Guide to Annual Benefit Enrollment

Nov 2, 2023

It’s Annual Enrollment Time… this year, commit to looking at your benefit choices with a fresh set of eyes instead of just rolling over what you did last year.  These decisions can have long-reaching impact on your financial well-being!  We are happy to speak with you about de-mystifying some of these choices so feel free to book a meeting with your Envest advisor as this is a complicated topic.

benefit-enrollment

Medical Insurance

Health care offerings can be the most complex to understand and can have the biggest impact of all your benefits.  If your HR department is providing benefit sessions for explanations and questions, make the time to attend.

A mid to large-size organization may offer employees a choice between 3 basic types of plans:

  • Health Maintenance Organization (HMO)
  • Preferred Provider Option (PPO)
  • High Deductible Health Plan (HDHP)

In general, an HMO will restrict physicians that you can see to a specified network.  Typically you also must see your primary care physician (PCP) prior to making an appointment with a specialist.  Lower cost comes with fewer choices.  If you are in excellent health and do not have an interest in saving now for healthcare expenses down the road, this may be the best choice.

A PPO will provide the most flexibility and typically the highest cost.  You may need to confirm that your physicians are in the network (otherwise do your cost analysis based on the out of network expense columns).  Pay attention to the deductible.  While many services may come with a reasonable co-pay, others (an orthopedist, for example) may require that you pay 100% of the plan-negotiated rate (lower than what is “charged” typically) until you have paid your full deductible – then insurance will cover approximately 80%.  If your coverage is for you plus family members, there is a per person and per family deductible; understand how likely you are to have to pay those amounts.

A HDHP (often the lowest monthly premium) is a little more complicated to assess but is our favorite selection to make if you are in relatively good health with no expected complicated procedures.  Only the HDHP will allow you to make contributions to Health Savings Account (HSA).  This is a “triple tax advantaged” account worthy of its own blog post for its benefits but is a wonderful way to get in front of health care expenses down the road (and they will only increase!).  To get the most from your HSA you should plan to invest the funds and not spend them during the year as they roll over and go with you should you leave your employer.  If you do choose to spend them, try to do so sparingly, the biggest benefit is realized with long term growth.

Most employers will make a contribution (free money!) to your HSA as an incentive to choose this plan.  Your own HSA contributions are pre-tax (like your 401K contributions) meaning that someone in the 30% tax bracket could contribute $3,000 (for example) into an HSA that would be worth only $2,100 on an after-tax basis.  This leaves $900 more for health expenses. As a downside, with few exceptions (annual physicals, well woman visits etc.), you will be paying 100% of the negotiated rate for physician services until you reach your deductible.  So when you do the math on this choice, it’s safest to assume you may reach your full deductible.

You can fund your HSA in 2024 at the following levels (all include any employer contribution):

  • 4,150 for self-only
  • $8,300 for couple or family coverage
  • $9,300 for 55+ couple or family coverage

Your HSA funds, in addition to being contributed pre-tax, can be invested in interest-bearing and/or mutual fund choices; will grow tax free until they are used; and you will not owe any tax on the growth as long as you use the funds for acceptable (and the list is large) health expenses.  When you leave your employer, your HSA goes with you.  It is a peerless savings vehicle.

Retirement Savings

Another critical benefit.  If your employer makes any kind of match to your contributions (free money!), ensure that you set aside at least the amount needed to maximize the employer match.  Ideally, you should put as much into your retirement savings as your budget and the IRS allow.  If you are over 50 or will turn 50 in 2024, you are eligible for even higher “catch up” contributions.

A typical 401(k), 403(b) or 457(b) plan will give you the opportunity to save pre-tax dollars into an investment account, lowering your current year tax burden and growing your retirement nest egg.  Unlike the HSA account (above), however, you will pay tax on these funds when you access them in retirement.  For many people, their tax bracket may be lower in retirement making this a desirable choice. For others who are unsure of future tax brackets or who can take some pain now for future payoff, a Roth 401(k) may be a great choice if your employer offers it.  (Note:  you can also split contributions between the traditional and the Roth).

Many individuals earn too much to be able to open a Roth IRA account.  This type of account (unavailable to single filers in 2023 with modified adjusted gross income above $153K) allows after tax contributions to be invested and ultimately withdrawn tax free.  A Roth 401(k) account does not have any associated income limitations, however, thereby opening this tax-advantaged savings tool to a wider group of individuals.  As long as your withdrawals are qualified, you will not pay any tax on Roth 401(k) withdrawals (for contributions within the elective deferral caps).  In addition, the SECURE 2.0 Act eliminated a prior requirement to take required minimum distributions from a Roth 401(k) making these accounts even more desirable.

Life Insurance

Your employer may be the most cost-effective source of life insurance for those of you who need it.  Typically you may be given 1x your salary by your employer for no out of pocket expense.  The great option, however, is to purchase additional coverage for a relatively nominal amount, often without medical “underwriting” (specific analysis of your personal health situation.)

When you leave your employer, you can reach out to the insurance provider to determine options for portability of this policy.  Because it is offered at a group rate, this may be your most cost-effective insurance choice in the years when you need it the most.

Disability Insurance

Take whatever option your employer is offering you for additional long-term disability.  Hands down, this insurance is one that most of us feel free to “skip.”  Statistically, it is one that most of us are most likely to need.  We would ideally encourage you to evaluate a private disability policy with robust coverage, but experience has taught us that many people won’t – or will be put off by the cost.  However, if you are a sole breadwinner with 2 or more dependents this insurance is worth pricing privately.

In the meantime, buy the maximum possible through your employer; because it is written at a group level, the relative expense is low.  Like life insurance, you can inquire about portability if/when you leave your employer and still need the coverage.  When you are paying the premium, any benefits would be tax free when received.  For coverage that your employer pays for, the associated benefit would be taxable.

Keep in mind that for both Life Insurance and Disability Insurance, you may need to file additional paperwork or undergo a medical exam. If you did not elect to purchase these policies when you first joined your company, your employer and the insurance provider will often allow you to do so later. However, be prepared for a more rigorous application process, which may include underwriting. This could potentially delay the coverage start date.

Other Tax-Advantaged Options

Some other offerings such as commuter benefits, dependent care accounts, flexible spending accounts (FSAs) and employer-funded Health Reimbursement accounts (HRAs) are also important to consider for tax and expense management.  Length doesn’t permit us to delve into each of them here, and many have been around for long enough that you will have familiarity with them.

Often Overlooked Benefits

In addition to commonly known benefits like health insurance and retirement plans, employers often offer a variety of overlooked perks. These can include legal assistance, gym memberships, and tuition reimbursement for continuing education. Some companies may also provide employee assistance programs for mental health support, or discounted or free tickets to local events. It’s always a good idea to thoroughly review your benefits package to ensure you’re taking full advantage of what your employer offers.

Bottom Line

A key element of your compensation is the benefits package offered by your employer.  Take the time to ask questions and understand the rules and requirements that accompany each offering.  It can feel overwhelming – but it is worth taking the time to make an informed decision.

We are happy to have conversations with clients who may want more in-depth guidance.

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