Apr 16

This proposed change to the tax code is a simplification, but at what cost? One bit of the proposal offers to eliminate RMDs on retirement account that are worth less than $100K. A good thing, I suppose, although those with a low IRA balance are also likely to be in such a low tax bracket that the withdrawal wont be a burden. The next part of this change is add RMD requirements to the Roth IRA. I have mixed feelings about this. One view is that retirement accounts are meant for just that, retirement. These accounts have morphed into estate planning tools, especially for those of modest means. The IRA offers a great way to pass your assets on to a loved one, bypassing probate, and in the case of the Roth IRA, doing so with no tax bill on withdrawal.

I’m neutral on this proposal. Of course the government sees it as way to raise money.

written by Joe \\ tags:

Jan 18

There are times I get a comment that’s both long enough and insightful enough that I request the author’s permission to put it up as an article. The follow guest post is from Andrew Chunis, the Business Manager at Advanced Benefit Strategies, a third party administrator of employee benefits. Andrew makes a compelling case for improvements to the FSA, not elimination. Thank you, Andrew, here’s your comment-turned-article, unedited.

Gonna have to disagree, Joe. Hear me out:

First on administration cost: Typically a third party administrator bills the employer a monthly fee per enrolled employee. However, depending on the average election, the employer is usually saving much more in taxes per employee than the monthly fee incurred, based on their FSA funds coming off of payroll.

Now the alternative to an FSA would be itemizing deductions on a Schedule A, which is currently limited to expenses greater than 7.5% of your adjusted gross income. As we know, itemizing deductions greatly increases the risk of triggering an IRS audit. For the average person this is a complex procedure to be able to enjoy all the benefits of an FSA (saving receipts, making sure you have your RX for tylenol, etc.), and the penalties and government administration of these expenses would be far higher than FSA administration. Further, this would also likely increase the administration at tax service centers such as H&R block.

So far from being overly complicated, the FSA actually simplifies the tax process for the participant a great deal, simply by removing these funds off their W2. Without question, the average person currently receiving tax benefits on their FSA would not get the same benefits on itemized deductions. And any “efficiency” costs would be rendered moot by greater IRS auditing procedures and third party tax preparers. As far as the government is concerned, the plans are a win-win-win benefit. Win for the government: outsourcing administration to a private party; win for employers: receiving a tax benefit simply by having a plan in place; and win for the employee: removing these funds from their W2 to enjoy their tax savings.

Also, technology is simplifying the FSA process a great deal. We have FSA debit cards that can process transactions at the point of service: eliminating the reimbursement process. We have smart phone apps that can read your documentation and automatically submit for reimbursement/adjudication. We have dependent care affidavits that only have to be set up once and automate the reimbursement process for the rest of the year.

Rather than scrapping the Flexible Spending program, we should really be expanding it. Some of the proposed legislation would have fixed some current issues with the plans: add a possible roll over for unused funds, allow for OTC items without an RX, and possibly even use the accounts for health and wellness expenses such as gyms and exercise programs.

It does look like the current administration would like to kill the FSA, which would be unfortunate. They are probably one of the main tax benefits working class people can enjoy, besides maybe the EITC.

I will say though that employers would do right by getting a quality administrator for their plan, rather than just looking for the lowest cost.

written by Joe