offers a multitude of benefit programs for faculty and staff.
Two of these programs are the Health Care and Dependent Care Pre-Tax
the Pre-Tax Expense Accounts Work
of Pre-Tax Expense Accounts
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.
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
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 www.irs.gov.
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.
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.
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.
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.
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.
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
($2,500 if you are married and filing separate federal income
annual income; or
spouse's annual income.
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).
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
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.
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.
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
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
further information, please see www.hr.upenn.edu/benefits.
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).
of Human Resources
Almanac, Vol. 48, No. 26, March 19, 2002
March 19, 2002
Volume 48 Number 26