A Flexible Savings Account (FSA) plan allows you to put money into an account at the beginning of the calendar year that can be used for medical expenses. This amount is not subject to federal tax. As you pay medical expenses during the year, you are reimbursed by the administrator of the FSA until the money is exhausted
A Flexible Savings Account (FSA) plan allows you to put money into an account at the beginning of the
calendar year that can be used for medical expenses. This amount is not subject to federal tax. As you
pay medical expenses during the year, you are reimbursed by the administrator of the FSA until the
money is exhausted. From that point on, you must pay your medical expenses out of your own pocket.
On the other hand, if you put more money into your FSA than the medical expenses you incur, this extra
money is lost to you. Your annual salary is $80,000 and your federal income tax rate is 30%.
[1] Assume that your medical expenses in a year are
standard deviation $500. Build an @RISK model in which the output is the amount of money left
to you after paying taxes, putting money in an FSA, and paying any extra medical expenses.
Experiment with the amount of money put in the FSA, using a RISKSIMTABLE function.
[2] Rework part a, but this time assume a gamma distribution for your annual medical expenses.
Use 16 and 125 as the two parameters of this distribution. These imply the same mean and
standard deviation as in part a, but the distribution of medical expenses is now skewed to the
right, which is probably more realistic. Using simulation, see whether you should now put more
or less money in an FSA than in the symmetric case in part a.
Hint: to calculate the medical expense above FSA limit, you may need to consider using the MAX
function. That is, if the contribution is larger than the medical expenses, the difference is 0. If the
medical expenses are larger than the contribution, the difference is the difference.
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