It’s fall time, which means cooler weather here in Texas, football season, and employee benefits enrollment season!
While it’s easy to get carried away with football games and preparing for the holidays, it’s essential to dedicate time to review some of the key benefits provided to you by your employer. You have a brief window of time where you will need to make annual elections, and perhaps you’ve had a life event where your benefits elections will impact your finances. There’s a good chance that your employer also made some changes to your benefits.
In this blog, I’ll cover the most significant and commonly provided employee benefits where you will need to decide. I can’t emphasize enough how important it is to re-evaluate the changes in your situation and to align the best options that support your short-term and longer-term goals.
#1 – Health Insurance
According to the National Center for Health Statistics, national health spending is projected to grow at an average annual rate of 5.4 percent for 2019-28 and is expected to reach $6.2 trillion by 2028. In 2020, the average national health expenditure was $12,530 per person, which amounted to $4.1 trillion and accounted for 19.7% of the Gross Domestic Product (GDP).
Unsurprisingly, one of the most significant benefits available to employees is group health insurance provided by an employer. The costs associated with your healthcare expenses, like premiums, deductibles, copays, and out-of-pocket expenses, are likely one of your major expenses. So it will be essential to look at how your circumstances have changed since your last annual enrollment to appropriately manage the cost of healthcare and match the options to your needs.
As a reminder:
- A deductible is an amount that you pay before insurance kicks in
- A copay is a predetermined amount you pay every time you use a service
- Coinsurance is the percentage of costs you’ll pay after you’ve met your deductible
- The out-of-pocket maximum for the year is the total amount of money you will have to pay for the year before the plan covers 100% of the cost of covered benefits (includes spent on deductibles, copayments, and coinsurance)
HMO (Health Maintenance Organization) plan or a PPO (Preferred Provider Organization) plan?
PPO – Preferred Provider Organization
Between an HMO and a PPO, the PPO will be more flexible in terms of whom you or another insured individual in your family can see should a health need arise. A PPO plan does not require you to go through a PCP (Primary Care Physician) to be seen by a specialist like an orthopedic doctor, oncologist, or neurologist.
Naturally, you will pay higher premiums for the flexibility of being insured by a PPO plan. There’s also a good possibility that you will pay higher coinsurance should you see an out-of-network provider.
In what instances does a PPO plan make the most sense?
Individuals or families that see doctors more frequently or people that see specialists like dermatologists, orthopedists, ophthalmologists, etc., may prefer PPO plan coverage.
HMO – Health Maintenance Organization
An HMO plan will be more restrictive in terms of providers because the plan requires the insured individual to go through a PCP to see a specialist and refer patients in-network. You might have heard someone refer to the HMO as a plan with a ‘gatekeeper,’ which in this case would be your PCP.
The trade-off to being covered by a more restrictive HMO health plan option is lower premiums and competitive copays. Individuals seeking out-of-network treatment may have to pay out of pocket for those services unless they are seen for an emergency.
In what instances does an HMO plan make the most sense?
Individuals or families that visit doctors on an infrequent basis, who don’t mind going through their primary care physician to be referred to a specialist, and who prefer to keep their health insurance premiums low may choose HMO plan coverage.
High Deductible Health Plan (HDHP) or Low Deductible Health Plan?
The first significant decision you make with healthcare is selecting either a High Deductible Healthcare Plan (HDHP) or a low-deductible healthcare plan.
According to the IRS, for 2022, a health plan must have a minimum deductible of $1,400 for an individual or $2,800 for a family to be considered an HDHP. Additionally, annual out-of-pocket maximums, including copays, deductibles, and coinsurance, must be limited to $7,050 for individuals and $14,100 for family coverage.
Why does this matter?
You may be eligible to contribute to an HSA (Health Savings Account) if you opt for an HDHP and the minimum deductible and total annual out-of-pocket maximum criteria are met. The option to contribute and save towards an HSA is not allowed if you select a low-deductible health plan.
HSA – Health Savings Account
An HSA (Health Savings Account) allows individuals to contribute pre-tax dollars to save for qualified medical expenses. An employer will often provide an annual contribution to the HSA account. Cha-ching, free money!
Think of the HSA account as an IRA account but for medical expenses. The HSA account is considered a triple-tax-free vehicle! This means you can contribute to the account on a pre-tax basis and benefit from a deduction, invest the money on a tax-deferred basis, and take distributions from the account tax-free to pay for qualified medical expenses. That’s some powerful stuff right there!
Other Key HSA Facts:
- HSA funds are yours to keep. If you separate from service, you can rollover the funds to another provider without incurring any taxes or a penalty.
- The maximum contribution limit for 2022 is $3,650 for an individual or $7,300 for a family. (The limit includes any employer contribution.)
- An additional catch-up contribution of $1,000 is allowed once you reach the age of 55.
- Withdrawals taken that isn’t considered a ‘qualified medical expense’ is subject to ordinary taxes + 20% penalty!
- Qualified medical expenses include most out-of-pocket costs, dental, vision, chiropractic, fertility enhancement, and even guide dogs.
HSAs are an excellent long-term savings vehicle for future healthcare costs due to the triple tax-free nature of the account. Ideally, if your budget allows for it, you should try to save as much as possible into the HSA account, invest, and avoid taking withdrawals until later in life, closer to your retirement years. Healthcare expenses make up a significant portion of a retiree’s budget, and an HSA can be a great tool to provide additional funding on a tax-free basis for future healthcare costs.
FSA – Flexible Spending Account
An FSA account is another tool to spend pre-tax dollars to pay for qualified medical expenses. For 2022, the annual maximum contribution is $2,850. It’s also important to note that the annual max contribution of $2,850 applies regardless of whether you file your taxes as a single individual or jointly. FSAs also have the “use it or lose it” provision, where you can only roll over $570 (for 2022) each year. If you don’t spend the funds on qualified medical expenses, the difference of $570 and the remaining balance is lost. You will want to estimate the cost of healthcare as best as possible throughout the year to avoid overfunding the FSA.
Other key FSA facts:
- FSA funds stay with the employer once separated from service. The funds are not yours to keep, unlike an HSA.
- You can contribute to an FSA in a low-deductible health plan, whereas an HSA requires you to opt for a high-deductible health plan.
- You cannot contribute to an HSA and a traditional FSA plan.
- You may contribute to an HSA and a Limited Purpose FSA (LPFSA works like a regular FSA, but the funds can only be used for vision and dental expenses.)
In most cases, an individual that opts for an HDHP will want to consider an HSA over an FSA because of the ability to keep the HSA funds indefinitely without worrying about having a portion of unused FSA funds not rolling over. However, if you’re opting for a low deductible health plan, a traditional FSA may be the only option to spend towards healthcare expenses on a pre-tax basis.
Dependent Care FSA (DCFSA) –
A Dependent Care FSA allows participants to use pre-tax dollars to pay for eligible dependent care costs. A qualifying ‘dependent’ may be a child under the age of 13, a disabled spouse, a parent, or a relative who needs dependent care. Some eligible dependent care expenses include daycare, nursery school, preschool, elder daycare, and babysitting, to name a few.
In 2021, The American Rescue Plan Act allowed for a one-year increase in the contribution limit from $5,000 to $10,500 for the year to provide additional relief due to Covid. For 2022, the individual and family contribution limit is $5,000. You may also contribute to a DCFSA even if participating in a High Deductible Health Plan and contributing to an HSA.
Paying for eligible dependent care costs through a DCFSA can be a great tool to help reduce taxes for expenses you would have normally incurred to care for dependents. Remember that your employer will deduct the annual contribution you elect in equal parts from each paycheck, which means you can only spend the money in the DCFSA account.
#2 Life Insurance:
The topic of life insurance is rarely something my clients enjoy talking about, but the reality is that life insurance plays a crucial role in protecting your loved ones. Imagine the impact on your family if you were to pass away and leave behind obligations like a mortgage, credit card debt, and the cost of burial. The only thing your loved ones should be spending time doing upon your passing is mourning rather than worrying about how to cover financial burdens.
Many companies provide employees basic group term life insurance at no cost to you. For instance, your employer might cover 1-2x of your base salary, but in most cases, it is not enough coverage to take care of your beneficiaries’ financial needs. There may be an option to purchase additional supplemental coverage to increase the death benefit to 8x your salary, where you would need to pay an additional premium.
One thing to remember is that your group term life insurance coverage ends upon separation of service. However, some group policies may allow you to convert the group policy to an individual policy by a particular deadline. Families with dependents with a greater need for coverage may want to consider a separate individual term life policy if a group term policy does not have the option to convert to an individual policy upon separation.
While there are numerous methods for determining how much life insurance coverage to purchase, my general rule is to consider a multiple of 10-12x your gross salary, which may be too low or too high depending on your situation. A single individual with little to no liabilities may not have to purchase additional coverage beyond the company-provided basic coverage, whereas a family with dependent children may need to purchase more coverage than the 10-12x general rule of thumb.
#3 Disability Insurance:
Have you thought about how your financial situation might be affected if you were to get into an accident outside of work that would prevent you from working for months or even years?
The Council for Disability and Awareness states that there is more than a 1 in 4 probability that a 20-year-old is likely to become disabled before they retire. Additionally, the Council also highlights that the average duration of a long-term disability claim lasts as long as 34.6 months – nearly 3 years!
I have seen some companies provide their employees with basic short-term disability (STD) insurance which might cover 40-60% of gross income for anywhere between 3-6 months. However, in most cases, an employee will need to enroll in a long-term disability (LTD) benefit, which might cover anywhere between 90 days to a couple of years of lost wages.
Ask yourself the following questions as you evaluate your disability insurance options:
- How much of your income is covered by STD and LTD policies?
- What is the elimination period? (This is the period you have to wait before receiving benefits.)
- How long does the benefit last?
While I recommend that my clients maintain at least 6 months of expenses in the case of an emergency, sometimes a 6-month reserve is not enough of a buffer to sustain a household if an income-earner has to take an extended leave of absence due to disability. A household with a single-income earner will likely have a more significant impact than a dual-income household if someone becomes disabled. Further, if the income earner in a dual-income household has a proportionately larger income level, that individual should be prioritized for STD and LTD disability coverage.
Summary:
- Don’t delay your employee benefits decisions during Open Enrollment! Open Enrollment comes around once a year, and you’ll have a short window of opportunity to make changes to major benefits like health insurance, life insurance, and disability insurance.
- Assess how you’ve used your healthcare insurance benefit over the past year and the services you can reasonably expect to use for the upcoming year. Review the total cost of healthcare expenses like premiums, deductibles, copays, coinsurance, and out-of-pocket maximums to evaluate the financial impact of making changes to your current health insurance plan. Decide between a High-Deductible Health Plan (HDHP) and a low-deductible health plan.
- Review the trade-offs between a Health Maintenance Organization (HMO) plan vs. Preferred Provider Organization (PPO) plan. PPO plans are more flexible and allow patients to see specialists without seeing a primary care physician (PCP), but premiums will be higher than a more restrictive HMO plan.
- Consider a High Deductible Health Plan (HDHP) to take advantage of a triple-tax free Health Savings Account (HSA) investment vehicle to save and invest toward future healthcare expenses. Funds in HSA accounts are yours to keep; some employers make annual contributions on your behalf, and the account is yours to keep upon separation of service.
- If you decide to enroll in a low deductible plan and are not eligible to invest in an HSA, consider making contributions to cover qualified medical expenses on a pre-tax basis. Remember that FSAs have a “use it or lose it” provision, so you’ll want to ensure that you manage your contributions and distributions from the FSA throughout the year. FSA funds are not yours to keep, and they are not portable.
- Evaluate your need for life insurance to protect your loved ones and consider additional supplemental life insurance coverage. Some households with more dependents may want to consider purchasing a separate individual term life insurance policy for additional coverage above and beyond what the employer provides. Check to see if the group term life insurance policy can convert to an individual policy upon separation of service.
- Don’t underestimate your need for additional long-term disability coverage. The average long-term disability claim lasts nearly 3 years! Review how much of your income is covered by disability insurance, the elimination (waiting) period, and how long the disability payouts will last.
Article written by Peter Kim, CFP® on November 21, 2022