Ok Mamma, I know this is a rough one. I write a lot about parenting tips and awesome products, but I’m also SUPER passionate about financial independence. I believe that in order to be the best parent you need to set your family up for success (which starts with getting out of debt, but that’s another story). It’s impossible to be 100% present and engage with your kids if you’re worried about how to pay your electric bill. One of my favorite money-saving strategies is to simply pay for more things tax-free, whenever possible. There are a few very simple changes you can make when applying for insurance coverage that will save you lots of money by simply reducing the amount of taxes you’re paying. Open Enrollment was always a stressful time for me as I tried to figure out how to maximize my insurance benefits while choosing only the plans I needed. If you want some quick tips on how we save lots of $$, keep reading!
With these accounts and health insurance benefits plans there isn’t really a strategy to be had. The main way you “save” money with these is by putting money into the account tax-deferred. I’m going to run through a quick example, so you can see what I mean.
Let’s say you’re in the 25% tax bracket and have a $100 medical bill.
With a typical high premium/low deductible account, you’d pay that $100 out of your wallet, which means you needed to earn $134 to pay the bill.
Taxes (25%) = $33.5
Net Income to your Wallet = $100.5
Doctor’s Bill = $100
Leftover = $0.50
With a tax-deferred Health Savings Account (HSA), you put your gross paycheck dollars in tax-free to pay medical expenses. Let’s keep with the same example of a $100 doctor’s bill.
Taxes (25%) = $0
Net Income to your HSA = $134
Doctor’s Bill = $100
Leftover = $34 (for your next appointment)
With just one doctor’s appointment, you can already see why an HSA can be a huge benefit!
Top Plans & Accounts you Need to Maximize Tax Advantages
Health Savings Account
Overview and Benefits: This is typically an 80/20 plan that allows you to put in money tax-deferred. Once we hit our deductible, the plan pays 80% of the cost of the bill, and we’re responsible for 20%. Like a traditional health care plan, there are in and out of network out of pocket maximums for annual expenses. Additionally, each plan has a maximum annual family contribution you add in for all your health care expenses. The best news is that this account grows like a money market account, moves with you if you change employers, and doesn’t expire at the end of the year. You reap all the rewards without the worry.
The cons: You’ll have a higher out of pocket deductible than some other plans, so you’ll need to be able to cover an upfront deductible of a few thousand dollars before the plan kicks in. You’ll get the tax break, so be sure to factor that into your calculations as you determine whether this is a good value for your family.
Flex Spending Account (FSA)
Another good option is to use a flex spending account if you decide the HSA plan isn’t for you. We used one of these for years with our low deductible plan. The plan covered 90% of expenses and we had a very low deductible for it to kick in. The tradeoff was that our monthly premiums were much higher, but we liked it because this kind of plan helped us plan our healthcare expenses. We never had a huge bill to pay and we were still able to utilize an FSA for tax benefits.
Overview and Pros: The FSA works exactly like an HSA in that your paycheck is contributed automatically and is tax-deferred. However, there are additional stipulations with an FSA that don’t exist with an HSA.
Cons: The FSA maximum was $2,500 per year. Our healthcare bills are higher than that, so we missed out on some savings. The FSA needs to be used within one fiscal year. There is a grace period, but it doesn’t carry over year over year, earning interest. It also isn’t transferrable. Meaning, you can’t keep the account if you move plans to another employer.
Childcare Flex Spending Account
A childcare FSA also feels like a no-brainer. This is an account you can use much like the healthcare FSA. You’ll have your paycheck deposited into the account and can request reimbursement for daycare, babysitter, or nanny expenses. Our family max is $5k, which doesn’t even cover half of our annual childcare expenses, but any savings is better than nothing!
You can have the childcare FSA in combination with the healthcare FSA as they’re used for different things. However, you may not have both the HSA and healthcare FSA. You’ll need to choose a plan with one or the other.
Do I have to make these changes during Open Enrollment?
My employer only allows changes during Open Enrollment or with a qualifying life event like marriage, divorce, or the birth of a child. My husband is under the same restrictions. If you’re signing up for new coverage you can just choose the plan you want at that time. I wouldn’t assume if you’re going through a traditional employer health care plan that you would be able to make a change mid-year, but it’s always worth it to check with your insurance benefits administrator.
I’ve always been given at least two weeks to weigh the options of each health care plan and make the best choices for myself and our family. However, if you’re on a tight timeline it might be worth it to review your employer’s prior year plan options to help you make decisions. Costs do change year over year, but you’ll probably have the same general options available. For instance, we knew we would never go to the “lowest” coverage plan available. Although it has the cheapest monthly cost, it also has the highest out of pocket expense and we both go to specialist doctors fairly often. This was an easy one to weed out before Open Enrollment even began.
With all the options out there, Open Enrollment can be a confusing time. However, once you understand the tax benefits of these options, the choices are much clearer. You do need to be able to afford the higher deductible and co-insurance amounts, but if you’re financially secure month to month the savings are significant with a few specific choices.
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Hope this helps as your open enrollment windows come up this Fall!