenses on January 19th even though you have not made a contribution at all so far during the year. Of course if you use up your entire contribution in the first month of the year, you continue to pay every paycheck. If you leave your job during the year, you do not have to re-pay your employer if your reimbursements have exceeded your contributions at that point. That is a risk taken by the employer. My company goes seriously in the hole by January 31st because so many employees use services at the start of the year.
On the other hand, if you do not use your entire contribution by the end of the year (more on the rollover in a minute) you lose whatever you have not spent. That is the risk YOU take.,
The IRS began last year to permit employers to modify their plans to allow a roll-over period in the following year of two and one-half months or March 15th. So you can submit expenses in the first months of 2008 and charge that against any unused funds from 2007. The expenses must be submitted by March 31st, 2008 in order to be eligible for reimbursement.
The neat thing about this is that you contribute money pre-tax and get reimbursed for what would otherwise be after-tax expenses. Depending on your income and state of residence this could save you 40% in taxes on the amount you contribute.
Speak to HR at your employer..