Should You Use an FSA?

My sister asked me the other day if she should set up a Flexible Spending Account (FSA). Of course, my answer was yes! You’re able to set aside money for healthcare or childcare/dependent expenses on a pre-tax basis when you create an FSA. In her case, she was asking this question because she is in the re-enrollment period for her company-sponsored health insurance. Many of us are in the same boat, that have healthcare plans that begin July 1st.

A flexible spending account is a great, tax-advantaged tool that can help you save for health and dependent care expenses. Tax-advantaged means you can automatically transfer money from your paycheck into the FSA, prior to taxes being taken out. It is a win-win. You save money on taxes and have money set aside for eligible healthcare and dependent care expenses.

Tax-advantaged or pre-tax dollars means that the money is set aside before taxes (Federal, FICA, and State) are taken out of your paycheck. Setting money aside in this way, before taxes, has two benefits: (1) Setting this money aside before taxes lowers your end-of-year tax bill. When the money is set aside, prior to taxes, it is though that money never existed. (2) Because the money is going into the FSA account before taxes are taken from it, you get a little extra – because the taxes were not deducted.

The draw-back to an FSA account is that it’s a “use it or lose it” account; you either use your money by the end of the year or forfeit it. Calculating how much you want to put into the FSA account is very important and if this is your first year using one, I suggest that you underestimate. Although, there is some flexibility as you roll into the next year, and you can reassess your needs during your open enrollment period. For more information, read the factsheet that I co-wrote on Flexible Spending Accounts. 

Do I Need a Different Insurance Plan?

Health insurance can be confusing. We are often asked in a short period of time to commit to a plan for an entire year. We are confused with terms such as premium, deductible, and co-pay and plan types such as a PPO (Preferred Provider Organization) and HMO (Health Maintenance Organization). In most cases you only have once a year, during open enrollment, to change plans. It helps to start thinking about your current plan and future needs early to be prepared to make those changes during the open enrollment window. 

I will share a few reasons why you may consider changing plans. 

Health Care Providers/Doctors – Depending on the type of plan you have, health insurance companies enter into agreements with health care providers and doctors, which involves pre-determined prices for services. Health care providers/doctors in this agreement are referred to as “in-network.” If you see a provider that is not in-network, or “out-of-network,” you often pay higher prices. In some cases, you may have a provider that you like to use which is not in your network. If that is the case, you may decide to change plans during the next open enrollment.

Premiums/Deductibles – Some people choose a plan based on how much it costs them on a monthly basis. Those monthly payments are referred to as premiums. Deductibles are how much you need to pay before the insurance plan begins to pay. Deductibles vary in amount depending on the plan type. Typically, lower premium plans have a higher deductible, and higher premium plans have lower deductibles. Individuals that don’t use their plans often choose a low premium/high deductible plan. You may change a plan based on how you used the plan in the previous year or how you anticipate using a plan in the coming year.

Plan Type – There are four different plan types which offer various levels of flexibility in the healthcare providers you use. Information about the types of plans can be found here.  Some require that you stay within the plans network while others provide more flexibility. Some plans require a referral to see a specialist and others may not. The level of flexibility you want in your health insurance will determine which type of plan you select.

Change In Use – We typically select plans based on the information we have at the time. Over the course of a year, the reasons you chose that plan may change. Changes in your health or in needs for life like planning for a family, may affect when and how often you use your insurance plan. You may anticipate using the plan more often than the previous year and decide you want a plan with a lower deductible as a result. You may want to see a doctor that is not in-network and decide to change plans to ensure you visit your preferred doctors.  

It is not uncommon for someone to change plans. Just make sure you select a plan that best meets your needs. The Health Insurance Literacy Initiative at University of Maryland Extension developed resources to guide you through the process.