Next Monday -- Dec. 12 -- is the big deadline. That's when open season ends for enrolling in a flexible spending account and for switching to a new health insurance plan.

An overwhelming majority of federal employees (and retirees) understand the importance of health insurance coverage, but not that many federal employees (about 10 percent) participate in FSAFEDS, the flexible spending account program administered by the Office of Personnel Management.

Compared with health insurance, FSAs are relatively new to federal employees. The government introduced them in June 2003 as a way to use pretax salary dollars to pay for some costs not covered by health insurance and to reduce the expenses of dependent care, especially child care.

FSAs come with a few basic rules to keep in mind:

* You must enroll in FSAFEDS each year to participate. Enrollment does not roll over from year to year.

* You face contribution limits: $5,000 for a health care account (which can be used to pay for prescription drugs, orthodontia, eyeglasses, hearing aids and over-the-counter products, such as aspirin ) and $5,000 for a dependent-care account (which typically means child care and elder care).

* You "use it or lose it" -- that's the Internal Revenue Service rule. Participants forfeit unused balances, although the IRS recently agreed to give enrollees 141/2 months to spend down their accounts. (The IRS also does not permit retirees to set up FSAs because contributions must come from pretax salary dollars.) If you've never enrolled in an FSA, all this can come across as fairly confusing. On the Nov. 30 Federal Diary Live, several readers asked questions about the mechanics of FSAs and received advice from Laura J. Lawrence, chief of the FSA, Life and Long Term Care Insurances Group in OPM's Center for Retirement and Insurances Services.

A question from the online discussion touched on a common concern of federal employees -- that they believe they cannot afford a payroll deduction for an FSA and also pay their weekly child-care expenses.

Asked about this concern, Lawrence offered the example of a federal employee who pays $400 per week for day care and wants to set aside the maximum allowed, $5,000, in the dependent-care FSA.

The maximum FSA contribution works out to a paycheck deduction of $192.31 over 26 biweekly pay periods, Lawrence said.

In this scenario, you, the federal employee, pay $400 to the day-care provider in the first week of January. On payday, the agency sends $192.31 to FSAFEDS.

After paying for the day care, you submit a $400 claim to FSAFEDS and, when the payroll deduction shows up at FSAFEDS, it transfers $192.31 to your bank account.

You send in the rest of your $400 weekly claims -- 13 in all -- for reimbursements up to your annual limit, $5,000. By June, you have hit the limit and no longer have to submit claims for reimbursement.

For the rest of the year, FSAFEDS collects $192.31 each pay period and deposits it back into your bank account.

But, Lawrence pointed out, you are reaping tax savings each pay period, because federal income tax -- and probably your state income taxis not collected on FSA dollars. In this scenario, the "true" biweekly cost to our federal employee ranged from $115 to $153, depending on the tax bracket, she said.

Federal employees who are wary about using FSAs can start with a small payroll deduction and see how it works. In most cases, employees would have spent the money anyway on such routine expenses as over-the-counter drugs.

"With an FSA, you'll have an additional benefit of using pretax dollars," Lawrence reiterated. "That is free money."

For more information, check out the federal program's Web site,, which provides a calculator. You've got a week left to crunch those numbers.


Rich Freethey, chief of the Coast Guard office of procurement management, retires Jan. 3 after 32 years of government service. He previously served in the Army, the Government Printing Office and the departments of Housing and Urban Development and Transportation.

Judy Vasey, a senior special agent at Immigration and Customs Enforcement, retired Nov. 30 after 331/2 years in law enforcement. She began her career with the D.C. police department and, in 1982, became the first female special agent in the new Environmental Protection Agency criminal investigations division. She transferred to the U.S. Customs Service in 1988.