Open Enrollment for employee benefits is coming soon for most companies. It’s the perfect opportunity to review your insurance choices, investment elections, and other potential benefits. These choices can mean the difference in a few thousand dollars this year, and potentially tens of thousands into the future. The next few sections will outline some considerations to make the most of your elections.
Each plan can be a little different. It’s important to think both about your and your family’s health care needs as well as the potential financial implications. This helps you balance the coverage you need for care with your ongoing financial considerations.
Health Care Needs
Your and your family’s health is the starting point.
- Are your preferred providers covered?
- Is there a difference in how prescriptions are covered?
- Will you or someone in your family need any procedures done in the next year?
- Are there procedures that have been put off because of COVID that make sense to schedule?
- Are you adding or removing someone from your plan?
Many employers now offer both a high-deductible plan and a low-deductible plan. A higher-deductible plan keeps the per paycheck costs for insurance lower, but you’ll need to come out of pocket more if you need care. The higher-deductible plan may also offer a Health Savings Account (HSA). On the other hand, a low-deductible plan has a higher per paycheck premium, but you may benefit from both lower Co-Pay percentages and a lower Out-of-Pocket Max.
It may make sense to look at a few scenarios to compare different levels of medical expenses. If you are healthy, a high-deductible plan can make a lot of sense. A trip to the hospital might put you in the breakeven territory between the plans. A few health care issues might justify the higher ongoing premium for helping cap off expenses.
HSA vs. FSA
Flexible Spending Accounts (FSA) have been around for a long time. They are the “use it or lose it” type plans. These may be available no matter what Health Care Plan you elect.
A Health Savings Account, on the other hand, is only for High-Deductible Plan participants.
Health Savings Accounts are a pre-tax savings account for qualified medical expenses. (At age 65 or older, they can be used for any reason.) Many employers will seed contribute to these plans. If you don’t use all of your funds, they are available for future years. Moreover, there is an opportunity to invest these funds so that they can grow for future use.
Vision and Dental Plans
These are often fairly straightforward. If you have the need, it usually makes sense to get the coverage. However, many people have found that it is more cost-effective to self-fund. The provider may offer a lower cost for service without having to go through insurance. It might not be the case for you, but it may be worth the conversation.
Many larger companies offer one times salary as a standard benefit. This is a great starting point but likely is not enough coverage for your family. While there is often the opportunity to increase at a multiple of your salary, it may make more sense to explore getting Term Insurance.
Term insurance provides a specified dollar amount of coverage for a specific number of years. This coverage is often more affordable than permanent coverage. It also remains in place whether you continue to work at the company or not (assuming you’re paying your premiums).
A typical rule of thumb is you should have ten years’ worth of living expenses in life insurance coverage. That can differ greatly based on your family’s individual needs.
A few questions to consider for how much life insurance you need:
- Costs for burial or cremation?
- How much is outstanding on your mortgage?
- Do you have any other debts?
- Are there any future obligations (college for children, retirement) that you would like to fund?
- Are you the sole breadwinner?
- What would ongoing living expenses be for your surviving family?
Accidental Death & Dismemberment (AD&D)
If you have a more industrialized job, this might make sense. For the average office worker, it may make more sense to skip. Term insurance (or other permanent life insurance) may be sufficient.
Many people are under-covered when it comes to disability insurance. It’s may seem like an easy expense to forego since you work in an office. However, the probability of getting disabled, including a short-term disability is higher than many people suspect.
Short-term disability coverage may be an area you can skimp if you have a large enough emergency fund.
Long-term disability, however, could have a huge financial impact on your family. Not only would you not have your income, but you would now have higher expenses for care. It may make more sense to get a private policy rather than the group policy as they might not offer the longer-term coverage desired.
60% of income seems to be a fairly good initial target for disability coverage. Let’s say you’re paying 30% in taxes and 10% into savings, this would leave about 60% of income that needs to be replaced. If you are paying for the disability policy whether directly or through your employer, these benefits are tax-free to you.
Retirement Plan (401(k), 403(b), SEP, et cetera)
Most plans allow for you to make changes to these plans throughout the year, but I find it’s helpful to review during benefit elections.
Have any new alternatives been added to your plan? Is there a Roth 401(k) option? Are you able to make additional after-tax contributions? This is additional savings after you’ve contributed to the annual limit (2021: $19,500; $22,500 over 50).
Take a look at your savings. Are you currently maximizing your contribution? Is it pre-tax or Roth? Are you at least getting the company match?
Review your investments. What is your asset allocation? Does it need to shift? Are you using a target-date fund or making your own allocation decisions?
Employee Stock Purchase Plan
For public company employees, you may have the ability to participate in an Employee Stock Purchase Plan (ESPP). The plans typically offer the ability to purchase employer stock at a discount to the market price. Typically your elections to these plans are fixed through the year and cannot be changed like your 401(k) contributions.
It’s important to understand the mechanics of how the plan works. What’s the trading window? What is the match or discount?
Additional Compensation Structures
These compensation structures typically are discussed as part of your annual compensation plan which may, unfortunately, be at another point in the year. Nevertheless, take a look at the year ahead to see if you have anything vesting or maturing (Restricted Stock Units, Nonstatutory Stock Options, Incentive Stock Options, et cetera)? This may mean you should adjust your withholdings for this year. Most stock bonus payouts are only taxed at 22% Federal which may mean you’ll owe more come tax time.
If you have additional cash flow from these awards, it may help influence your election decisions. You may be able to take more options rather than cash compensation. It may also make sense to utilize the Deferred Compensation plan to help offset the higher income being recognized.
Other Potential Benefits
The types and changes to employee benefits over the last decade have been encouraging. Review all of the options available in your plan. I’ve seen transportation/parking discounts, alternative medicine discounts (chiropractic, acupuncture, and massage), fertility treatments, student loan refinancing, identity theft protection, pet insurance, and the list goes on.
There are three that I have found particularly helpful for clients.
Dependent Care Flexible Spending Account
If you and your spouse are working, this is a great way to put pre-tax money aside to help pay for childcare. Yes, you can pay for a portion of daycare or other qualified institution expenses before taxes.
This benefit may allow you to have direct access to a financial planner that can at a high-level talk through your finances. Particularly for higher compensated individuals, I have seen some companies offer a stipend for financial planning advice. It may not cover the full cost of planning, but it certainly helps.
If you don’t have your basic estate plan together, or you need to refresh it. This benefit may allow you to pay a few hundred dollars for what might cost you $2,000 working directly with an attorney. Some plans are less generous only offering a discount.
Benefit Elections is an important annual opportunity to review your elections. These elections can make up a considerable amount of compensation beyond salary and bonus. Put some uninterruptible time on your calendar to make sure you’re making the most of them.
If you want to set a (free) 30-minute video call with me to discuss your situation, you can access my calendar here.