Vast Majority of Workers Skip Tax-Saving FSAs

About 10 percent of federal employees set up flexible spending accounts this year. That leaves a lot of people missing out on a nifty tax break.

Take a look at the math:

Janet Fed earns $50,000 a year. She makes a $2,000 pretax contribution to her FSA, bringing her taxable income down to $48,000. She then pays $11,842 in Social Security and federal income taxes, instead of $12,495.

That's a savings of $653 in taxes.

Janet Fed can use some of the $2,000 she set aside to pay for health care -- prescription drugs, over-the-counter products such as aspirin and pain relievers, orthodontia, eyeglasses, hearing aids and other expenses not covered by her health insurance.

She can put some of the money in a dependent-care account -- for child care, at a day-care center or for a private sitter, to cover late pickup fees from child care, or to pay for adult day care for an elderly parent.

Tax savings are available to federal employees in every General Schedule grade. A GS-5 earning $27,969 -- in the 15 percent tax bracket and including Social Security -- would save $226.50 in taxes by making a $1,000 contribution into an FSA. A GS-14, earning $86,353, in the 28 percent tax bracket, would save $1,782.50 in taxes with a $5,000 payroll deduction for an FSA.

"Federal employees work too hard for their salaries to give any of it away. But that's exactly what happens when they pay for medical or child-care expenses with out-of-pocket dollars, instead of dollars from their FSAFEDS account," said Frank D. Titus , assistant director for insurance programs at the Office of Personnel Management.

Flexible spending accounts have been around since 1978 and are increasingly popular in the private sector. The Employers Council on Flexible Compensation estimates that 20 to 25 percent of private-sector and state and local government employees enroll in FSAs.

FSAs, however, are relatively new to federal employees, and that may account for why only 10 percent of the 1.8 million workers are enrolled. OPM set up the FSAFEDS program in June 2003, with SHPS Inc., a health care company in Louisville, as the administrator. After its launch, OPM combined the annual FSA sign-up with the "open season" for enrollment in the federal health insurance program.

This year, the enrollment season for FSAs and health insurance starts Nov. 14 and ends Dec. 12. There are a few rules to keep in mind: