Don't Overlook Flexible Spending Accounts.

• Position: Brief Article - Statistical Data Included

One of the best fringe benefits offered by many employers is also one of the most overlooked by employees--flexible spending or reimbursement accounts. These accounts allow you to save tax dollars on money you spend for dependent or health care expenses. The Financial Planning Association, Denver, Colo., explains how they work and why they can be a good deal:

Say your employer offers a flexible spending account (FSA) for health care. You direct your employer to set aside from your paycheck a certain amount of money for the year to be credited to the account. It usually isn't taken out all at once, but spread out over the year. If the total amount is $1,200, the employer would take out $100 a month (some employers require larger upfront payments). As you incur unreimbursed medical expenses, such as co-pays, the account pays you back, up to the total set aside.

The money the employer deducts from each paycheck is before taxes--like money taken out for a retirement plan, only better. Say you have $3,000 set aside in an FSA. If you are in the 28% Federal income tax bracket, you will save $840 on your tax bill. Without the FSA, you'd have to earn $1.39 to buy $1 worth of health care. In essence, Uncle Sam subsidizes a portion of your health care costs. Obviously, the tax savings are more the higher your tax bracket. With the exception of a couple of states, you also can save state and local taxes. Furthermore, unlike money deducted for retirement plans, the money set aside for an FSA is not subject to Social Security and Medicare taxes, though this could reduce the amount of Social Security benefits you are entitled to when you retire.

The Federal government doesn't limit how much you can set aside in an FSA for health care as long as it doesn't exceed your income. However, most employers cap it at $2,500 to $5,000. Federal law limits the dependent care FSA deductions...