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MEDICAL SET-ASIDE ACCOUNTS CAN PAY OFF BIG AT TAX TIME

SHARE MEDICAL SET-ASIDE ACCOUNTS CAN PAY OFF BIG AT TAX TIME

As companies try to help ease the burden of health-care costs, medical set-aside accounts are showing up on more benefits menus.

Few tax breaks are as generous. But there is an added burden on employees to anticipate expenses - and share risks: Money you've set aside but don't use is forfeited at the end of the year.The simplest health-spending accounts are those to which you allocate pretax dollars to pay for such out-of-pocket costs as eyeglasses or child care.

Many employers also offer dependent-care set-aside accounts, to which you can contribute as much as $5,000 in pretax dollars.

No matter what the setup, you have to specify ahead of time the amount to be put into the account. Then that amount is deducted from your paycheck.

The payoff comes at tax time: Money you've contributed is excluded from federal and, except in New Jersey and Pennsylvania, state taxable income.

The funds are also exempt from Social Security and Medicare taxes.

Say your combined federal, state, local and Social Security tax bracket is 40 percent. On every dollar you contribute to a set-aside account, you'll save 40 cents in taxes.

The key to making the most of the set-aside account is to estimate your expenses as closely as possible.

Begin with fixed costs - such as your health plan's annual deductible - then look at your total expenditures last year and what you expect to spend this year.

Losses from forfeited funds occur in 22 percent of accounts, at an average of $27 a year, according to Hewitt Associates, a benefits consulting firm, although track records improve over time as employees pinpoint probable expenses.

But because the tax breaks are so generous, you're likely to save money even if you don't use all the funds in your account.

Employees aren't the only ones assuming some risk. Your employer is required to reimburse claims up to your yearly maximum, even if you file for them early in the plan year, before you've contributed the full amount to your account.

If you then leave the company before paying in what you spent, your employer absorbs the loss.