What Are Out-of-Pocket Expenses?

Out-of-pocket expenses refer to costs that individuals pay out of their own cash reserves. The phrase is most often used to describe an employee's business and work-related expenses that are later reimbursed by the company. It also describes a policyholder's share of health insurance costs, including money spent on deductibles, copays, and coinsurance.

Key Takeaways

  • An out-of-pocket expense is a payment you make with your own money even if you are reimbursed later.
  • Business and work-related out-of-pocket expenses are usually reimbursed by the employer, but the process for doing so varies.
  • In terms of health insurance, out-of-pocket expenses are your share of covered healthcare costs, including the money you pay for deductibles, copays, and coinsurance.
  • Health insurance plans have an out-of-pocket maximum that caps the amount you pay each year for covered healthcare expenses.

Understanding Out-of-Pocket Expenses

Employees often spend their own money on business-related expenses. These out-of-pocket expenses are typically reimbursed by the employer, using a specific, company-approved process. Common examples of work-related out-of-pocket expenses include airfare, car rentals, taxis/Ubers, gas, tolls, parking, lodging, and meals, as well as work-related supplies and tools.

Health Insurance Out-of-Pocket Maximums

In the health insurance industry, out-of-pocket expenses refer to the portion of the bill that the insurance company doesn't cover and that the individual must pay on their own. Out-of-pocket healthcare expenses include deductibles, copays, and coinsurance.

Health insurance plans have out-of-pocket maximums. These are caps on the amount of money that a policyholder can spend each year on covered healthcare expenses. The Affordable Care Act requires all non-grandfathered group and individual plans to stay within annually updated guidelines for out-of-pocket maximums. For 2020, the out-of-pocket limits are $8,200 for individual coverage and $16,400 for family coverage. While plans can't have out-of-pocket maximums that are higher than these limits, many offer lower maximums.

What's the Difference Between Deductibles and Out-of-Pocket Maximums?

With health insurance, the deductible is the amount you pay each year for covered costs before insurance kicks in. Once the deductible is met, the policyholder "shares" the costs with the insurance plan through something called coinsurance. With an 80/20 plan, for example, the policyholder pays 20% of costs, while the plan picks up the remaining 80%.

The amount you pay for coinsurance—as well as your copays and deductible—all count toward the out-of-pocket maximum for the year. Once you reach your out-of-pocket maximum, the plan pays 100% of covered costs for the rest of the year.

Example of Out-of-Pocket Expenses

Here's an example of work-related out-of-pocket expenses. Assume an employee has a meeting with a potential client. The employee spends $250 on airfare, $50 on Uber rides, $100 on a hotel, and $100 on meals—all charged to their own credit card. After the trip, the employee submits an expense report for $500 for their out-of-pocket expenses for the trip. The employer then issues a reimbursement check for $500 to the employee.

Other Types of Out-of-Pocket Expenses

In the real estate industry, out-of-pocket expenses refer to any expenses above and beyond the mortgage itself that the buyer incurs through the sales process. These costs vary depending on the property and real estate laws in the area, but they typically include the cost of a home inspection, appraisal fees, and escrow account deposits. They also include closing costs, which can include loan origination fees, attorney fees, and property taxes.

Out-of-Pocket Expenses and Tax Returns

Some out-of-pocket expenses can be from your personal income taxes. For example, income tax deductions are still available for expenses related to charitable donations and unreimbursed medical expenses. Since passage of the Tax Cut and Jobs Act, however, individuals can no longer deduct un-reimbursed business expenses. While tax deductions don't represent a direct reimbursement, there is an ancillary benefit, as claiming these expenses as a deduction can lower your tax burden for the year.