Flexible Spending Account (FSA) is the third thing I want to discuss in this benefits series (see Part 1 - 401(k), and Part 2 - Life Insurance). FSA allows employees to divert some pre-tax income for important purposes like dependent care and medical expenses. Microsoft benefits package offers two types of FSA: Dependent Care FSA and Healthcare FSA. While FSA is a useful tool, there is also a catch (from IRS): you will lose anything you left over in FSA by calendar year end.
If you stayed with me during the last benefits enrollment season, you know the choice I made last time: I signed up for $200 pre-tax deduction for Healthrecare FSA to cover some dental deductibles and OTC drugs, and I chose to put nothing to the Dependent Care FSA as I didn't have visibility for my child care cost for 2004.
SmartMoney refers to Healthcare FSA as "the only tax break available on medical expenses for most people these days." I totally agree with that. And my signup for this year's $200 contribution now appears to be a successful deal. I only have about $20 left over in the account and I can pick up some OTC drugs to fill the bill. (If you cannot find good ideas about using up your remaining Healthcare FSA balance, consult this "Use It or Lose It" feature from SmartMoney.)
For next year, my wife's dentist already identified that she needs a new crown for her, which will cost about $750. I also may pay out a few hundred bucks for my teech. From my experience this year, we are also incuring out-of-pocket medical expense here and there in lots of OTC drugs. With this in mind, I will sign up for $1,400 into Healthcare FSA for 2005.
Dependent Care FSA
Previously, I discussed why Dependent Care FSA is a superior deal than taking Dependent Care Tax Credit during tax time. I cannot regret my decision not to put anything to Dependent Care FSA; I explained I didn't have much visibility back then. Now my two-year-old has been in daycare for the last five months and is burning $940 a month for us for daycare expenses every month, it is the right time to sign up for the maximum of Dependent Care FSA; I will ask to deduct the maximally allowed amount of $5,000 for Dependent Care FSA.
One of the hidden benefits of FSA is cashflow improvements. Deductions toward FSA will be distributed evenly across the year, but FSA account owner can use all the money up to the annual commited deduction even before a dime is deducted. In the case of my Dependent Care account, I will pretty much use up the $5,000 by June, and I will only have $2,500 deducted from my paycheck by then. In other words, I will be able to earn a float worth a couple of grands for several months. Who can say it is not a good deal?
Read The Complete Benefits 2005 Series:
Benefits 2005, Part 1: 401(k)
Benefits 2005, Part 2: Term Life Insurance
Benefits 2005, Part 3: Flexible Spending Accounts
Benefits 2005, Part 4: Accidental Death and Dismemberment
Benefits 2005, Part 5: Everything Else