Jovan Johnson, MBA, CFP®, CPA/PFS

It is that time of year again for open enrollment. Most plans allow you to make changes or updates until December 15th. As we receive many notifications from our HR departments, it can be very overwhelming to understand the decisions that need to be made. However, with a year like this one, it is very important that we be proactive during this time. These decisions can have an impact on many areas of your overall financial plan, not just health insurance. Some of these areas include retirement planning, life and disability insurance, health insurance (incl. dental & vision), and tax planning. This is why you should devote more time to open enrollment than just a few minutes right before the deadline. It is certainly worth doing some research and homework.

There are many factors to consider when making decision about your benefits. It is important to discuss with your spouse which plan is best for you and your family. In addition, it is extremely important to understand your medical history and your family’s.

If you find yourself becoming confused with terms like deductibles, copayments, co-insurance, waiting period, etc., asking your HR department questions is a great start. Hopefully this article is able to provide some insight to help you make these decisions.

In this article, we will take a deeper dive into all of the benefits that many employers offer to their employees and what they can mean for you.

1.) Health Insurance

Recently, there has been a drastic increase in high deductible health plans. Many employers may offer a low-deductible and/or a high-deductible health plan. While it is easy to get confused with these two plans, it is important to understand the benefits and costs of each option to optimize your health insurance. The first thing you want to do is look at how much did you spend on healthcare throughout the year? Did you find yourself going to the doctor’s office often? Do you typically spend a lot of money on prescriptions drugs throughout the year? Will there be any changes for next year, such as an expected child or surgery? Once you answer these questions, you will have a better picture of which option may work best for you and your family.

What Is the Difference?

In simplistic terms, with high deductible plans (HDHP) you are responsible for more medical costs upfront when they arise; however, you pay a lower premium each month. A low-deductible plan (LDHP) acts as the opposite, higher monthly premium, but responsible for less medical costs upfront. HDHP typically has higher out of pocket limits than the LDHP. If you’re deciding between a low- and a high-deductible health plan (HDHP), there is more to consider than just deductibles and monthly premiums.

Health Savings Accounts (HSAs)

A HUGE advantage to having a HDHP is your eligibility to use a Health Savings Account (HSA). HSAs are tax-advantaged, meaning that you can take a tax deduction for the amount you contribute. Also, your employer may contribute to your HSA. Wait…. There is more! HSAs are triple tax-advantaged, if you use the funds for qualified medical expenses, as defined by the IRS. Not only can you receive a tax deduction for your contributions today, but you can also invest this money with the earnings being tax-free. Lastly, the money you withdraw to pay for qualified medical expenses is tax-free. If you decide to use the funds for other purposes, other rules apply. One thing to consider is that HSAs also can be used for retirement planning. Something else that you may not know is that you may establish an HSA even if your employer doesn’t offer one, if you have a qualified HDHP.

However, please note that not all HDHPs qualify you for an HSA, your plan must meet certain rules set forth by the IRS. Please seek confirmation from your service provider for more information.

Which Plan May Be Best for Me?

A LDHP may be the better option for you if any of the following applies:

  • You are expecting, planning to become pregnant, or have small children
  • You need to see a doctor frequently or have a chronic condition
  • You’re considering surgery
  • You spend a lot of money on prescriptions

A HDHP may be the better option for you if any of the following applies:

  • You are healthy and rarely get sick or injured
  • You can afford to pay your deductible upfront if an unexpected medical expense comes up
  • You have enough cash in savings to cover the full annual out-of-pocket maximum
  • You are able make contributions to an HSA each month
  • You are healthy and are interested in using an HSA as a way to save or invest money

Before you make a decision, you should consider all of the potential costs and benefits. If you expect similar costs between the two plans, the HDHP may be the best option because it gives you access to the HSA.

2.) Retirement

If your company offers a retirement plan, such as the 401(k) or similar plan, this is a great time to decide on how much you want to contribute to the plan and what investments you want to choose. Please don’t miss an opportunity to check-in with your retirement accounts. Also, if your employer offers a match, make sure you take advantage of it. Do not leave free money on the table. Ask your employer if your plan allows you to make Roth contributions or after-tax contributions, as this is another great option to explore.

Also, do not forget that you are not only limited to your company’s retirement plan. It may make sense to create outside retirement sources such as a Roth or Traditional IRA.

3.) Life Insurance

Many employers offer group term life insurance based on your salary. When considering how much insurance is needed, first ask yourself if there is anyone in your life right now that depends on your income? If you were to pass away, how much money would your family need to maintain their same standard of living? If no one “depends” on your income right now, supplemental life insurance may not be needed. If you do decide that you need additional insurance, I recommend you seek quotes on term insurance from a reputable provider like Policygenius. You may receive a better rate elsewhere. Also, if you were to leave your company, you may lose the plan coverage offered by your employer. If this happens, you will be older than when you first received coverage and will likely have to pay a higher premium. This is why I would recommend that you consider purchasing a term policy outside of your employer. You can choose term insurance for whatever duration you prefer, 10, 20, or 30 years.

4.) Disability Insurance

Disability insurance is often overlooked during open enrollment. This is a great time to consider if you have enough insurance and the right type. If I were to ask you what is your largest asset, what would you say? Would you say a home or a business? Well, for most of us, it is actually our ability to work and earn an income. You are your greatest asset, which is why you should protect yourself with disability insurance. Your employer may offer some disability coverage. You also can purchase the coverage outside of your firm through a private provider. When deciding on the amount of insurance to have, think about how much money would be needed to maintain your standard of living if you were to stop working or reduce your work hours due to illness or injury. Do keep in mind that coverage provided through many employer plans is considered taxable income when paid out. However, if you decide to seek a policy from an outside private provider, you can choose a plan type that is not considered taxable income when paid out. Another key term to be aware of is the elimination period. This is the period where you will need to cover any expenses on your own before the insurance kicks in to pay. Keep this in mind when you are building your emergency fund. Another reason to consider a policy outside of your employer is because just like group life insurance, your coverage with your employer ceases once you leave your job.

Read our post to learn more about disability insurance.

5.) Health And Dependent Care Flexible Spending Accounts

These are other hidden gems that many employers offer for you to take advantage of. There are two types of Flexible Spending Accounts (FSAs): health FSA and a dependent care FSA. The health FSA is a tax-advantaged account that reimburses you for qualified medical expenses. While the dependent care FSA is a tax-advantaged account that reimburses you for dependent care services such as day care, preschool, summer camps, plus more! Your employer may offer one or the other, or both. For 2021, the dollar limit for contributions is $2,750 for the health FSA and $5,000 for the dependent care FSA (married filing jointly).

The greatest advantage to having one of these FSAs is that your contributions are not subject to Social Security and payroll taxes or federal income tax, if used for qualified expenses. This can provide you with a lot of tax savings. For example, assume your income is taxed at the 24% tax bracket. Your total savings can be near 32% (24% + 1.45% payroll + 6.2% social security) plus more if you pay state income tax. However, there are some cons to utilizing these accounts. Many plans have a rule called “use it or lose it”. This rule essentially forces you to use all of the money in the account by the required deadline for the year or your forfeit the balance in the account. Some plans may allow you to carryover up to $500 to future years, but it is important to check with your plan first. So, if you are going to take advantage of these accounts, make sure you budget your expenses properly.

Final Thoughts

Employee benefits cover many aspects of your financial life, so it is very important to spend some time researching and learning more about your options. You deserve these benefits! This is all a part of your compensation package, so do not leave free money on the table. If you would like further suggestions or analysis for your open enrollment, you may schedule a free consultation with me here.

Disclosures

None of the information provided is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Piece of Wealth Planning LLC does not promise or guarantee any income or particular result from your use of the information contained herein.