How Flexible Spending Accounts Can Save You Big Bucks

(MoneyWatch)  Four days left in benefits open enrollment through my husband's company. This is the two-week period when we can make our 2011 choices for things like health care and dental plans, as well as allot money for flexible spending accounts.

So I spent 20 minutes this morning looking at the flexible spending elections for our medical savings and dependent care accounts. I feel like we can really save some money here, and it's important to try to make an accurate prediction. Allot too much, and you lose it at the end of the year. Put away too little, and we'd be missing out on tax savings.

My sweet husband, a wordsmith but not much of a numbers guy, needs a review on this every November. And frankly, I'm always a little surprised by the savings. These examples are round numbers for simplicity's sake, but check them out:

Say you're a couple, both working, earning a combined $100,000 a year. You spend $5,000 annually for daycare for your kids while you're working. If you don't bother with one of these dependent care accounts, you earn your $100k, and let's estimate you pay 25% taxes on it. So now you're down to $75,000. Then you pay your $5,000 daycare bill - which leaves you with $70,000.

Now, assume you do enroll in a dependent care account. So you set aside $5,000 for the daycare costs. Your taxable income is now $95,000. Pay your 25% taxes on that, and you're at $71,250. You've just saved yourself $1,250. Which makes clipping coupons or harassing Verizon seem like small potatoes in comparison.

Putting aside even $1,000 in a flexible spending account, whether it's for medical expenses, dependent care, or commuting costs, saves you $250 in the above example.

The law is changing so that in 2011, medical spending accounts can't be used for over-the-counter medications unless you have a prescription, and even then you'd have to pay for them first and submit for reimbursement later. So things like cough medicine, painkillers and allergy meds (I paid $16 for 10 Claritin D pills at CVS last week) are a lot harder to claim.

I called the company that administers our medical savings account and asked if they could itemize what we spent on those items this year. They couldn't. I suppose I should have kept better records, but I'm guessing, Claritin aside, it wasn't a huge amount. I'll knock $100 off what we've contributed to our medical spending account in the past. Better to err on the conservative side, because if we end up with an end-of-year surplus, we won't be able to stock up on OTC drugs. (You can still load up your cart with Band-Aids and contact lens solution, but really, how many Band-Aids does a family need?)

There's still plenty of guesswork involved. As the kids get older they seem, fingers crossed, to be a little healthier. They need only one well visit per year, unlike the five or so babies need in their first year. On the other hand, as my husband and I age, we seem to be racking up more tennis and triathlon injuries, necessitating visits to the sports med doc with the accompanying $40 copays. And the ophthalmologist. Can't forget him. So maybe it balances out?

The dependent care reimbursement is also tricky. As a freelancer, my work hours ebb and flow. So I'm trying to judge how much I'll be working this upcoming year. Will I need to pay for after-school care? Summer camp? I'm giving it my best guess, low-balling a little, because if I overestimate, I can't get the money back.

Feeling confused? Call up HR. I had a pleasant, informative 10-minute call today with the benefits specialist listed on the open enrollment brochure my husband's company puts out. I would urge you, if you have any questions, to call these people. They have a wealth of information, and it's their job to talk to you. Even if you're the spouse and not the employee.

Photo courtesy Flickr user Creative Tools, CC 2.0

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