The Finance Buff

This is the fourth installment of the Open Enrollment mini series. Previous posts in the series were

• Open Enrollment, Part 1: Health Care
• Open Enrollment, Part 2: Life Insurance and AD&D
• Open Enrollment, Part 3: Disability Insurance

I cover flexible spending accounts in this post.

A Flexible Spending Account (FSA) allows you to set aside money before tax and pay for health care and dependent/child care using pre-tax dollars. It’s a great deal because you get to use pre-tax dollars. Not only you don’t have to pay federal and state income tax on your deposits to the flexible spending accounts, you also get to avoid Social Security and Medicare tax. The only catch is “use it or lose it” — you lose what you can’t use. Because there are many ways to spend the flexible spending account money, and because the tax savings is substantial, you have to be way off in your estimate to lose money in an FSA. For 2007, you also have 2.5 months more time to use up your FSA. If you find yourself sitting on a big balance in your FSA next November, just reduce your contribution for 2008 and use up you existing balance by March 15 2008.

There are two kinds of FSAs, health care and dependent care, each has its own separate “bucket.” Deposits into one type can be used only for that purpose. You can’t use Health Care FSA to pay for child care and you can’t use Dependent Care FSA to pay for health care. You can’t transfer funds from one bucket to the other either.

1. Health Care Flexible Spending Account

Health Care FSA can be used to pay for health insurance deductibles, co-pays, medication or services not covered by the health plan, OTC drugs, even contact lens solutions and condoms. Just make a ballpark estimate of how much you will spend on this type of things. Be a little conservative if you want (who plans to be sick anyway?). I’ve been using around $1,000 for the two of us and we never lost any money.

2. Dependent Care Flexible Spending Account

This is typically used for day care expenses for your child. People usually have a very good handle on the need because they know how much day care costs. The maximum a family can contribute is $5,000 a year and people tell me that they use up that limit pretty easily.

This concludes the Open Enrollment series. I hope you find these useful. Any comments?

Related Posts:

• Open Enrollment, Part 1: Health Care
• Open Enrollment, Part 2: Life Insurance and AD&D
• Open Enrollment, Part 3: Disability Insurance