This is the time of year when the temperatures turn brisk, leaves begin changing colors and fall, the smell of apple pie fills your kitchen, college football draws you in every Saturday, and you get notice from your employer that Open Enrollment must be completed in the next few weeks.
Like tax season, this typically is a stressful time for employees trying to understand what they have currently, what benefits are changing, and what they may need in the year ahead. We put together a list of benefits to keep in mind while you're flipping through your benefits book or website over the coming weeks to help you conquer Open Enrollment.
1. Take Advantage of Flexible Spending Accounts
The Big Brother to the ever-popular Health Savings Account (HSA), still packs a lot of punch for those who qualify. This benefit comes in two flavors: Healthcare Flexible Spending Accounts and Dependent Care Flexible Spending Accounts. They both work in similar ways, you contribute to these accounts pre-tax out of your paycheck and the money gets set aside in an account that you can use (or be reimbursed) when you incur healthcare or dependent care expenses.
Healthcare Flexible Spending Accounts
Healthcare Flexible Spending Accounts (HFSA) are only available to those employees not covered under a High Deductible Healthcare plan coupled with an HSA (Health Savings Account). The annual contribution limit to this type of plan is $2,650 for 2018 (contribution limit has not yet been released for 2019). The real benefit of an HFSA is that your entire yearly contribution into the HFSA is available January 1.
Let’s say you are paid twice a month and have elected to contribute $50 per pay into the HFSA. Let’s also assume that on January 20th, you have a medical procedure where you incur $1,200 worth of costs out-of-pocket. With an HSA, you would have to wait until there is enough money in the account to be reimbursed (the end of the year, unless you had money carryover from the previous year). This is not the case with the HFSA, you could be reimbursed for the full $1,200 incurred on January 20th even though you would have only contributed a mere $50 into the account at that point.
What’s the catch? The catch is that any money not spent in the HFSA is forfeited by March 15 of the following year. The IRS does allow employers to adopt a provision allowing for a carryover of $500 to the following year, but I have not come across this provision being used.
Starting in 2020 (delayed from its original start date of 2018), the Affordable Care Act (ACA) begins imposing a 40% excise tax on healthcare premiums exceeding certain thresholds, with HFSA contributions being included in the premium calculation. If the excise tax remains in place, it’s likely that we will see less and less companies offering these plans over the coming years. Use them while you can!
Dependent Care Flexible Spending Accounts
Dependent Care Flexible Spending Accounts (DCFSA) are similar to their HFSA cousins. Money is contributed pre-tax to an account where the employee can be reimbursed for dependent care expenses they incur over the course of a year.
The DCFSA differs from the HFSA in that your entire balance you’re set to contribute over the course of the year is NOT available on January 1. You’re only able to be reimbursed for the amount you have already contributed to the DCFSA.
Also, you aren’t able to use the DCFSA for babysitters or family members who you pay to watch your children but who don’t claim that income on their income tax return. In order to get reimbursement, you must provide the provider’s name and Employer Tax Identification Number or Social Security number.
The DCFSA is ideal for high income-earning couples as the deduction and tax savings of using this type of account will likely exceed the benefits you would receive from the Child and Dependent Care Expense Deduction allowed on your federal income tax return. The annual contribution limit to this type of plan is $5,000 for 2018 (contribution limit has not yet been released for 2019).
2. Choose the Best Health Insurance for Your Situation
The granddaddy of Open Enrollment is Health Insurance. The landscape has changed tremendously over the past few years. Company-provided health insurance continues to be one of the most important, and most costly employee benefit. It behooves you to spend time seriously weighing your options. Many companies have been phasing out traditional health insurance plans, like PPOs or HMOs, in favor of less costly, high deductible health insurance plans (HDHP).
HDHPs can be combined with a Health Savings Account (HSA) to allow you, what we like to call, a “Roth IRA on steroids” where you can contribute pre-tax money from your paycheck into the account and use it to pay for qualifying health care expenses without paying taxes. You get the best of both worlds! In addition, unlike Flexible Spending Accounts, HSAs can roll over from year to year, so it’s like an IRA for health care expenses.
So, do you elect a HDHP or stick with the traditional health insurance plan like a PPO or HMO? Terms like coinsurance, copays and deductibles all play into this decision. How often do you visit the doctor? Do you go just for routine check-ups or do you have some ongoing health issues? What do each of these plans cover? What is the maximum amount that I may have to pay out-of-pocket? Do these plans cover specialty services like physical therapy or chiropractic care?
After you’ve determined what these plans cover, and have looked at possible upcoming medical procedures over the course of the next year (like the birth of a child), it’s time to sit down and look at both the premiums you would pay as well as out-of-pocket costs. If your employer contributes to an HSA on your behalf, then that should be factored in as well as a benefit to the HDHP.
If your employer still offers the traditional health care plans, it may make sense to pay a bit more every pay for the additional coverage and lower deductibles. Or maybe you would rather just pay a bit more knowing that there’s greater coverage with the traditional plan should you have a medical emergency. These plans will continue to be phased out as a looming excise tax of 40% on premiums over a predetermined threshold for the Affordable Care Act begins in 2022.
3. Consider a Pre-paid Legal Benefit (Even for Just a Year)
Many larger employers offer pre-paid legal services as an option for employees during Open Enrollment. These plans typically charge $15-$40/mo for access to legal services and may provide a nice benefit if you’re looking to have wills drafted or other simple legal matters. In some cases revocable trusts are covered, which can easily run $800-$2,000 on their own.
With these plans, the devil is in the details and knowing what you’re buying before you enroll can save you a lot of headaches or higher costs later. Find out what your plan DOES NOT cover BEFORE enrolling. This may end up being a benefit that you enroll in specifically for a service you know you’ll need in the coming year.
4. Add Life Insurance Coverage (Without a Medical Exam)
It’s common for employers to offer a base amount of life insurance for employees, usually 1-2X the employee’s salary. In many cases, employees can also elect to purchase additional life insurance without having to undergo a medical screening.
This is a great way for those with health issues preventing them from adding coverage outside of their employer, such as those diagnosed with cancer or some other life-threatening illness.
If you’re younger the costs to elect this additional coverage may be slightly higher than what you can get on the outside, but it’s convenient.
With the increasing trend of no longer having a single employer during one’s entire career, it makes sense to not only take advantage of life insurance through your employer, but also add some coverage on the outside, like a term policy.
5. Bonus Tip: Retirement Savings Check-up
Since you’ve gathered all of your information and are in your planning “mindset”, you might as well pull out your 401(k), 403(b), or 457(b) statements and revisit what you’re doing from a retirement standpoint.
It’s not an employee benefit you elect during open enrollment, but it’s typically the benefit that employees tend to neglect the most. They make their contribution election, choose the funds (or have them automatically chosen for them), but never really circle-back to evaluate how they are doing. Also, make sure that you’re at least taking advantage of your employer match. Open enrollment is a great time for an annual review of these important accounts.
In addition to the tips above, there are a number of other benefits available to you through Open Enrollment that you can, and in some cases, should take advantage of. You may find that they can help you build and secure your family's financial future. If you’re unclear how these benefits fit into your financial life, consider contacting a fee-only financial advisor to help you sort through your options.
About Chessie Advisors
Erik O. Klumpp, CFP®, EA, founder of Chessie Advisors, LLC and Chessie Tax, LLC, believes that teachers, engineers, and young professionals should have access to objective, fee-only financial planning and investment management to help them create and realize their American Dream. For more information on the services offered through Chessie Advisors, check out our website, contact Erik, or schedule an introductory call.