Navigating The Maze Called Open Enrollment
As we approach most employers’ benefits open enrollment season, we are mindful of the many decisions people have when it comes to employee benefits. FSAs, HDHPs, HSAs, life insurance, disability insurance, Roth 401(k)s...the list goes on and on. For some, it can be relatively straightforward. For others, it can be very overwhelming and results in many employees electing benefits they may not understand or even need. In this article, we will summarize some of the key benefits we discuss with our clients as they go through the open enrollment process.
Most people spend the majority of their time contemplating their health insurance plan options. Many larger employers will give their employees an option between a traditional plan (commonly referred to as a PPO) and a high deductible health plan (HDHP). Most smaller employers nowadays are only offering HDHPs. A PPO plan’s monthly premiums will be higher than the HDHP’s, while its annual deductibles will be lower.
Many employers will help offset the deductible risk associated with HDHPs by making contributions to their employees’ health savings accounts (HSAs) on an annual basis. These contributions make the HDHP option even more compelling as the contributions along with the premium savings will oftentimes basically fund the higher deductible amount. Thus, there may be very little “risk” in choosing the HDHP.
Flexible Spending Accounts (FSA) & Health Savings Accounts (HSA)
Depending upon which health insurance plan you elect, you’ll likely have the ability to contribute to an FSA or HSA. Contributions to both vehicles are pre-tax (and also avoid FICA/payroll taxes, unlike 401(k) contributions) while distributions are tax-free to the extent the dollars are applied to qualified healthcare expenses.
FSAs are associated with PPOs and the dollars contributed ($2,650 limit in 2018) to an FSA in any given year must be spent by the end of the calendar year or else they’ll be forfeited (with a minor exception in
HSAs are associated with high deductible health plans (HDHPs) but, unlike with FSAs, unused dollars can be rolled from one calendar year to the next. We are big proponents of HSAs if the individual is comfortable with higher individual and family deductibles. We generally recommend they enroll in an HDHP while contributing at least the premium savings (the difference between the annual PPO and HDHP premiums) to an HSA. Ideally, they “max” it out annually ($3,450 limit for an individual in 2018, and $6,900 limit for two or more people). An added plus with HSAs is the ability to invest within an HSA. Most custodians require a certain amount to be maintained in cash ($2,000 for example) for healthcare expenses, but anything over and above that amount can be invested, and hopefully grow over the course of time.
DCFSAs, or Dependent Care FSAs, have gained in popularity as more and more families are having to incur daycare-related expenses. A DCFSA allows an employee to contribute dollars ($5,000 limit in 2018) to an account on a pre-tax basis (also avoiding FICA/payroll taxes) that will eventually be allocated towards childcare expenses. The main caveat is that the childcare provided must be “qualified.”
HSAs and the various FSAs are easy ways to save on taxes. By simply taking advantage of an HSA and a dependent care FSA, a family could save as much as $4,000 annually in income and payroll taxes. Sounds like an extra family vacation!
Most employers provide life insurance benefits of at least $50,000 (as the first $50,000 is tax-free), if not some multiple of the employee’s annual compensation. Employers might also offer the opportunity for their employees to purchase supplemental life insurance with post-tax dollars. This coverage is typically provided for on a guaranteed basis at a group rate. While it’s nice to have coverage guaranteed, you may be better off obtaining an individually-owned policy if you are healthy. You are likely to get a better rate guaranteed for typically 10 or 20 years, and some group policies may not be portable when an employee leaves their job. This could be troublesome if your health has changed and you are unable to qualify for reasonable
Long-term disability is a critical benefit that is provided for by many employers. In the event an employee becomes disabled, long-term disability insurance typically “replaces” a percentage of their lost wages (50% or 60% as an example). Some employers provide good disability benefits while others do not offer any coverage or have plans with very limited benefits. Also note that disability benefits will be taxable if the employer paid the premiums; unless those premiums are included in your W-2 taxable wages. Three key areas to consider are the definition of disability, the maximum benefit amount, and whether or not there is a cost of living adjustment.
The definition of disability is key in that you want a “regular” or “own occupation” definition for an extended period of time, as opposed to a short time period with a definition thereafter of “any occupation.” This is especially critical for highly specialized professions like physicians. We don’t see too many physicians that have labored through years of training who are content with the idea of working in “any occupation.” You want to protect yourself for the occupation you have trained for all these years.
One must also be cautious about the maximum benefit allowed under a group plan. Some plans have limits of $5,000 or $10,000 (per month). If the goal is to replace your earnings, these limits could be very damaging to your family’s lifestyle. If your plan has such limits, please consult with your trusted financial advisor about potential individual disability policies to supplement any employer-
Many group disability plans also do not offer a cost of living adjustment. Thus, if your monthly benefit at age 35 is $10,000, most group plans will only pay you $10,000 per month through age 65. Given the potential impact of inflation throughout the next 30 years, you would be losing ground in your true buying power. It’s critical to have a cost of living factor in your disability plan.
Long-Term Care Insurance
One other insurance-related area is long-term care insurance. Many insurance companies no longer offer such insurance on a group basis. Therefore, it is imperative that individuals discuss options for long-term care with their trusted financial advisor. It is often a significant risk to the success of your retirement plan.
Most employers offer their employees the opportunity to contribute to a Traditional 401(k) and/or a Roth 401(k). Contributions to a Traditional 401(k) are pre-tax while contributions to a Roth 401(k) are after-tax. It is also important for employees to understand whether or not their employer “matches” employee contributions, and what needs to be done to take full advantage of this opportunity. For example, some employers will match 100% of the first 3% of contributions and then 50% of the next 2% (4% altogether). So if an employee contributes 5% they’ll be garnering an 80% return on their investment without even incurring any risk. Free money!
Open enrollment is a great time to consider whether to switch from a Traditional 401(k) contribution to a Roth 401(k) contribution. While you would not get the upfront tax benefit for a Roth contribution, the Roth 401(k) grows tax-free and all withdrawals are tax-free if done during retirement. We highly recommend having Roth assets available during retirement to provide for flexibility each year depending on your specific tax situation. For example, if you want to take that extra vacation, wouldn’t it be great to take a tax-free distribution from your Roth IRA vs. paying tax on yet another Traditional IRA withdrawal?
We hope this summary provides you a better idea for some of the options you’ll have available to you during the upcoming open enrollment season. The key is to truly understand the benefits and not simply click the buttons to rollover your elections from the prior year. Please feel free to reach out to us with any questions you may have.
John D. Dovich & Associates, LLC is located at 625 Eden Park Drive, Suite 310, Cincinnati, OH 45202. For more information, call 513.579.9400 or visit www.jdovich.com. John D. Dovich & Associates is a Federally Registered Investment Adviser. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information within this material is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.