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Optimizing Your Flex Plan Contribution

If your company offers a “Flex Plan,” the time is quickly approaching when you will need to decide how much, if any, you will contribute next year. The flex plan allows one to sock away a limited amount of tax-free cash for medical, day care, and individual insurance costs. My wife and I visit the doctor infrequently and only recently had our first child so it was never worth the trouble to use the flex plan, and what’s more, I’ve always thought it’s just an ingenious congressional scam. But as you move into new stages in life you have to make the most of your money.

Two years ago we had our first son and then last year, when flex plan decision time came around, my wife was pregnant with our second son. Well, after insurance kicked in our first son cost us a certain amount – let’s call it $1400 – so I thought: “By using the flex plan we can save a few hundred bucks this time around!” and we decided to contribute $1600 for the year. The $200 extra would be for other expenses like dental visits and prescriptions.

But I should have thought about it a bit more. It turns out that our actual medical expenses this year will not be anything near $1600. First, we used the services of a certified nurse midwife instead of a doctor for this baby, bringing the cost down significantly. Second, our insurance now has a lower deductible. The actual cost of the birth was more like $500 and now I’m stuck with a bunch of money left in my flex account. So I’m seriously thinking about having my teeth whitened this year.

The moral of this tale is if you’re going to utilize the flex plan, you want to underestimate your expenses and use a logical model to determine your optimum contribution:

1. Take your fixed expenses

o Dental visits

o Contact lenses

o Day care

o Etc…

Call this Amount 1. You can probably contribute at least this amount.

2. To Amount 1, add your medical insurance deductible

Call this Amount A

3. To Amount 1, add your estimated variable medical costs

o Check-ups

See Also

o Broken bones

o Cavities

o Hangnail reconstruction

Call this Amount B.

Now you’ll have to judge your actual contribution based on experience and expectations, but the smaller of Amounts A and B is your maximum contribution. Don’t go over it! Remember, the key to beating the flex scam is to underestimate, especially if you’re a first time user. Make your best guess, and to be safe subtract 25%, because over contributing by $1000 will cost you $1000, but under contributing by $1000 will only cost you on the order of $300. Then maybe you won’t need to have your teeth whitened.

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