Kevin Colby: News, culture, political blog

Well, it’s that time of the year again for open enrollment with your employer.  Clark Howard wants to make sure that you take advantage of the Flexible Savings Account that your employer offers.  This is a way to take tax money back from Uncle Sam. It’s like getting an automatic raise.

Here’s how it works: You elect to have your employer automatically deduct money out of your gross pay. That money is essentially put into a savings account funded with pre-tax dollars. Then over the course of 2009, you can take those pre-tax dollars and use them for qualified medical expenses.

A Flexible Spending Account (FSA) is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer.  An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Money deducted from an employee’s pay into an FSA is not subject to payroll taxes resulting in a substantial payroll tax savings.

The most common FSA, the medical expense FSA (also medical FSA or health FSA), is similar to a health savings account (HSA) or a health reimbursement account (HRA). However, while HSAs and HRAs are almost exclusively used as components of a consumer driven health care plan, medical FSAs are commonly offered with more traditional health plans as well. An FSA may be utilized by paper claims or an FSA debit card also known as a Flexcard.

One drawback though:  You’ve got to use it or lose it. If there’s unused money left over at the end of the year, you won’t get it back.

The health care FSA can be used to take care of un-reimbursed medical bills like deductibles, co-pays, medications, eyeglasses, etc. It can be funded up to a limit of $5,000 annually.

A recent change in the law now allows you to apply your 2009 money to qualifying medical expenses incurred in the first 2 months and 15 days of 2010. This modification was put in place in 2007 to make people feel comfortable about contributing to their FSAs.

The second type of FSA is for dependent care. For example, you can use the money in this FSA to pay for daycare or a legal nanny. The same $5,000 limit and forfeiture rules apply. Other qualifying uses of this money include paying for an elderly relative or other adult who needs special care.

Read more about Flexible Savings Accounts.