Go into your benefits open enrollment with a plan to avoid stress and make the best decisions for you.
September and October are popular months for employee benefit open enrollments. Open enrollment periods are the one-time a year that you are able to change your benefit elections without having a qualifying event. Unfortunately, too many people ignore the open enrollment period and blindly allow their benefit elections to roll over to the next year or procrastinate and don’t properly review what’s available and how it fits into their broader financial plan. We want to help you go into your benefits open enrollment with a plan to avoid stress and make the best decisions for you. This is our quick guide on how the most common employer benefits might fit into a broad financial plan.
Play defense with insurance
You can’t have a game plan without having a plan for “defense”. Financial planning after all is life planning and life is unpredictable. Insurance is the financial tool to help protect your savings and avoid going into debt because of a life event that is out of your control. When deciding on which insurances are best for you it is important to consider the likelihood of something happening to you along with the severity of the financial impact.
Here are some of the most common insurances offered in employer benefit programs:
This should be a no-brainer. It’s pretty simple: You can’t control when you or someone in your family might get sick or injured but it’s a very likely possibility. When you are sick or injured you are going to need/want medical care to get better. Medical care is expensive and could wipe out your savings and put you into debt.
What to consider during enrollment: Unfortunately, deciphering between different types of plans is not as simple. Health insurance options are laced with terminology and acronyms that can be difficult to understand and intimidating.
The HMO vs. PPO dilemma: Traditionally, HMOs limit you to a network of providers whereas a PPO will give you the ability to get service “out-of-network”. Nobody likes to be restricted but don’t rule out HMO’s. First off, HMO networks have been greatly expanded and many offer “open access” with out of network options. Second, HMO coverage tends to be less expensive freeing up dollars for other financial planning needs. The first thing we recommend is checking whether your existing doctors are covered. The healthcare provider’s website will provide you a database where you can search for your doctor(s) by name to verify that they accept the insurance you are considering.
Deductibles & Co-Pays: The next thing to consider is the level of cost sharing between you and the insurance company, which is determined by your deductible, co-pays and maximum-out of pocket expenses. High-deductible health plans (HDHPs) may require you to pay a larger share of the cost yourself before the insurance company starts to pay BUT your premiums are generally lower and they typically preventive visits (ie. annual physicals, mammograms, etc.) are fully covered or subject to a small co-pay. To make HDHPs more attractive they allow you to qualify for a health savings account (HSA) which will allow you to save money pre-tax that can be used to pay the out-of-pocket expenses, while reducing your taxes and building up additional savings (more on HSAs below). If you don’t have many pre-existing conditions or regularly make visits to the doctor, then a higher-deductible plan may provide the protection that you need while saving you money on monthly premiums that can be used towards other financial goals. Conversely, if you have health conditions that require you to seek regular medical care then a lower deductible plan may be best.
Dental insurance can help to mitigate the cost of expensive dental procedures that could wipe out your savings or cause you take on high-cost debt. However, don’t expect dental insurance to cover all of your costs and most importantly make sure you have regular check-ups whether you elect the insurance or not. Regular check-ups can help prevent problems from developing that lead to expensive procedures.
What to consider during enrollment: Dental insurance may not be right for everyone. If you only regularly visit the dentist for routine cleanings, then the cost of the insurance may be more than paying out of pocket. However, it may still make sense to have the insurance if you are living paycheck-to-paycheck and do not have savings to cover more expensive procedures that could pop-up. Older adults tend to require more dental procedures so may be at a higher risk and benefit more from the coverage. Do your own cost benefit analysis by contacting your dentist to see what the cost of a routine check-up is (with and without x-rays). Also, consider whether you have enough savings in the event you had to come out of pocket for a more expensive procedure; routine fillings for cavities can be a couple hundred dollars while a crown, root canals or dentures can be into the thousands.
Vision insurance typically covers the cost of eye exams, glasses, frames and contacts. The cost of these products isn’t something that would necessarily de-rail a financial plan so the relative cost/benefit for vision insurance boils down to how many of these products you or your family use and how much the insurance cost. Typically, injuries, disease or infections of the eye would be covered by your health insurance so the risk is relatively confined to those products mentioned above.
What to consider during enrollment: Understand whether your insurance provides a dollar maximum per year or a discount that can be used toward glasses, contacts, etc.. Compare the cost of the insurance vs. your expected cost for the vision products you use and determine whether you will come out ahead.
Disability Insurance (Short and Long Term)
Disability insurance can help to replace your income if you are unable to work due to illness, injury or pregnancy. Chances of missing work for an extended period of time due to illness or injury are greater than most people realize. According to the Social Security Administration 1 in 4, 20-year old’s can expect to be out of work for at least a year because of a disabling condition before reaching normal retirement age. (source: Social Security Administration).
Short-term disability policies will replace your income for a period of 90 days typically starting shortly after the leave from work begins. Long-term disability policies do not start until after 90 days from the event but will provide income replacement for a longer period-of-time perhaps until normal retirement age (usually age 65). Disability policies will typically not replace more than 60% of your income and for higher earners it can be much less.
What to consider during enrollment: The most important things to consider are your age and your level savings. Younger workers typically have less savings and more working years that could be forgone in the event of a disability which could make coverage more important. Older workers should check to see to what age the policy benefits stop. Many policies will not pay a benefit after age 65 which can severely limit the potential payout from a policy. For more information check out: https://disabilitycanhappen.org/
Life insurance will provide money for your loved ones in the event of your death. Group life insurance policies generally cover a percentage of your salary up to a certain amount and you may be given the opportunity to buy additional coverage.
What to consider during enrollment: First, determine what amount of insurance you can get at no cost then determine how much insurance you need and whether you are better off getting the additional coverage through your employer or on your own. If you work with a financial advisor, then you should ask them to help you determine how much insurance you need or you can do a calculation on your own with no shortage of online calculators. Be careful taking recommendations from the salespeople that might be paid a commission on insurance that you buy from them or online sites that try and do the same. Here is a link to a good resource with a calculator: https://lifehappens.org/
Play offense with tax favorable accounts
As we all know saving can be hard. The government has a vested interest in encouraging us to save for certain life events therefore to encourage savings for retirement, healthcare and dependent care they offer tax incentives/savings. There is no open enrollment period for retirement savings but here are some savings accounts that could be offered by your employer during open enrollment and can help you reduce your taxes.
Health Savings Accounts (HSA)
We generally love HSAs, with the qualifier that you have already determined a high-deductible health plan is right for you. HSAs are one of the best tax benefits available in the entire tax code – they can be triple tax free. The contributions you make to an HSA account are pre-tax (like your 401k or IRA); you can invest the money you save in an HSA without paying tax on the annual interest and gains and if you withdraw the money for qualified healthcare expenses you will pay no taxes at the time you take the money out. Unlike the spending accounts below you can carry your account balance over year-to-year. Because of the tax benefits, we encourage people to try and use other savings for healthcare expenses before taking withdrawals from an HAS so that it can grow and compound tax-free over a longer period of time.
What to consider during enrollment: If you have chosen a high deductible health plan then confirm it is HSA eligible and see if your company will contribute anything to your HSA account. Some companies will contribute to your account regardless if you choose to save, others may offer a matching contribution similar to the 401k plan. The annual savings limits for 2023 is $3,850 for individuals and $7,750 for those with family coverage when enrolling you will want to determine how much you can save towards those limits from your paycheck.
Healthcare Flexible Spending Account (FSA) & Dependent Care Flexible Spending Account
Flexible spending accounts can be a great way to save money on known healthcare and childcare expenses. They allow you to have money deducted pre-tax from your paycheck and saved into your FSA account. There are two types of FSA accounts, one for healthcare related expenses and the other for dependent care. Money saved into an FSA account can be withdrawn for eligible expenses incurred within the benefit period. Unlike the HSA any unused benefits are lost and do not rollover to the next year therefore you will want to be certain that you will in fact incur the expenses.
What to consider during enrollment: First look at the list of qualified FSA expenses made available to you by the FSA provider. Determine which expenses you know you will incur in the next calendar year (or benefit period), if none apply to you or you are not certain that you will have those expenses during the required timeframe then move on. The FSA is probably not right for you. If you are certain, you will incur those expenses then determine your expected cost and consider saving that much (up to the limits) into the FSA.
By understanding which benefits add value to your overall financial plan and doing a little leg work on each to customize them to your needs you can play good defense to protect your finances and good tax offense to lower your tax bill. The key to dominating your open enrollment is to know which benefits apply to you going in.