For many employees, open enrollment is here. Soon, open enrollment will start for Medicare recipients to choose their benefits to supplement governmental benefits. We will discuss Medicare open enrollment in a later post.
For employees, consider what your options are. Be sure that you understand what you are choosing or not choosing. Maintaining the same benefits from year to year without considering the changes that have occurred to your living situation may not be the best use of your benefit dollars.
Consider what your medical needs are before automatically signing up for the same plan. If you are not a heavy health care user, it might make sense to pay the lower premiums and have a high deductible part of your plan. Take the savings in the premium dollars and fund a Health Savings Account (HSA). You must have a health plan that meets the IRS definition of a highly deductible plan to fund an HSA.
An HSA can accumulate dollars from year to year, and it provides an opportunity for these dollars to be put away and grow tax-free. If disbursements are used for medical costs, they are not taxable. A recommendation we have for many is to let these dollars accumulate year after year with the plan of using them in retirement. It may be a means of accumulating dollars that can pay insurance premiums before starting Medicare if you retire before age 65. An HSA can pay your Medicare premiums if you turn 65 and are not yet collecting Social Security.
In some cases, employers are partially funding HSAs in exchange for the employee choosing a lower-premium option. The employee can elect to fund the balance of the account each year from their funds. Anyone over the age of 50 can also make an extra $1,000 contribution annually.
If you are a heavy health care user: have significant doctor visits, have several prescriptions, are managing chronic diseases, have mental health expenses, etc., it might be less out-of-pocket costs for you if you choose a low deductible plan and pay the higher premium. Review the typical expenses that you have annually and consider the plan that works better for you.
There is a difference between a Health Savings Account (HSA) and a Flexible Spending Account (FSA). If your employer offers an FSA, realize the dollars in the account will go away if they are not used within 60 days of the end of the year. An FSA does not allow for dollars to accumulate year after year.
Both an HSA and an FSA give you the opportunity of lowering your taxable income each year. If you put $2,000 into either account, you will save $560 between federal and state taxes if you are in the 22% federal tax bracket. We recommend that you fund your HSA to the full amount. The FSA you want only to fund the amount you anticipate you would need in a year. Think about the routine prescriptions you take, the number and dollar amount of co-pays in a typical year, dental and vision costs that you incur annually, etc. This is the amount that you would put into the FSA account. If something unusual occurs during the year, you may have some costs not covered by the FSA funds. You also do not want an excess of funds that you lose because you do not use them.
Review the vision and dental plan options. We often see people paying for these services and then not incurring any expenses. We see the cost of the plans be more than if the expenses were paid out-of-pocket. If your dental costs for cleanings are about the same as the premiums for your dental insurance, it makes sense to have the insurance just in case you have additional expenses. If the premiums far outpace the cleaning costs, you need to consider the chances you will incur extra expenses when deciding if the premiums are worth the price.
For married couples – be sure to coordinate health, dental, and vision benefits for the family. Sometimes it works better if everyone is on one plan. Sometimes it works better if a married couple with no children each carries their own plan. It might be one person’s health coverage is better and the other person’s vision and dental are better. Compare both costs and coverage to determine your best option.
Often, many employers pay for one- or two-times salary and give the employee the option of purchasing more life insurance. Is it worth the added expense? Maybe. You need to consider how much life insurance you have and how much you need. You may find the cost is higher for younger employees than if you were to purchase insurance on your own. This is possible because the group term insurance is considering an average age. So the younger employees may be paying more while the older employees may be paying less in premiums for their age.
Also, consider whether you want all your life insurance tied to your employer. If you change jobs, you may find yourself without any life insurance. You may find yourself paying higher premiums because you are purchasing insurance at older ages. It often makes sense to take what the employer offers you for free and go outside for the remainder of your insurance needs. Converting a group term policy to an individual policy to maintain your insurance after leaving an employer is often expensive. Review your options and if interested, contact us to review your life insurance needs. We often find individuals carrying the wrong amount or the wrong type of life insurance.
If your employer provides an option for group long-term care insurance and long-term disability, it can be hard to get lower premiums than what you can obtain through an employer’s policy. Consider purchasing these optional insurance coverages. Typically, long-term disability policies are not cost-effective to be portable if you change jobs. It does provide coverage while you are still employed. Long-term care insurance policies are often priced to allow them to transition to individual policies at the time of retirement or leaving the company. We often see them as affordable to continue once you leave employment.
Many employers allow you to change your 401(k) or employer retirement plan throughout the year. Others only allow you to adjust the plan during open enrollment. We strongly recommend for most individuals that you increase the amount you are contributing if you are not at the maximum amount. Ideally, if you can set it to automatically increase 1% or 2% each year without thinking about it, that is preferable.
If you choose to fund your 401(k) with pre-tax contributions, consider changing all or part of those contributions to Roth contributions. Having your retirement dollars growing tax-free rather than tax-deferred can make a significant difference in what you have available during retirement. If your employer does not offer a Roth option, we suggest you see if you can get them to start one.
Fund your company’s retirement plan at least to get the amount of the free match from your employer. Do not allow this free money to disappear. If your plan has a Roth option, continue funding until you reach the maximum. If your plan does not have a Roth option, consider funding your own Roth IRA after reaching the company’s match amount. Once the IRA is fully funded, go back and put more dollars into the employer’s plan.
The key – do not just check the same boxes as last year when it comes to open enrollment. Take the time to consider if other choices may be more appropriate. Certainly, you are welcome to see us if you want assistance in determining your best options.