The real benefit of a 125 Plan is the tax advantage you get from spending pre-tax dollars on Medical and Dependent Care expenses. By participating in a 125 Plan, you can have money exempted from federal tax. By using pre-tax dollars for medical and dependent care expenses, you in essence make your dollars go farther. As an example, if your federal tax rate is 15% and you contribute $1,000 annually to your 125 Plan, you will be able to actually see $150 in net income increase. Here's the details:
Without Flex Spending: $1,000 income - 15% taxes ($150) = $850 net take home
With Flex Spending: $1,000 income - 0% taxes = $1,000 net take home
So, if you have $1,000 in medical expenses over the year and you don't use your flex spending account, you will have to earn $1,176.85 in order to get the same $1,000 buying power!
Steps
Check with your employer to see if Flex Spending is available
Sign up during open enrollment
Make sure to keep receipts to submit your expenses with
Tips and Tactics
Be sure to estimate your expenses correctly
Plans are always use it or lose it by the end of the plan year
Better to underfund and pay the difference than to overfund and lose money at year end
Check out the federal guidelines on qualifying expense - you'll find all sorts!
