A new report by the Office of Personnel Management says that 117,950 employees opened a health care FSA and 18,178 enrolled in a dependent care account for the 2004 plan year.

By 2007, OPM projects that more than 283,000 federal employees will have health care accounts and 43,627 will have set up dependent care accounts, the report says.

FSAs allow employees to allot pretax dollars to cover out-of-pocket health care and dependent care expenses. For an employee with a taxable income of $50,000, setting aside $2,000 in an FSA will produce tax savings of $576 annually, OPM estimates.

The accounts have long been popular in the private sector but were offered on a government-wide basis only last year.

Under the federal program, employees may set aside as much as $4,000 in their health care account, which can be used to reimburse medical, dental and vision expenses not covered by health insurance. Employees may designate as much as $5,000 annually for deposit in a dependent care account, a popular way to pay for child care.

Kay Coles James, the OPM director, said FSAs work to the benefit of employees and agencies, which are required by law to shoulder the program's overhead costs.

"Employees benefit because untaxed contributions from their salaries are deposited into their FSA accounts, and the lower employee taxable income translates into agencies paying out less in Social Security and Medicare taxes," she said in a statement. "And because agencies pay less in taxes, they more than recover the cost of paying FSA administrative fees."

The OPM report says agencies will pay about $80 million in fees through 2007 for employees who open FSAs.

For this year, OPM estimates that agencies will pay more than $5.6 million in fees to administer the health care accounts and about $980,000 to administer dependent care accounts.

In general, OPM said, agencies will save $20 in payroll taxes for each employee who participates in the FSA program.

The report says that the fee charged for administering the health care accounts has grown from $4 per employee per month in 2003 to $7.50 per employee per month this year. The higher fee, the report says, will cover "the additional administrative costs and risk of overpayments" related to an Internal Revenue Service decision late last year to allow FSA reimbursements for over-the-counter drugs.

The additional $3.50 charge will be set aside in a reserve fund "and will be adjusted -- up or down -- in future years based on actual experience as well as review by OPM," the report says.

The FSA program began taking enrollments in June 2003 and operated for less than six months at some agencies last year because payroll computers had to be reprogrammed. For 2003, 28,356 employees opened a health care account and 7,003 employees had a dependent care FSA, the report says.