Unreimbursed Medical Spending Account (UMSA) allows employees
to save taxes on out-of-pocket medical and dental expenses that
reduce spendable income. Contributing money to the UMSA
can result in a reduction on taxes because the money contributed
to the account is free from federal income, Social Security, and
Medicare taxes and remains tax-free when it is received.
this plan, up to $2,500 of salary may be set aside on a before-tax
basis in a health care spending account each calendar year. The
member and eligible dependents can be reimbursed for eligible
expenses incurred during the year. Eligible expenses include
co-payments, deductibles for medical, prescription and dental
bills; expenses for medical services not covered by health plans
or State vision coverage, such as contact lens solution, hearing
aids, etc.; and any other health care expense that can be legally
deducted on an income tax return, except premiums for health care
that are covered under the Premium Option Plan.
Publication #502, Medical and Dental Expenses, provides
a complete list of services eligible for reimbursement.
no medical or dental plan will pay for everything, members will
be able to save money by using before-tax dollars to pay for these
to Decide How Much to Set Aside in an UMSA
member must estimate how much will be spent on unreimbursed health
care during the calendar year. Based on this amount, contributions
will be taken out of the member's paycheck each pay period throughout
the entire year.
is very important to base estimated out-of-pocket expenses on
past experience because, according to IRS code, unused contributions
must be forfeited. Many who participate use conservative
estimates for their UMSAs, rather than risk forfeiture of unused
contributions at the end of the year.
claim may be submitted for services performed during the calendar
year at any time up until the end of March of the following year. When
a claim is filed, the member will be reimbursed for up to the
total amount that has been elected for contribution, whether or
not the total deductions to date from payroll cover the amount
of the claim. When filing for reimbursement, the member
must verify that there has been no other reimbursement from any
the federal government offers a federal income tax deduction for
unreimbursed eligible health care expenses which exceed 7.5% of
adjusted gross income, the UMSA offers tax-free reimbursement
on each and every dollar of eligible expenses, which may provide
immediate tax savings for those who do not meet the medical expense
deduction threshold. In addition, UMSA also saves the member
on Social Security and Medicare taxes, another 7.65% on every
dollar. At the same time, expenses that are reimbursed under
this plan cannot be deducted from the member's federal income
UMSA, any unused contributions remaining in an account at the
end of the calendar year are forfeited. Members have until
March 31 of the following year, three months after the close of
the calendar year, to file for eligible reimbursement.
payments to a Flexible Spending Account (DCSA or UMSA) and POP
lower annual earnings against which Social Security deductions
or employer contributions are made, there is a valid concern that
participation in these plans would result in reduced Social Security
benefits at retirement.
a person born after 1928, the Social Security benefits are calculated
using a 35-year average of earnings. A reduction of $2,000
a year or even $5,000 a year over some portion of this 35-year
span would have little effect on the average salary and, therefore,
minimal impact on the Social Security benefits.
illustrate possible Social Security implications, the Social Security
Administration has provided the Division of Pensions and Benefits
with an example of an employee who retired in 1998 at age 65 whose
wages had been at the maximum wages subject to Social Security
deductions. Upon retirement, this individual's monthly Social
Security allowance was $1,343. If that same person had been contributing
$2,000 a year for the last 10 years to a FSA, the subsequent reduction
in Social Security wages would have produced a monthly Social
Security allowance of $1,335, a difference of less than $10 per
Fact Sheet #44, Tax$ave,
and the annual Tax$ave
Open Enrollment newsletter provide additional information
about Tax$ave, including the UMSA.
Information about the UMSA