The FLAC Winamp plug-in seems to work pretty well. When you try tagging, it gives a warning about not being able to update the tag, but appears to save the info anyway.
"What does "lossless encoder" mean? Does it improve the sound? Make smaller files?"
There are two types of encoders, lossy (mp3, mpc, ogg, wma, aac) and lossless (flac, ape, lpac, and others). If you are encoding a .wav file, for example, a lossy encoder analyzes the audio data and decides which parts are inaudible and can be thrown away and which parts to keep. That's how a 60mb .wav can be compressed down to a 6mb mp3. More and more data gets thrown out as you increase the compression rate, but then you are more likely to notice differences in the way the compressed file sounds when compared to the original.
A lossless encoder compresses a file without throwing out any audio data, but probably the most compression you can get is about 50%. So, a 60mb .wav would probably be somewhere around 30-35mb (Monkey's Audio generally gives the highest compression rates for a lossless encoder). You should not be able to hear any difference between a lossless encoded file and the original.