While most people look forward to Thanksgiving during November, it’s important not to gloss over the importance of your Open Enrollment and Employee Benefits packets. For most employees, Open Enrollment occurs every November and means attending a few review workshops and making selections. Reviewing your employee benefits is a crucial step that sets the stage for the entire year and can help you save money!
What is Open Enrollment?
Open Enrollment is when employees elect, or make changes to, the benefits available through their employer. Examples include health, dental, vision, and voluntary benefits such as prepaid legal services, disability insurance, etc. Most of these benefits are paid through a payroll deduction. It’s important to keep in mind that most of these selections are nonreversible until the next open enrollment period. There are exceptions: for example, the birth of a child, marriage, adopting a child, and death. Check with your employee benefits office to obtain a full list of qualifying life events.
Here are three underutilized benefits that are well worth examining when making selections:
Flexible Spending Account (FSA) – Take Advantage of the Care You Need Tax Free!
An FSA is a tax-advantaged spending account for medical expenses. It allows you to defer pre-tax money into a separate account and use the funds on qualified medical expenses. This is extremely valuable and can save you considerable money if you already have planned expenses, such as deductibles, co-payments, dental work, or even prescription glasses. The only drawback is that FSA’s have a use it or lose it policy. Most plans use either a Grace Period or Carry Over option to help reduce this risk. A Grace Period can offer up to 2 ½ extra months to use the money in the account. The Carry-Over option allows you to carry over $500 to the following years FSA plan. Check with your benefits office to see which option may be available.
How do you know how much to fund an FSA?
The best way to determine FSA funding is to review and tally the past (2) prior years of medical expenses. Use an aggregate of those prior years as a starting point and then add planned expenses you have for the year such as dental work, chiropractic care, hearing aids, glasses, laser eye surgery, etc.
Currently (2019) FSAs are limited to $2,700 per year per employee contribution. This doubles if your spouse is on the plan as well.
Group Disability benefits – What would happen if you could not work tomorrow?
Group disability insurance is provided by your employer to cover loss of income due to an accident or illness. Most group disability policies are short-term disability, which means they will cover you for a few months up to a year depending on the policy, typically replacing 60% to 70% of your base pay. This is an excellent complement to an existing long-term disability policy and can help cover costs during a long-term plan’s waiting period. If you do not currently have a long-term disability policy, consult with your financial advisor, soon. According to the Council for Disability Awareness, one in four Americans can expect to be out of work for at least a year due to disability before reaching normal retirement age. With group pricing, these benefits are usually fairly inexpensive.
Healthcare Savings Account (HSA) – With tax deductible after-tax contributions, portability, and annual rollovers, it’s like an FSA but better!
An HSA is a tax-advantaged medical savings plan available to those enrolled in a high-deductible health plan (HDHP). The contributions to the account are not subject to federal income tax if used for qualified medical expenses (there is a 20% penalty for non-qualified expenses). The good news is that many expenses qualify, check out this list from the IRS. HSAs are more expansive than FSAs, but unlike an FSA, contributions are rolled over each year and it is portable. That means even if you change employers or plans, the balance is not forfeited. The main advantage to an HSA is in the title, it is a savings account, not a spending account like an FSA. Your account balance in the HSA grows tax-free and earnings are nontaxable. It also has features very similar to an IRA or 401(k) because contributions can be invested. Those nearing retirement can consider maximizing these contributions to help reduce your Required Minimum distributions because HSAs are not subject to RMDs when at the age of 70 ½.
Current HSA contribution limits are $3,500 for individuals and $7,000 per family. There is also an additional $1,000 catch-up contribution for those age 55 and older. For those 65 and older who are enrolled in Medicare part A, you will not be eligible for additional contributions. Lastly, once you turn 65 and the 20% penalty for non-medical related expense no longer applies, you can treat it like a retirement account without the RMDs.
Many important factors go into open enrollment benefit selection and no two individuals are exactly the same. It’s wise to have an independent advisor review your individual circumstances to provide guidance about maximizing the above options for your unique situation.