It’s time to be thinking about enrolling in benefits. For many companies, benefit enrollment begins in October or November, so now is a great time to look ahead at 2022.
Benefits enrollment gives you a chance to review what did and didn’t work in this last year, and, since you’re in decision-making mode, it also gives you a chance to look at the future landscape with some clearer eyes than normal. Benefits enrollment is also a time to perform some basic tax planning functions. Of course one of the simplest and more important tasks in benefits enrollment is updating addresses, dependents, and beneficiaries, but here are some good tips for what lies ahead in a few categories:
Often, there is one choice for your health insurance option; however, some employers still have multiple selections. There are generally three categories: PPO (Preferred Provider Organization), HMO (Health Maintenance Organization), and HDHP (High Deductible Health Plan).
The most limiting of the three plans is generally the HMO, which essentially mandates a certain physician network to provide care in order for the insurance company to pay the medical bill. The HMO has had a bad reputation in the last decade or two, and it’s somewhat rightfully so. The bad reputation is due to a limited physician network. Regarding the insurance coverages within the network, the coverage of an HMO might provide the lowest out-of-pocket of all the other insurance options to a degree.
A PPO is what most people envision when they think of health insurance. There are in-network physicians, and there are out-of-network physicians, but the health insurance company pays for both groups; it’s just the in-network physician care generally receives better pricing.
An HDHP is a health insurance plan that allows the insured to pay the first chunk of the health costs for a lower premium in return (an HDHP is essentially the same as a PPO, just with a higher deductible). The HDHP will often pay more for care than other plans, but only after the deductible is reached, resulting in greater up-front costs and lower back-end costs. With an HDHP, you are allowed to fund a Health Savings Account (HSA), which is an income tax-free method of saving for healthcare costs to better prepare for the deductible.
There’s one other form of “health insurance” that hasn’t been mentioned, and that’s direct-pay primary care. This is a newer form of healthcare, which essentially undermines the current health insurance system by paying a primary care physician a “subscription” premium, which gets you access to this physician for all visits. It’s kind of a Jerry McGuire approach to medicine with a “less patients, higher quality” philosophy. Select this option if your physician supports this model and you are looking for a very close relationship with your primary care physician.
There are certainly pros and cons to each health insurance selection, so before blindly choosing the same health insurance selection as the prior year, think about the health history and upcoming risks for you and your family. If you or a family member do not seek medical advice and treatment, other than routine meetings with primary care physicians, you might want to choose an HDHP and fund a Health Savings Account with the premium savings. If your family requires regular healthcare or even just travels a lot, you might be better off with a PPO. For many, the only time you might opt for the HMO is when an HMO is the only choice or if it’s very affordable compared to the other options available.
Most of the time, hospitals and large companies offer long-term disability insurance as a benefit. I typically see hospitals offer to pay for a certain amount of insurance with available buy-up options for additional insurance. Typically the amount of insurance offered might be to cover 50% of your base salary up to a maximum monthly benefit of $15,000 per month. The buy-up options might allow you to purchase an additional amount to cover up to 66% of your base salary. This insurance is generally very affordable compared to purchasing an individual disability plan; however, it’s important to note that the group disability insurance is only active while you’re employed with that employer.
There are two factors to consider when assessing the disability insurance offered at work: 1) What is your base salary vs. total income? and 2) Is the benefit taxable as income or income tax-free?
In the world of physicians and executives, there are generally multiple tiers of income. Physicians might receive bonuses that make up half their income (or more), and executives receive equity compensation, such as stock options or equity bonuses, as well as cash bonuses. For executives, these bonuses can make up the majority (sometimes 90%) of their income! When considering your benefits, such as disability insurance, it’s important to understand that the base salary is what’s being covered. If you have a base salary of $150,000, but your total compensation is $450,000, then you likely have disability insurance covering 50% of $150,000 annual income. That disability benefit ultimately translates to $6,250 of monthly benefit. If the benefits are taxable as income, then it could result in a take-home pay of approximately $4,000.
In any disability insurance policy, the taxation of the benefits is determined by the taxation of the premiums. If the premiums are deducted, then the benefits will be taxed as income. If the premiums are not deducted, then the benefits are received income-tax free. Typically, if your employer pays the premium, then the benefits will likely be taxable. An employer provides benefits as a business expense, so the benefit costs are deducted. If you have the option to purchase disability insurance through your employer, you will likely be asked if you want to pay with pre-tax (deduct the premium) or after-tax (do not deduct the premium) dollars. With disability insurance, you will want to select the after-tax option, unless you have received sound tax advice to act otherwise.
Your benefit packages generally offer some amount of life insurance. The employer usually pays for a minimal amount, and you are allowed to purchase more life insurance through the benefits enrollment process (oftentimes subject to health underwriting). If you are young and healthy, there’s a good chance a 20-year term policy purchased on an individual basis is significantly cheaper than the group life insurance policy. With a group life insurance policy, the premiums are averaged, so the young and healthy participants offset the cost of the older participants. An individually owned life insurance policy is tailored to the health of just one person specifically. So if you’re relatively healthy, the premiums are often inexpensive. If you’re not healthy, you might want to opt to purchase insurance through the group plan. It’s important to note that the group life insurance is usually only valid and active while you’re employed with that employer. It’s this way with virtually all group benefits.
An employer can pay for up to $50,000 of life insurance for each employee before the premium is taxable. If an employer pays for more than $50,000 of group life insurance, the employee receives an additional tax on their W-2.
Group life insurance benefits can also cover dependents and spouses. Like purchasing additional personal life insurance through a group plan, I’d recommend shopping for individually owned life insurance for spouses and dependents. The premiums are usually more favorable if owned individually, and you have control over the policies.
When reviewing your life insurance through the benefits enrollment process, it’s normally a good practice to review and renew your beneficiary elections. I also suggest reviewing all your beneficiary elections, including your retirement plans and other life insurance policies. This is a great time to make sure your financial plan is congruent.
HSA (Health Savings Account) vs FSA (Flexible Spending Account)
If you have access to an HSA, then you’ve selected a HDHP (High Deductible Health Plan). The HSA and FSA look very similar from a distance, but you’ll find significant differences.
The HSA works like an IRA for healthcare expenses. Money gets saved and invested on a pre-tax basis, and if the money is used for qualified healthcare expenditures, then there is no tax due on that money. Any amount leftover in the HSA that is not used by the end of the year, stays in the HSA account, and the money remains tax deferred; it gets saved for later, whenever that may be. The HSA does not expire. It then becomes a retirement healthcare account if it isn’t used during your working years. In fact, after the age of 65, the HSA can be used for any reason! It’s a multi-purpose account, doubling as a retirement account!
An FSA, on the other hand, is a sort of escrow account for health costs. Like an HSA, you can elect a certain amount of your paycheck to be credited toward the account each pay period. With an FSA, if you chose $100 per month to be contributed toward your FSA, then on January 1 of that year, you have access to all $1,200 that will be contributed to the account. The contributions are tax deductible, and the benefits are tax-free when used for healthcare expenses. The benefits are usually paid in a reimbursement form, so you’ll likely need to submit receipts to receive the benefits. With FSAs, they are only good for the elected year. An FSA is a use-it-or-lose-it benefit. Let’s say you put $100 per month in the FSA, then you have access to $1,200 of tax-advantaged healthcare funds for the year (anything beyond $1,200 is not tax-advantaged); if you use only $800 of the $1,200 available funds during that year, then you lose the leftover $400.
If you fund an FSA, you had better be certain that you will use all the money allocated to the FSA. Conversely, with an HSA, you are accomplishing multiple tasks: storing tax-advantaged money for healthcare costs and saving for retirement if those funds are not used.
There are certainly other employee benefits that are important but do not often require as much thought. These benefits include dental insurance, vision insurance, etc. While employee benefits are not the only way in which you should be protecting your family against unknown occurrences if you or your spouse were to get sick, hurt, or die prematurely, they can be used as a basis and springboard for planning for your future. The benefits enrollment process is a great time to consider and review your financial planning. Have your beneficiaries changed? Has your familial situation changed? Has your tax situation changed? Employee benefits are typically deemed ancillary benefits, but the act of enrolling is often the impetus to adding perspective to your future and considering a bigger picture.