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Financial Education for Everyone

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September 28, 2012

Over the next few weeks, millions of Americans will receive their 2013 open enrollment materials. Although it's tempting to simply check "same as last year," that can be a costly mistake – especially if your employer is offering different benefit plans next year or your family or income situation has changed.

Plus, an important feature of health care flexible spending accounts, which many people use to reduce their tax bite, is changing next year (more on that below).

Here's what to look for when reviewing your benefit options:

Many benefit plans – especially medical – change coverage details from year to year. If you're offered more than one plan, compare features side by side (including plans offered by your spouse's employer) to ensure you're choosing the best alternative. Common changes include:

  • Dropping or replacing unpopular or overly expensive plans.
  • Increased monthly premiums for employee and/or dependent coverage.
  • Increased deductible and/or copayment amounts for doctor visits, prescription drugs, hospitalization, dental or vision benefits, etc.
  • Revised drug formularies.
  • Doctors and hospitals sometimes withdraw from a plan's preferred provider network.
  • Raising maximum yearly out-of-pocket expense limits.

If offered by your employer, health care and dependent care flexible spending accounts (FSAs) can significantly offset the financial impact of medical and dependent care by letting you pay for eligible out-of-pocket expenses on a pre-tax basis; that is, before federal, state and Social Security taxes are deducted from your paycheck. This reduces your taxable income and therefore, your taxes.

You can use a health care FSA to pay for IRS-allowed medical expenses not covered by your medical, dental or vision plans. Check IRS Publication 502 at www.irs.gov for allowable expenses. Dependent care FSAs let you use pre-tax dollars to pay for eligible expenses related to care for your child, spouse, parent or other dependent incapable of self-care.

Here's how FSAs work: Say you earn $42,000 a year. If you contribute $1,000 to a health care FSA and $3,000 for dependent care, your taxable income would be reduced to $38,000. Your resulting net income, after taxes, would be roughly $1,600 more than if you had paid for those expenses on an after-tax basis.

Keep in mind these FSA restrictions:

  • Important: Effective January 1, 2013, employee contributions to health care FSAs are now limited to $2,500 a year; however, if your spouse has FSAs at work, you still may contribute up to $2,500 to each account.
  • The dependent care FSA limit remains unchanged at $5,000.
  • Health care and dependent care account contributions are not interchangeable.
  • Estimate planned expenses carefully because you must forfeit unused account balances. Some employers offer a grace period of up to 2 ½ months after the end of the plan year to incur expenses, but that's not mandatory, so review your enrollment materials.
  • Outside of open enrollment, you can only make mid-year FSA changes after a major life or family status change, such as marriage, divorce, death of a spouse or dependent, birth or adoption of a child, or a dependent passing the eligibility age. If one of those situations occurs mid-year, re-jigger your FSAs accordingly for maximum savings.
  • You must re-enroll in FSAs each year – amounts don't carry over from year to year.

Also remember that if you marry, divorce, or gain or lose dependents, it could impact the type – and cost – of your coverage options.


This article is intended to provide general information and should not be considered health, legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.