It is insurance time soon. We have the option of a flexible spending account.
I wear glasses, and need new ones every year or so.
I take 2 thyroid meds because mine was removed. I have to take them. I take a couple of others as well.
I do not understand the FSA, and am not sure if I need one. I have about $100 USD in meds co-pays a month, and $25 co-pays for at least 8 doctor visits a year for blood work for the thyroid stuff.
My coworkers are better at adulting, and I do not want to ask around at work…
So do I need one, and how does it work? Thanks in advance.
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Disclosure: I have an HSA, which is similar but not exactly the same as an FSA. One crucial difference, I believe, is you *have* to spend the money in an FSA that year (with some very limited exceptions). An HSA also usually requires a high-deductible insurance plan, which I won’t get into here unless you ask.
The idea of both is the same. The government says “If you spend your money on these specific things (generally healthcare), you don’t have to pay taxes on that money.” This usually saves you a bit of money.
It’s easiest to understand after putting numbers to it. Here’s some super simplified ones.
Let’s say you make $10,000 in a year, and you get taxed at 10%. Normally, this means you pay $1,000 in taxes, leaving you $9,000 to spend. Suppose your healthcare costs are $1,000. You now spend $1,000 on taxes, $1,000 on health care, and have $8,000 to spend anyway you want.
If you have an HSA/FSA, you can instead deposit that $1,000 you spend on healthcare into that account. Once you do that, the government says “Okay, you don’t need to pay taxes on that money, only the other $9,000”. So now you pay $900 in taxes, still spend $1,000 on health care (from your FSA), and have $8,100 to spend anyway you want. So, by using the FSA, you essentially saved $100 you would have otherwise paid in taxes. The tradeoff is that, once the money is in your HSA/FSA, you are now restricted on what you can spend it on (namely, healthcare expenses). The idea is that, usually, you would have spent that money on healthcare anyway, so it’s a net benefit.
Unfortunately, it can be very difficult to figure out if, in your exact situation, you would end up with more money taking the FSA or not. There’s just too many factors, including what the rest of your insurance plan looks like (deductible, premiums, copay, coinsurance, in-network vs out of network, etc.)
In my case, it would have been really close either way, so I chose the HSA option for the following reason. With the traditional (non-HSA) plan, I pay the insurance company ~$100 every month no matter what (the premium). Then when I need care, I have a small deductible I need to spend out of pocket, then insurance helps pay for the rest. But insurance will only really help pay for things that are “in-network” and covered. For example, they might not consider couples counseling a valid expense they cover, so then I’m on my own for that despite paying them every month.
By contrast, with my HSA plan, I pay next to nothing in premiums, but I have a high deductible. This means I have to pay for a few thousand dollars of my care out of pocket before insurance starts to help out. However, I can spend that money from my HSA. So what I do is just deposit that ~$100 I would have paid on my premiums into my HSA, and use that to pay for health expenses. The nice thing about this is that the HSA can be spent on anything the government recognizes as healthcare, which is a *much* broader definition than my insurance company’s in-network / covered services. So I could pay for couple’s counseling from it and not need to negotiate with insurance at all (although in that case it may not count towards my deductible).
TL;DR an HSA/FSA gives you more flexibility on how you spend you healthcare money with the tradeoff of having slightly less predictable/consistent costs. In many (but not all) cases, this can save you money by letting you pay less tax.
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