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[October 5, 2006]
The UC Tax Savings on Insurance Premiums (TIP) Program combined with a Health Care Reimbursement Account (HCRA) can reduce your taxes – and lessen the impact of medical plan premium increases.
As you know by now, most employees will see an increase in their monthly UC medical plan premiums next year. (See online details about 2007 rates.) However, UC provides two programs that can help to lessen the actual impact of those increases. With Open Enrollment less than a month away, you should begin planning now to use these two programs next year to take charge of your health care expenses.
- With the Tax Savings on Insurance Premiums (TIP) program, your medical plan premiums are automatically deducted from your UC earnings before taxes (unless you have chosen not to participate in the program). Your taxable income is reduced by the amount of your premiums, and as a result, you pay less taxes. If you have previously opted out of TIP, you can opt back into it for 2007 during Open Enrollment.
- With a Health Care Reimbursement Account (HCRA), you set money aside each pay period by deduction from your UC earnings before taxes to build an account that you can use to pay anticipated qualified out-of-pocket health care expenses during the year. As with TIP, your taxable income is reduced by the amount of your HCRA contributions, and you pay less taxes. You need to take action during Open Enrollment to open a HCRA account for 2007. NEW IN 2007: HCRA participants will receive a convenient spending account card that can be used to pay for eligible out-of-pocket health care expenses at participating providers' offices and facilities, drug stores, and most pharmacies where VISA® cards are accepted. With the card, you simply "debit" your UC HCRA account (without the hassle of a PIN) and won't have to pay cash out of pocket or file reimbursement claim forms.
- Combined, TIP and HCRA can provide significant tax savings that can help lessen or offset your medical plan premium costs. Let's look at an example.
Example
Doris, a UC employee who earns $50,000 a year, covers herself, her husband, and their child under a statewide UC HMO medical plan. Last year, Doris paid $112 monthly ($1,344 a year) for her medical plan; this year, the monthly premium has increased to $161 ($1,932 a year). That's an annual increase of $588 in her medical plan premiums.
Doris pays her premiums pre-tax under TIP, and she has enrolled in HCRA this year, electing to have a $1,000 account to pay for doctor office visits, optometry visits and glasses, some dental procedures, prescription drugs, and recurring over-the-counter medicines and first aid supplies. She contributes about $83 a month pre-tax to her HCRA account. She can use up to the full $1,000 to pay for qualified out-of-pocket health care expenses during the year, even if her deductions have not yet reached that amount.
The following table shows how TIP and HCRA combined affect Doris's annual federal tax withholding from her UC earnings, and the effect they have on her increased medical plan premiums. Withholding amounts for 2006 are shown based on three withholding allowances that Doris has declared for herself, her husband, and her child.
Annual federal tax withholding comparisons for Doris – with and without TIP and HCRA
|
Without TIP or HCRA |
With TIP |
With TIP and HCRA |
|
|
Gross Annual Salary |
$50,000 |
$50,000 |
$50,000 |
|
Minus Pre-Tax UC TIP/HCRA Deductions |
- 0 - |
-1,932 |
-2,932 |
|
Reduced UC Salary |
N/A |
48,068 |
47,068 |
|
Annual Tax Withheld |
4,068 |
3,780 |
3,624 |
|
ANNUAL TAX SAVINGS |
- 0 - |
288 |
444 |
As the table shows, with TIP alone, Doris saves $288 in tax withholding for the year. However, TIP combined with her $1,000 HCRA account saves her $444 per year. Although her annual medical plan premium has increased by $588, this tax savings means that she actually pays only $144 more for medical plan premiums ($588-$444 = $144). That's less than a quarter of the actual annual premium increase.
Take a good look at HCRA now and during Open Enrollment.
You certainly owe it to yourself to consider enrolling in HCRA for 2007 – and, if you already participate this year, remember that you must re-enroll if you want an account next year.
Visit the HCRA Details site online to read important information about how the account works. Then, go to the SHPS website for further information, and to use the special calculator to help determine how much you'll need in your account, and to estimate your potential tax savings. (SHPS, Inc. administers HCRA for the University.)
Watch for additional information about HCRA and the new spending account card in future emails, and in the Open Enrollment mailer that you will receive later this month.
Don't forget UC's other tax-savings programs.
TIP and HCRA are only two of a number of UC programs in which you can participate to reduce your tax liability while paying for expected expenses or building security for your your future during retirement. Those programs include the following:
- Dependent Care Reimbursement Account (DepCare)
- Pre-Tax Parking and Public Transportation Program
- UC Retirement Savings Program
-
- Defined Contribution Plan
- Tax-Deferred 403(b) Plan
- 457(b) Deferred Compensation Plan
Visit the At Your Service website for information about these plans.