Suze Orman Money Matters

The future of how -- and most importantly how much -- Americans pay for health care is getting plenty of attention these days on the campaign trail. But it's just a lot of talk at this point.

Even if any new major health care initiative gains traction during (and after) the presidential election, it'll probably be close to two years at minimum before any meaningful legislation is passed. And no one has a clue what it could ultimately mean for consumers.

It Pays to Be Flexible

So what should you do in the meantime? Well, if you work for a firm that provides health insurance coverage, you're probably about to endure the annual push to get you to decide which benefits to sign up for in 2008.

I urge you to give serious thought to signing up for a flexible spending account (FSA) if your company offers such a plan. According to Mercer Consulting, although more than 80 percent of large firms offer FSAs, just 20 percent or so of eligible employees take advantage of them. That makes no financial sense.

As you no doubt already know, employers are coping with their rising health insurance costs by shifting more of the bill to employees in the form of higher employee-paid premiums, higher co-pays, and reduced benefits. (Translation: You pay for some procedures that years ago were covered by the plan.) And chances are your share of your health care costs are going to continue to rise.

FSA 101

Preliminary results from a recent Mercer survey reports that 56 percent of employers plan to require employees to cover more of their health care costs in 2008. Rising costs can come from any number of changes in your plan: requiring you to pay more of the premium; imposing higher deductibles; boosting the employee co-pay; and raising the annual out-of-pocket maximum you're liable for. Given the trend toward pushing costs on to employees, using an FSA has never been more valuable given the tax advantage offered in most such plans.

Here's a quick FSA refresher course: With an FSA you can have money deducted from your paycheck on a pre-tax basis, which you can then use to cover many health care costs you (rather than your plan) are responsible for. That includes your deductible, any co-pays, and a plethora of "other" types of costs not typically covered by insurance plans, from eyeglasses to orthodontia to over-the-counter medicines.

Even though health care insurance premiums aren't directly payable through an FSA, there's a strategic way to use the FSA to help you deal with premium costs. As with your home and auto insurance, you can typically lower your premium cost by increasing the deductible you're willing to pay. If you then set aside money in an FSA to cover that deductible, you'll be able to pay it with pre-tax dollars.

Tax Advantages Abound

I realize the last thing many of you can afford is to have yet more money deducted from your paycheck; you may feel like you need get every penny of it you can manage into your checking account. But step back and realize that you're stuck paying for these health care costs regardless, and an FSA provides a valuable tax break that can save you anywhere from 20 percent to 40 percent or so.

For example, if you're in the 28 percent federal tax bracket, setting aside $4,000 in an FSA to pay for your family's uncovered health care costs nets you a tax savings of $1,120. Add in the fact that you're shielding that $4,000 from FICA tax (the tax that funds Social Security and Medicare) as well, and your savings will be even more.

Obviously, if you're hit with state income tax, too, using an FSA reduces your state's bite of your paycheck. (And if you have young children in day care -- or an adult who lives with you and you claim as a dependent -- check if your employer offers a dependent care FSA; just like the health care FSA, you can use pre-tax dollars to pay for qualified dependent care costs.)

Rethinking Flexibility

If your reluctance to use an FSA stems from the "use it or lose it" provision, it's time to revisit the topic. While it's still true that any money left in your FSA at the end of the year is indeed forfeited back to your employer, the IRS changed its definition of a plan year for FSAs: Instead of the standard 12 months, most plans now give you 14.5 months to use up your FSA money.

For instance, your 2008 FSA that starts on Jan. 1, 2008, can be used through March 15, 2009. In my opinion, that extra time makes it far easier to assure that you won't leave any money on the table. Even if you get to December 2008 and realize you still have money sitting in the account, you have another two and a half months to drain the account.

Besides, it only takes a little bit of planning to get a good conservative estimate of your out-of-pocket health care costs. For starters, take a look at what you spent in the past year. Then think through any new costs you can anticipate, such as orthodontia or elective surgery. Ask your HR department for a complete list of all expenses that can be paid through your FSA. You may be surprised at all the types of charges that are FSA-eligible. For example, you may be able to use your FSA to cover costs associated with fertility treatments, acupuncture, and LASIK eye surgery.

Another new development is that many employers are issuing debit cards for employees to use when they have an FSA-covered expense. So instead of the old system that required you to pay upfront and then file for reimbursement, you can now pay directly with a debit card. If the paperwork is what kept you from participating in the past, you just lost that excuse.