Final answer:
When starting a flexible spending account, one should not ignore contribution limits. It is crucial to assess healthcare needs, determine eligible expenses, and understand the 'use it or lose it' rule, in addition to being aware of key insurance terms such as deductible, fee-for-service, and health maintenance organization (HMO). Proper budgeting is also essential for managing FSA contributions.
Step-by-step explanation:
Before starting a flexible spending account (FSA), an individual should perform several steps to ensure that they are making a well-informed financial decision. However, one action that is not recommended is (c) Ignore contribution limits. Instead, someone should:
- (a) Assess their healthcare needs: Estimate potential medical expenses based on past healthcare use and foreseeable medical needs.
- (b) Determine eligible expenses: Understand which medical costs will be covered by the FSA to make sure they align with their anticipated healthcare needs.
- (d) Understand the "use it or lose it" rule: Be aware that funds contributed to an FSA must be used within the plan year or they may be forfeited, although some plans offer a grace period or allow a small amount to roll over.
Contribution limits are important because they dictate the maximum amount that can be deposited into the FSA and are set by the IRS. Ignoring them could result in tax penalties and forfeited benefits.
Making informed decisions about FSAs includes understanding the insurance terms like deductible, which is the out-of-pocket cost before insurance coverage kicks in; fee-for-service, a payment model where providers are paid for each service they render; and health maintenance organization (HMO), which offers health services for a fixed annual fee.
Considering these elements, alongside creating a budget and making informed financial choices, are crucial when planning for healthcare expenses and ultimately making the best use of an FSA.