Pre Tax Health/FSA

[Bimmerbill]

New guy with another question my HR office couldn't help me with:
I have the option of having my health care plan premiums and flexible savings account payments taken out pre tax. When I set it up there was a caution that it would reduce my social security earnings.
How do I calculate the savings and the possible reduction in social security earnings to see if it is worth it?

Thanks!

[Nords]

Quote:

Originally Posted by Bimmerbill New guy with another question my HR office couldn't help me with: * * *I have the option of having my health care plan premiums and flexible savings account payments taken out pre tax.* When I set it up there was a caution that it would reduce my social security earnings. * * *How do I calculate the savings and the possible reduction in social security earnings to see if it is worth it?*

Hunh-- healthcare premiums & FSA payments must be treated differently than Thrift Savings Plan / 401(k) contributions. My spouse's SS deduction is still 7.65% of her pay (right off the top) before the deduction is made for the TSP. It'll be interesting to see which wage number shows up in her SS earnings history-- the SS wage used for that 7.65% deduction or the (much lower) taxable income.

Anyway, assuming that HR is reading the rules correctly, first you'd want to calculate your taxes using your current pay (without the pre-tax deductions that you're contemplating). That would be federal, state, & any locality taxes. (Hang on, the fun is just starting.)

Then you'd want to plug your lifetime earnings history into the SS calculator to see what your current SS benefits should be (without the pre-tax deductions).

Then you'll have to know how much is deducted from your income for the premiums & FSA payments. Gee, maybe even HR could figure this one out.

Then you'd have to recalculate your taxes using your new (lower) taxable income (reduced by the amount of the premiums & payments). That should give you an estimate of your annual tax savings from having your premiums & payments paid pre-tax. If you're not near a tax-bracket breakpoint then you could probably ballpark it by multiplying the amount of the premiums & payments by the tax bracket that you're currently in.

Then you'd have to plug your lower (taxable) earnings history into the SS calculator, get your lower SS benefits estimate, and see how much SS benefits you "lose".

If the loss is close to zero then it's either not significant-- or you'll want to download & install the "detailed" SS calculator.

Hopefully you're saving more now in taxes than you're losing later from SS, although an extremely detailed calculation would look at how much the savings will grow if you invest them each year against your first SS withdrawal.

[maddythebeagle]

I would look at this way, if you are in the 25% tax bracket, you will save that now (and add in your state taxes) before even looking at the S.S. issue. Put that saved money in a roth ira in conservative investments (like the S.S. money is invested in) and you will be ahead.

[Sisyphus]

My two (inflation adjusted) pesos...

- Odds are that you've either accumulated enough SS contributions at this point in your career, so it really won't matter much...OR.... SS won't be there when you retire, so don't worry about it.

- If it's pre-tax $$, you're basically getting that 28% (or so) ROI right off the bat.

I'd go with the FSA, but that's just me. I wouldn't make ANY decisions around how it might impact Social Security!!!

Best of luck!

[Lusitan]

Just be careful to note if it's "use it or lose it" each year (which I think these plans are). Be sure to underestimate your expenses so you don't end up leaving money on the table. And get into the habit of going through whatever process you need to reclaim your funds as soon as you incur the expenses - don't procrastinate!

I speak from experience on this one

[Bimmerbill]

Thanks for the insights. The FSA is linked to my federal health plan, so they automatically submit any non covered expenses. It's pretty handy. They did recently extend the period you can spend your own money thru March of the following year I think. I have orthodontics at a set payment schedule, so it's easy to figure out how much to take out.
I'll have to check my LES to see if my TSP deduction is right off the top or after SS...

[SteveR]

Some FSA plans will allow expenses for even non-traditional medical expenses like vitamins, over the counter (OTC) drugs like cold medicine, wrist splints, home blood pressure monitors etc. These add up pretty fast so consider them if your plan allows them. We have always done a FSA and it does help a bit on the taxes and that is real money. I have never lost a dime and usually have several hundred $ more I could have filed.

Check out your plan and keep track of what you spend on allowable items. It might suprise you how fast they add up.

As far as SS--never been an issue since I max it out every year. My wife does not but we put the FSA on my check so it lowers the tax bill a bit more and does not affect her SS.