By Margarette Burnette
Bankrate.com
The final few months of the year mark the open-enrollment season for benefits at many companies. This is the perfect time to consider opening a flexible spending account, or FSA, a workplace benefit that helps you pay certain bills while reaping big tax savings.
Health care and dependent care FSAs allow employees to set aside money to pay for qualified expenses. Each pay period, your company deducts an agreed-upon amount from your check on a pretax basis and deposits it into the flexible spending account.
After incurring a qualified expense, you can be reimbursed with tax-free withdrawals from the FSA.
Flexible spending accounts can be great money-savers, but they come with a catch -- they are use-it-or-lose-it accounts. If you don't claim all of your money for the plan year, you forfeit the remaining funds.
"I think when people hear about FSAs, they're reluctant to sign up when they find out they can lose the money," says Natalie Kaufman, a human resources manager with Altier Credit Union in Tempe, Ariz. "But if you take the time to look at them, each of us can come up with opportunities to save taxes on those accounts."
Six Ways to Capitalize on FSAs
1. Review the past year's costs. At the beginning of each plan year, you decide how much money to put into your flexible spending account. To avoid leaving money in your flexible spending account at year's end, estimate how much you'll spend next year for qualified out-of-pocket medical or dependent-care expenses.
Typically, health care FSAs can be used to pay for most expenses not covered by your health insurance plan, including co-payments, deductibles and prescriptions. Meanwhile, dependent-care FSAs cover qualified child care and elder care expenses.
A good way to predict future spending is to look at past costs.
"For every medical procedure that you've had done, you should receive an explanation of benefits (from your health insurer) that tells you what the actual cost of your procedure was, what the negotiated rate was and what you paid out of pocket," says Mark Woody, a human resources project specialist at Ent Federal Credit Union in Colorado Springs, Colo. "If you're good at holding on to those forms, you can get a good idea of what you're spending in medical expenses."
Don't forget to include recurring expenses when figuring out your planned FSA contribution for next year. For a health care FSA, these may include purchasing prescription drugs, over-the-counter medicines and contact-lens supplies. For a dependent care FSA, these may include adult day care or child care.
Even if you have misplaced the paperwork or receipts related to these expenses, there are other ways to find this information.
"Many insurance companies today have personalized Web sites where you can look up your past history and explanation of benefits," Woody says.
Next: 2. Set aside money for major work. >
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