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Human Resources

The University offers a multitude of benefit programs for faculty and staff.
Two of these programs are the Health Care and Dependent Care Pre-Tax Expense Accounts.

How the Pre-Tax Expense Accounts Work

Description of Pre-Tax Expense Accounts

  • The Health Care Pre-Tax Expense Account may be used to help pay for uninsured medical and dental expenses. Some examples of eligible expenses are medical and dental deductibles, co-payments and coinsurance amounts, prescription drug deductibles, co-payments and coinsurance amounts and vision expenses. The maximum contribution is $3,000 for full-time employees and $1,000 for part-time employees with two years of continuous service.
  • The Dependent Care Pre-Tax Expense Account may be used to help pay for dependent care expenses that are necessary for you to work. Some examples of eligible expenses are dependent day care expenses and after-school care for children under age 13. The maximum contribution is $5,000, although, due to IRS regulations, adjustments may be made at year-end for employees earning $85,000 and over in the current year. The Secretary of the Treasury may also adjust this compensation limit for inflation from time to time. (Please see the section titled: Dependent Care--Special Limits for a discussion of the maximum tax-free reimbursement under this Account).

Most health care expenses that are deductible for federal income tax purposes may be reimbursed from the Health Care Pre-Tax Expense Account. Internal Revenue Service (IRS) Publication 502 contains information on deductible health care expenses while IRS Publication 503 describes eligible dependent care expenses reimbursable from the Dependent Care Pre-Tax Expense Account. You can request these publications by calling 1-800-829-FORM or by accessing the IRS's website at

Important Government Restrictions

  • You decide how much to contribute for each plan year (July 1-June 30) and make your election in advance of the plan year during the open enrollment period. Only eligible expenses incurred during the plan year and while you are an active participant can be reimbursed from contributions during the current year.
  • Once you make your decision, it may only be changed if you have a qualifying life event, such as marriage, divorce, birth or adoption of a child, etc.
  • Any money left in your account for which there are no eligible expenses is forfeited at the end of the grace period (90 days after the end of the plan year). For example, if you elect to contribute $3,000 for the plan year and only incur $2,500 of eligible expenses, then $500 will be forfeited. The forfeitures for the fiscal year ending June 30, 2001, were $73,200 or an average of $29.49 per participant for the Health Care Account and $15,900 or an average of $25.57 per participant for the Dependent Care Account. These amounts were returned to the University and used to reduce administration expenses incurred in the administration of this plan as well as other employee benefit programs.

Tax Implications

In deciding whether or not to enroll and how to use your pre-tax accounts, you should make careful estimates of the eligible expenses you expect to incur during the plan year. If you are uncertain as to what your expenses might be, make a conservative estimate to minimize the risk of forfeiture. Despite this restriction, the opportunity to participate in these accounts is a valuable benefit because your taxes are reduced each pay period. Pre-tax expense account contributions are free from Federal Income and Social Security taxes. However, your contributions are subject to New Jersey personal income taxes if you live in New Jersey and, if you live in Pennsylvania, your Dependent Care Pre-Tax Expense Account contributions are subject to Pennsylvania income taxes. Your contributions may also be subject to local income taxes, depending on where you live.

When you are reimbursed from your account(s), payments are not subject to Federal Income, State Income or Social Security taxes. In most cases, local taxes will not apply either.

Dependent Care--Special Limits

It is important to keep in mind that there is a special limitation on how much reimbursement from your Dependent Care Pre-Tax Expense Account can be provided on a tax-free basis for Federal Income and Social Security tax purposes. Federal law provides that the amount excluded from your gross income cannot exceed the lesser of:

  • $5,000 ($2,500 if you are married and filing separate federal income tax returns)*;
  • Your annual income; or
  • Your spouse's annual income.

*These exclusions under the Code are not affected by the lower contribution limits that may be applicable to employees earning over $85,000 (or an amount indexed by the IRS).

Special rules apply if your spouse is (1) a full-time student or (2) physically and/or mentally handicapped or if you and your spouse are separated. Please refer to your Summary Plan Description for more detailed information.

Also, under applicable IRS regulations, any subsidies for dependent care that are provided by the University are taken into account in determining the maximum annual income exclusion. You will therefore want to take into consideration any University-provided subsidy for the Penn Children's Center in determining your contributions to the Dependent Care Pre-Tax Expense Account Plan.

You should also keep in mind that the reimbursement you receive under a dependent care account of another employer (including your spouse's employer if you are married and file jointly) will count toward the maximum annual exclusion amount. By making an election to contribute to a Dependent Care Pre-Tax Expense Account, you are representing to the University that your contributions to the Account are not expected to exceed these limits.

Finally, we would like you to be aware that the IRS allows you a dollar for dollar credit against your income tax liability in an amount equal to a specified percentage of your qualifying dependent care expenses. However, for purposes of the credit, qualifying dependent care expenses can be taken into account only up to $2,400 ($3,000 beginning in 2003) where there is only one dependent, and $4,800 ($6,000 beginning in 2003) where there are two or more dependents. These amounts are reduced dollar for dollar by dependent care expenses reimbursed under the Dependent Care Pre-Tax Expense Account Plan.

In order to obtain the income exclusion or the tax credit, you will need to file IRS Form 2441 with your federal income tax return. You can get a copy of the form by accessing the IRS's website at

* * *

For further information, please see Because of the complicated nature of the IRS provisions, we suggest that you consult with your accountant or tax advisor on issues affecting your income tax return. For other questions, please contact the Penn Benefits Center at 1-888-PENNBEN (736-6236).

--Division of Human Resources

Almanac, Vol. 48, No. 26, March 19, 2002


March 19, 2002
Volume 48 Number 26

Penn's Vice Provost for Information Systems and Computing will become Georgetown's next Provost.
Penn Medicine is getting one of the largest gifts ever to a university hospital: a $100 million endowment from Philadelphia Health Care Trust.
The Center for Folklore and Ethnography honors its first director at a symposium this week.
Last call for volunteers for University Council committees for 2002-2003.
Military Leave Policy revisions clarify benefits for those serving their country.
Health care and Dependent Care Pre-tax Expense Accounts: restrictions, tax implications and special limits for dependent care.