Generation X Finance » Featured

Flexible Spending Accounts: Is a FSA Right for You?

Jeremy — Wed, 01 Sep 2010 14:19:53 +0000

Flexible Spending Accounts Provide an Easy Way to Save Money and Pay for Health Care Expenses

One unfortunate result of rising costs associated with health care and health insurance is that employers are now looking for ways to trim employee health benefits. This usually includes increasing co-pays, out-pocket-costs, and deductibles. The good news is that employers are also conscious of the burdens such benefit cutbacks could potentially have and are thus introducing new services to offset the increased costs shouldered by their employees.

Flexible spending account plans are just one such product intended to minimize the strain employees face while their employers transition to a different, more affordable health benefit program for the company. These plans are meant to act as sort of a personal insurance paid for by the employee with the benefit coming in the form of a tax break.

Moreover, in contrast to a health savings account, a flexible spending account is a program through which employees set aside money which they predict will be spent in the upcoming coverage year. Under a flexible spending account plan some predetermined amount of money is automatically deducted from an employee’s pay check and deposited in an account. These funds are then to be spent on a qualifying expense in that same plan year.

More specifically, flexible spending account plans are aimed at partially covering the gap in out of pocket expenses created by higher co-pays and deductibles. The kinds of expenses which may be covered under a flexible spending account plan are limited to health care costs and costs associated with caring for a dependent. Although employees must still assume the responsibility for these increased expenses, under the plan it would be possible for plan members to use pre-tax dollars for some expenses. Generally speaking, the savings when participating in a flexible spending account will be anywhere from about 20-35%.

Joining Your Employer’s FSA

With a flexible spending account employees are given the opportunity each year to opt-in to the plan. Each employee carefully determines how much of his or her salary will be directed to the plan at the beginning of the coverage year. it is It is especially important to estimate your costs wisely because an FSA is a use it or lose it plan and money leftover in the account after the plan year ends will be forfeited.

The funds to be dedicated to the plan are called “benefit elections.” For medical care and dependent fare flexible spending accounts, the coverage period is 12 months, although there may be a brief extension in some plans. Sometimes employers will begin plan benefits at an irregular time of year for the first coverage period with the intent that the first year will be a “short plan year,” and that the next plan year will begin on the normal starting date. In such cases the period of coverage must be the entire short plan year. If employee voluntarily terminates employment during a coverage period they may either forfeit all available funds or discontinue making contributions or they may continue making contributions through the end of the plan year through COBRA. The deadline for qualifying expenses to be used before forfeiture is typically either December 15 or March 15. Employees should seek information from their employers or plan providers to be sure about the correct date. Also, only services which have been performed after the start of the coverage period are reimbursable. Hence, bills or records from before the coverage period are not eligible for reimbursement.

Deductible Expenses

Many, but not all medical expenses are potentially reimbursable from a flexible spending account plan. The expenses which may be excluded from gross pre-tax income according to tax code Section 213 may be reimbursable; however, any expenses reimbursable through any other health care plan of which the employee is a participant may not be reimbursed through a flexible spending account.

Typical reimbursable health care expenses:

Ambulance services
Coinsurance
Contact lenses
Dentures
Eye exams
First aid supplies
Lab tests
Physical therapy
Mental health expenses
Smoking cessation
Substance addiction treatment
X-rays

Health care expenses generally ineligible for reimbursement:

Cosmetic surgery for appearance only
Dental bleaching
Ear piercing
Health club memberships
Life, LTC, or disability insurance premiums
Marriage counseling
Massage therapy
Tattoo removal
Weight loss treatments (unless specifically prescribed by a doctor)

For more information about expenses which may be reimbursed under a flexible spending account plan, see “Medical and Dental Expenses” which is also known as IRS Publication 502. The document provides an exhaustive list of eligible services and expenses. Expenses which are typically not reimbursable under most plans are generally cosmetic or services and products not usually considered to be health care related.

Despite the fact that the decision to participate in a flexible spending account plan is made annually, in certain circumstances it is possible for plan sponsors to permit employees to alter benefit election requirements. For example, an employee who either marries or divorces during the coverage period may be permitted to alter the amount of his or her salary that must be contributed to the flexible spending account. Other conditions under which the terms of a plan may be changed include a change in the number of dependents and a significant change of residence or work location.

Changes for 2011

Starting January 1, 2011, you will need to be careful when planning your FSA deduction amount because there are changes in what can be reimbursed when it comes to over the counter drugs. In most cases, regular OTC drugs will not longer be eligible, but there are exceptions on insulin for diabetics and if your doctor prescribes a specific OTC drug. So, keep that in mind when making your elections for the 2011 plan year.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Flexible Spending Accounts: Is a FSA Right for You?

Five of the Best Websites for Freelance Writers

Charissa — Tue, 03 Aug 2010 13:09:40 +0000

These Sites Are 5 of the Best for Freelance Writers

As a freelance writer, I am always on the lookout for new ideas on how to drum up business. In addition to broadening my skill set, regular trips to the following five websites put me into contact with potential clients, give me pointers on how to be a stronger, more effective writer, and allow me to receive feedback from my peers.

Websites geared toward freelancers are a tremendous resource for those working for themselves because you often don’t have the same support network and guidance you may receive while employed in a traditional job setting.

Where to Find Tips, Advice, and Job Leads Online

1. Poe War. This Writing Career Center offers a lot to beginning writers. Articles about how to write a query letter and find jobs within the publishing industry are commonplace on the site and worth their weight in gold. Each blog entry contains links and videos so that its readers can make the most of John Hewitt’s expertise.

2. Freelance Switch. Freelancers of all types will find the advice given on this website useful. There is an hourly rate calculator, a directory and job board as well as a blog, podcasts, and other helpful tools. A post titled, “You Know You’re a Freelancer When…” demonstrates the humorous side of working in your pajamas.

3. Women On Writing. An ezine “Promoting the communication between women writers, authors, editors, Agents, Publishers and Readers.” Each issue follows a theme and has a variety of feature articles and resources to go along with it. The site even sponsors seasonal fiction writing contests that are open to both genders. I frequently print how-to articles from this site.

4. The Freelance Writing Jobs Network. Packed full of job leads, markets, and tools for freelance writers, it is one of the most up-to-date resources on the web. Article writers, business writers, and bloggers alike can find the information that they are looking for as they visit this site. Daily emails highlight the best jobs listed on Craigslist. This feature saves me immense amounts of time.

5. Inkygirl.com: Daily Diversions for Writers. Debbie Ridpath Ohi’s talent for writing and drawing shines through in every entry she posts on her blog. Her Writer’s Guide to Twitter and entries about her Wordcount Challenges are worth reading. I especially like the sense of playfulness she brings to her website with her comics.

Writing is a very personal act. For those individuals who seek to make a career out of it, a variety of resources can enrich their experience. Although there are many wonderful websites to visit, I feel that these five have had the biggest and most positive impact on my life professionally.

Charissa Arsaoui is a freelance writer for ChickSpeak, Buzzine, DisFUNKshion Magazine, Student Stuff, and a guest contributor for Wisebread. She loves thrift related topics and can spot a bargain a mile away.

Download My Free eBook: Invest Like a Pro

Jeremy — Mon, 19 Jul 2010 14:42:04 +0000

Are you tired of all the investing gimmicks out there? Invest in gold, buy commodities, short stocks, trade Forex, and all of that garbage? You’re not alone. Companies are targeting investors and trying to lure them into more uncommon investments in part thanks to the weak economy and stock market performance over the last few years. After all, if you lost 50% of your retirement account in just two years you’re probably open to trying something new and have your doubts about traditional investing.

The problem is that people begin flocking to alternative investments only to misunderstand the true risks involved and end up making matters even worse. There’s money to be made everywhere, but not all investments are suitable for everyone. Once you abandon traditional investment selection and portfolio management strategies you’re on your own. So, rather than trying to time the market by risking money on investments being sold by infomercials, it’s time to get back to basics.

That’s why I’ve put together Invest Like a Pro. It’s a collection of some old and new material that will teach a beginner how to choose mutual or index funds, how fees work, how to create an asset allocation strategy, and monitor and rebalance the portfolio over the years. No gimmicks here. Just sound investment advice for regular investors that can help you manage a portfolio like a pro.

Inside the book:

Learn how funds charge fees and how to minimize them.
Learn how to use Morningstar to research and compare investments.
Learn about asset allocation, correlation, and true diversification.
Learn how and when to rebalance your portfolio.

Sample Pages:

Download the Book:

All you need to do is fill out the form below to get instant download access. After verifying your email you’ll receive a direct download link. In addition to this book you’ll get exclusive personal finance content not found on the blog, access to additional books, and much more.

Health Savings Account (HSA) Basics

Jeremy — Tue, 15 Jun 2010 14:01:26 +0000

What is a Health Savings Account?

Health savings accounts (HSAs) allow individuals to save money for health care expenses on a tax-deferred and tax-free basis. This law was signed into law on December 8, 2003 and became effective on January 1, 2004. The tax deferred money can be invested into mutual funds, stocks, cash or bonds and can earn interest. The money can only be used for medical expenses otherwise taxes and a possible penalty may apply. Individuals with high deductible health insurance plans are eligible to open a health savings account. High deductible insurance typically require $1,000 or more in out of pocket expenses before it can qualify as such.

In 2003, health savings accounts were introduced as a part of a “consumer directed health care” initiative. The government encouraged these programs as a means to control health care costs. Health care companies and the government assumed that physicians would have an incentive to lower their health care costs if the physicians had to compete for a patient’s business. Consumers would also demand better care if they were spending their own money as opposed to a company’s or insurance company’s money. How well this has worked is obviously up for debate.

Individuals who are generally healthy will typically benefit from investing in a health savings account as it’s an effective way to pay for routine doctor visits, prescriptions, and procedures. However, individuals who may need immediate health care should assess whether or not they can afford their deductible and weigh the options. If you have a possible need for an expensive procedure in the next few years it may be far cheaper to pay the high deductible instead of putting money aside in savings that may not cover everything and have little time to reap the tax benefits.

How Does a Health Savings Account Work?

Funds deposited into a health savings account will continue to accumulate tax-deferred from year to year if they are not spent. A lot of people mistakenly assume these accounts are “use it or lose it” but that actually applies to Flexible Spending Accounts, or FSAs. The funds accumulated in the account are the individual’s and are not owned by your insurance provider. The funds may generally be withdrawn at any time, but in order to withdraw the funds without paying taxes on the gains or be assessed a 10% penalty they must be used for a qualified medical expense. Qualified medical expenses include:

Insurance Deductibles
Co-Payments
Dental
Vision
Chiropractic Care
Eyeglasses
Hearing Aids
Some Cover Mammograms
Prostate Exams
Colon Cancer Screenings
Pap Tests
Well Baby Care
Annual Physicals
Medical Transportation Expenses
Non-prescription Medications, until 2011

However, beginning in 2011 over the counter medical expenses will not be covered. If the individuals need to withdraw the money for non-medical expenses, then those funds will incur penalties. You should refer to the guidelines to determine the exact penalties associated with non-medical expense withdrawal.

Each year consumers may contribute up to a maximum amount to the health savings account. Depending upon the person’s familial status, the amount varies. The maximum amounts are listed below:

• Individual with Self Coverage (2010): $3,050
• Individual with Family Coverage (2010): $6,150
• Catch Up Contributions for Age 50+ (2010): $1,000

Other than the maximum contribution, individuals can contribute as little as desired. You also can decide which company will manage the account and subsequently choose what type of investments to make with the money in the account.

According to America’s Health Insurance Plans (AHIP), as of January 2009, nearly 8 million people were covered by the health savings account. Most were covered under a group plan which comprised 6.2 million of the people enrolled. Nearly, 1.8 million people are covered by individual policies. That number has increased since 2008 when only 6.1 million were covered under this type of program.

Statistics show that on average most people withdraw half of what they put into their HSA each year. For instance, if the average annual deposit was $2,100, then the average withdrawal was approximately $1,000. Individuals can withdraw from the account in a variety of ways. Some health savings account providers allow the contributor to have a debit card to withdraw funds. Other health savings accounts provide checks for contributors to withdraw funds. And some will allow you to make payments on your own and submit for a reimbursement.

The process will depend upon the provider you select which means it’s important to choose the right provider for your needs. The checks or debits can be made payable to anyone. However, those checks may incur a 10 percent penalty along with income taxes if it’s determined the payment was not for a qualified medical expense. Therefore, make certain to plan accordingly to avoid penalties and taxes. If the person is over the age of 65 or disabled at the time of withdrawal, then the 10 percent penalty may be waived.

Who Can Establish a Health Savings Account?

To qualify for a health savings account individuals must be under the age of 65 and possess a high deductible health insurance plan. If there is a spouse covered on the insurance, both must fall under the high deductible. Furthermore, each individual can only be covered by the high deductible health insurance without having a secondary provider. However, the covered can possess vision, dental, disability, and long term care insurance in addition to the high deductible health insurance plan which are not typically covered under regular health insurance plans.

According to one study, 46 percent of the health savings account holders were from a lower to middle income community with a median income between $25,000 and $50,000. Thirty-four percent of the individuals lived in middle income neighborhoods between $50,000 and $75,000. Twelve percent lived in an upper income neighborhood with a median income of $75,000 to $100,000. Three percent and five percent represent the lowest income neighborhoods and highest income neighborhoods, respectively. The low income neighborhoods represent median incomes below $25,000, and high income neighborhoods represent people with median incomes above $100,000.

Where Can You Set up a Health Savings Account?

Some employers offer health savings accounts to their employees so that is a good place to start. Employers may allow employees to contribute to a health savings account before their income is taxed as it comes right out of your paycheck. Some employers may even match what the employee contributes or fund the entire health savings account for the employee. Since each plan offered at the employer level is different you will want to check with your own employer to get the details.

For those who sign up for an independent health savings account through an insurer or bank, then the contributions made annually may be filed as a deductible expense on your taxes. Many of the insurers that offer health savings accounts are available on eHealthInsurance. Other options may be available by contacting the National Association of Health Underwriters. Some examples of health insurance companies that offer health savings account are listed below:

Aetna
Coventry
United Healthcare
AARP
Anthem Blue Cross Blue Shield
Cigna
Kaiser Permanente
PreferredOne
Providence Health Care
Rocky Mountain Health Plans

As of 2006, over 600 banks were also offering health savings accounts to individuals and to companies. Even more banks are offering this feature today, so another safe bet may be to check with your own local bank and see if they have an HSA plan available.

Summary

Some people are obviously hesitant about this particular savings plan compared to traditional health insurance. However, this plan gives you much more control over your money. With an HAS you have the ability to take some money out of your insurer’s hands and control how much you set aside, where you save that money and what kind of interest it receives, and then choose how to spend it. All while receiving tax benefits for doing so.

At the same time, these plans aren’t for everyone. Your specific health coverage, deductible amount, and health care needs will ultimately dictate which plan is right for you. You’ll have to take a look at all of the variables in your situation and determine if an HAS is able to save you money or not.

How Much Life Insurance Do You Need?

Jeremy — Wed, 09 Jun 2010 15:12:28 +0000

Life insurance tends to get a bad reputation even though most people have a legitimate need for coverage. The main problem is that there are many different types of life insurance and almost all policies are sold by someone working on commission. This scenario is perfect for abuse when you have people pushing a product to make some money and ends up caring more about the commission than finding the right amount of coverage with the right type of policy. Because of this you’ll often hear stories about how someone got sucked into a massive whole life policy at a young age, or signed up for million dollar term life when they don’t even make $50,000 a year and don’t have any kids.

These stories may be fairly common, but it doesn’t mean life insurance is a bad product or that you should shy away from determining how much life insurance you need. If you understand the different types of coverage and calculate how much you really need you’ll be able to get the protection you desire without feeling ripped off for buying too much or getting into the wrong policy.

Do You Even Need Life Insurance?

Before going on to find out how much life insurance you need you must first determine if you even need it. If you ask someone who sells insurance for a living they will tell you everyone needs life insurance regardless of what their situation is in life. This just isn’t true. There are plenty of people and situations where life insurance simply doesn’t make sense. So, how do you know if you’re someone who needs life insurance or not? Here are a few general rules to follow:

You probably need life insurance if:

You are married.
You have children.
You have a desire to leave a beneficiary something upon your death.

You probably don’t need life insurance if:

You are single.
You are older and your children are no longer dependent.
You are married but only your spouse earns an income.

Now keep in mind that these are generalities and not black and white questions. There are situations where there may be a combination of factors going on that warrant coverage even if the general consensus says otherwise. To put it simply, ask yourself this: If I were to die, would that place a financial burden on someone else? If you answered yes to that question that’s a pretty good indication that you need some sort of life insurance.

The Different Types of Life Insurance

Once you’ve determined that you could use some life insurance you’ll then want to consider the different types of life insurance options. To keep things simple, life insurance is generally broken down into two forms: term and cash value. Term life is just what you’d suspect. It’s an insurance policy that is only effective for a specific term and when that term is up the coverage ends. Policies that have a cash value come in a few different forms, but their goal is the same. They provide a death benefit just like term life but they don’t expire after a certain number of years (as long as you stay current on premiums) and a portion of your policy premiums build up cash value over time.

To get a better understanding of the different types of policies let’s look at some of the details of each:

Term Life - This is the cheapest way to obtain life insurance. You select the length of coverage, typically 5, 10, 20, or 30 years, and make premium payments as long as the term is in effect. The premiums typically remain the same for the life of the term and when the term is up you stop making payments and the death benefit goes away. Term life is cheap because the policy only lasts a set number of years and doesn’t have any sort of cash value or investment option. Term policies are best for those who need coverage for just part of their life such as while they are married and in their prime earning years or while there’s a dependent child in the house.

Whole Life - Unlike term life insurance whole life is meant to provide a death benefit for someone’s entire life as long as the premiums are paid. Because these policies are effective in most cases until someone dies the premiums are much higher since the insurance company will almost certainly have to pay out a death benefit at some point. Whole life also has a cash component that will take part of each premium payment and set it aside in a separate account earning a set interest rate. Because of the significantly higher premiums and low rates of return on the cash portion whole life is almost never recommended for young people simply looking to protect their family. Like term life, generally the premiums remain the same for the life of the contract.

Universal Life – Similar to whole life in terms of having a cash component and still unlike term life, universal policies provide a little more flexibility over whole life. With universal life you can usually increase or decrease the death benefit at some point in the future and you may have a few different investment options for the cash value component of the policy.

Variable Universal Life – Here’s where things get a bit complicated. Similar to the other cash value policies you pay a higher premium than term life and some of that goes into an separate investment account. But instead of generally earning a regular interest rate you have the ability to invest that money into a all sorts of things such as mutual funds, putting your money at risk. These investments also increase the total fees paid which hurt your returns but help pad the insurance salesman’s wallet. These are the policies that have really given insurance a bad name in recent years and since very few people have a situation in where this type of policy can help you should probably think twice if someone mentions a VUL to you.

Calculating How Much Life Insurance You Need

So, you’ve determined that you do need life insurance and have identified the type of policy that’s right for you, but how do you come up with the magic number for how much coverage to have? It’s not as hard as it sounds so let’s walk through the process.

First, take stock of any life insurance policies you already have. Maybe your parents took out a small whole life policy on you when you were just a child or maybe you already have some coverage through your employer. While you’ll want to take any existing policies into account, don’t hold them with as much weight because like with your employer’s insurance it may disappear if you change jobs, or the little policy your parents took out on you might be too expensive to keep paying premiums on for the provided death benefit so you may opt to cancel or cash it out.

Next, look at your other assets that would be given to your beneficiaries upon your death. If you have a 401(k), IRAs, property, or other assets that have your spouse or kids listed as beneficiaries they will receive the bulk of those proceeds upon your death just like they would from an insurance policy so these funds may offset some of the coverage you think you need and can help you keep premiums down.

Using Income Rules of Thumb

Now it’s time to look at how long you need coverage. We’re going to assume you’re looking at term life which is the most common so you probably want to have coverage while you have dependent children, so you’re usually looking at a 20-30 year term. For sake of calculations we’ll go with 20 years. If you need coverage for 20 years you’ll want to start with the worst-case scenario if you were to die in that first year. How much money would your spouse and/or dependents be missing out on if that were to happen? If you make $50,000/year the easiest way to figure that would be to take $50,000 x 20 years, or $1,000,000. That means if you were to die within the first year of the policy your beneficiaries would receive enough money to directly replace your lost income for the next 20 years.

That’s a good rule of thumb, but it’s not always as simple as that. For example, your income probably wouldn’t remain static for the next 20 years and you’d probably receive pay increases over time. On top of that you want to factor in inflation. Remember, $50,000 in year 1 is going to be worth a lot more than $50,000 in year 20. So, maybe you take your replacement income and come up with an average inflated number to use for your calculation. If you make $50,000 today and expect your pay to increase with inflation you might expect your income to be upwards of $90,000 by then. Without getting too complicated you could then use these two numbers and split the difference for an average income over that time and maybe use $75,000. So with $75,000 x 20 you get $1.5 million.

Remember what we talked about above with looking at existing policies and assets? Well, if you have say a $50,000 policy through your employer and $200,000 tucked away in retirement accounts and other assets you could reduce your life insurance death benefit accordingly and save on premiums. So instead of $1.5 million you may only want to get $1.25 million in coverage. There is no right or wrong way to figure this in, but keep that in mind so you can balance your true death benefit needs and keep premiums as low as possible.

Using a Bare Bones Approach

The income rule of thumb above is great for maximizing your death benefit to ensure your beneficiaries don’t miss a beat, but covering two people to match their income for the length of the term may put the insurance premiums out of reach for many. That’s ok. What a lot of people do instead is take a look at their financial situation and determine what the bare minimum of coverage should be so that if something were to happen your spouse or children aren’t faced with a financial hardship. For most families this means keeping up with the mortgage and car payments, paying off other debts, and putting some food on the table.

So, that means you can determine how much coverage you need so that you can alleviate those concerns for your loved ones. Assuming the worst-case again where you die in the first year of the policy you should add up all of your current debts. Say you owe $150,000 on your current mortgage, owe $15,000 on a few cars, and have $5,000 in credit card debt. If you were to die your spouse and children would be left to live on just one income and still need to keep up with all of the above debt payments. But you can add up those debs to get a bare bones number: $150,000 + $15,000 + $5,000 = $170,000. To be safe, you may want to tack on another $10,000 that would be used to cover funeral expenses. So, here we’re at a $180,000 death benefit.

To understand how this may be all you need, consider what happens if you were to die in the first year. That $180,000 would be enough to pay off the house, the cars, wipe out the credit card debt, and pay your final expenses. With all of those things eliminated your spouse doesn’t have a mortgage, car payments, credit card bills, or any of that to worry about. As long as they are working there’s a good chance their single income will be more than enough to live off of.

Making Sure You Can Afford Life Insurance

You’ve seen the two extremes in the examples above. You can go all out and give your beneficiaries complete replacement income or you can get just enough coverage to eliminate your existing debt so they don’t have to worry about trying to make the payments when you’re gone. It goes to show you that there’s no right or wrong answer when it comes to determining how much life insurance you need. Your priorities, financial situation, and use of the death benefit will determine how much you should have. For some it might be a lot, but others may only need a little. So, don’t get caught up on numbers people throw out there as must-haves when it comes to insurance. It’s up to you to decide that.

But whatever you decide it’s important to make sure it fits within your budget. If your premiums cut into how much you’re able to put into an emergency fund, save for retirement, or pay down your debt, you’re buying too much insurance. Those items should take priority and insurance should be something that you can comfortably add on to your monthly expenses without negatively impacting the other areas of your budget.

To give you an idea, term insurance is much more affordable than you may think. For example, my wife and were shopping for policies and for non-smoking 30 year olds we were looking at $500,000 20-year term life policies around $240/year or $20/month. 20 bucks a month, that’s it! When you look at how much you might spend on things like cell phones, internet access, your daily Starbucks and so on, it really puts things into perspective. It really wouldn’t cost much to make sure our family is taken care of if something happened one of us.