Fall Benefits Enrollment – Take a Closer Look
Soon notices will be sent to employees about the upcoming annual benefits enrollment. This enrollment period allows employees to update choices of benefits offered. For new hires, this may be a welcome opportunity to revisit decisions made during that first month on the job while drinking from a fire hydrant. For others, it may be viewed as an annoying annual ritual to passively click on last year’s choices.
I recommend taking the time to review the full list of choices as new options may appear or life circumstances may dictate different choices. Here are some things to look for.
Note: tax savings for each $1,000 tax-deductible contribution saves both marginal Fed tax rate plus state. If in 12% Fed bracket and flat 5% state tax, the savings per $1,000 is $170; if in 22% Fed the tax savings jumps to $270 - so worth looking at.
401k/403b and Retirement Savings
Technically this is not part of the annual benefit enrollment since you can change your elections to participate, contribution amount and of course investment selections throughout the year. However, this is a good time to review if any investment choices were updated (or just review them if haven’t!), verify the latest crediting rate on Stable Value Funds (it may be lagging the red-hot rising rates this year) and see if both Traditional and Roth are offered. Another feature to look for is an after-tax contribution (different than Roth) which allows for additional savings above the $20.5k limit for 2022 that can be converted to a Roth IRA. Also check if the company offers a pension plan (not many companies do) and appreciate the extra value of that benefit vs. competing job offers.
This is by far the benefit that gets the most attention and aside from retirement savings, likely takes the most out of your deductions. Verifying the network of doctors in a plan is a priority for most, but don’t overlook the different deductible choices given your utilization and the trade-off of a higher deductible (the amount you pay before insurance kicks in) with lower monthly premiums. Also verify if routine physicals and other preventive services are covered without hitting the deductible first. This can make the high-deductible plans more tolerable.
Health Savings Accounts (HSA)
Related to the health insurance choice is whether a particular health plan allows contributions to a health savings account (HSA). To qualify, your underlying health insurance plan must be a High Deductible Health Plan (HDHP). For 2022 the minimum deductible for an HDHP is $1,400 for individual and $2,800 for family. Be sure this potential out-of-pocket amount fits your or family needs. If so, choosing this plan with an HSA allows a fully deductible contribution (you + any employer combined) of $3,650 for individual and $7,300 for family for 2022 tax year. There is also a $1,000 catch-up contribution if over age 55 (not 50 like an IRA). An important distinction is that funds contributed to an HSA do NOT need to be spent each year. In fact, ideally health expenses can be covered from other funds and let this account grow tax-free if later used for medical expenses.
Health Flexible Spending Accounts (FSA)
A very similar sounding but very different account type is an FSA. These accounts allow tax deductible contributions of $2,850 per FSA for 2022. If a working spouse also has an FSA an additional $2,850 can be contributed to their plan but you can’t submit the same expense to each plan. As you incur out of pocket medical expenses you request reimbursement from the FSA. You do not need to have an HDHP plan to utilize these accounts. However, a key distinction is if not enough medical expenses were incurred to drain the account from reimbursements for a given calendar year, you forego most of the remaining balance. Starting in 2021, you are allowed to carryover $550 of unused funds into the following so be sure not to overfund your expected out of pocket health costs.
Dependent Care Flexible Spending Accounts (DCFSA)
Similar to a Health FSA, a similar account type is available for dependent care expenses. Obviously not related to a given health plan but you do have to have qualified dependent care expenses. Tax deductible contributions of $2,500 for single or $5,000 for family are allowed. A family in the 22% bracket with flat 5% state tax would see a tax benefit of $5,000 x (.22 + .05) = $1,350 tax savings. That’s a lot of diaper money.
Not all employers will offer this benefit and some may offer but the employee must pay the premiums. It is a very good idea to take this coverage. This insurance covers a % of your salary – typically 60% or 67% - up to a cap of say $10,000/month. There is a deductible expressed in months (usually 3) before the benefits begin. It may cover your own occupation disability for the first 2 years, then you must be unable to do any occupation after that to qualify for continued benefits (check details of plan). Most people wouldn’t hesitate to get life insurance if they have children but don’t think about disability insurance. Disability insurance is also recommended even if don’t have children because it is your future earning power while alive but disabled that is covered. The chance of becoming disabled during working years is greater than death.
Most employers may pay for a base amount of insurance expressed as multiple of salary – typically 1x or 2x salary. Amounts above $50,000 generate some pesky tax implications you might see on your paystub. Additional life insurance amounts are offered for purchase with no underwriting. Because of the potential for adverse selection, you can likely find better rates is purchase on own. This is a convenient option with the option of annual renewal (and rising premiums) but you pay for that convenience.
Other types of benefits may also be offered. Vision, dental, wellness, legal advice, commuter costs and educational reimbursement are some common benefits. Review what is offered to see if have an upcoming need over the next year and weigh the cost vs. alternatives.
If you are fortunate enough to have a solid benefits package, be sure to take a closer look this year and select the benefits that fit your latest needs – at least for the next year!
Posted by Kirk, a fee-only financial advisor who looks at your complete financial picture through the lens of a multi-disciplined, credentialed professional. www.pvwealthmgt.com