Fall is a time of leaves changing colors, children going back to school, families enjoying Thanksgiving dinners, and… open enrollment. Yes, it’s the opportunity for most employees to select which benefits they will have for the following year. Here are some of the most common mistakes we see people make:
Not fully understanding the value of an HSA-eligible health insurance plan. These plans tend to come with lower premiums (what you pay per month or paycheck for your coverage) but higher deductibles (what you pay out-of-pocket before most of the insurance benefits kick in) than standard health insurance plans. In addition, enrolling in one of these plans makes you eligible to contribute pre-tax dollars to an HSA (health savings account) that can be used tax-free for qualified medical expenses at any time.
While it’s easy to compare the difference in premiums and deductibles, don’t forget to factor in the value of the HSA. First, many employers will actually make contributions to your HSA for you. That’s free money! You can also deduct any contributions you make from your taxes.
For example, I spoke with an employee who would save almost $1,900 a year in premiums by choosing the high deductible health plan. In addition, he would receive $1,000 in his HSA from his employer and would save almost $2,000 in taxes by contributing another $6,000 to the HSA. The $4,900 in total savings dwarfed the difference in deductibles.
Once you turn 65, you can also use them for any purpose without penalty and they’re still tax-free for qualified health care expenses (including some Medicare and qualified long-term care insurance premiums). That’s why many HSA custodians let you invest the money. (Just be sure not to invest any money you may need in the next few years.) One option is to not use your HSA for current health expenses so that it can grow to be potentially tax-free for future health expenses in retirement. In that case, you may want to keep the receipts for unclaimed medical expenses in case you need the money since you can withdraw the money to reimburse yourself anytime tax and penalty-free.
Under- or over-funding an FSA. FSAs (flexible spending accounts) let you put money away pre-tax that can be used tax-free for health or dependent care expenses. If you’re in the 24% tax bracket, that’s like getting a 24% discount on those eligible expenses. Not taking full advantage of these accounts could cost you hundreds or even thousands of dollars in lost tax breaks.
However, there is a catch. Unlike HSAs, FSAs are “use it or lose it” so you don’t want to contribute more than what you’re pretty sure you can spend. (Having a general health care FSA also precludes you from contributing to the more valuable HSA in the same year, but some plans let you contribute to a “limited purpose FSA” for vision and dental expenses in that situation.) If you do end up with extra money in the account at the end of the year, try to use it by stocking up on qualified supplies like contact lenses and prescription drugs.
Not taking advantage of a prepaid legal plan. Do you have updated estate planning documents like a will, durable power of attorney, advance health care directive, and living trust? If not, you can save a lot of money by using your employer’s prepaid legal service to have these documents drafted or updated. You pay a fee per paycheck, but the legal services are free or heavily discounted. You can then choose not to renew it the following year after you’ve gotten your documents in place.
Assuming your employer-provided disability and life insurance is enough. Employers typically cover short-term disability but not long-term disability so you may want to purchase it in that case. Even if you employer does offer long term disability insurance, it may not be enough to cover your necessities so you may still want to consider purchasing a supplemental long-term disability policy. (The good news is that employee-paid disability benefits are tax-free.)
Your employer may offer you life insurance coverage equal to one or more times your salary, but you may want to purchase additional life insurance if you have dependents since that likely won’t be enough to provide for them. You can use this calculator to estimate how much you need. Then compare the cost of purchasing it through your employer with the cost of a policy in the individual market. (See if your coverage at work can be converted to an individual policy once you leave the job.)
Your benefits can be a significant part of your total compensation, and open enrollment can be your only chance to take full advantage of many of them. When in doubt about your selection of benefits, see if your employer offers a financial wellness program with free guidance and coaching from unbiased financial planners who are trained on your particular benefits. Then, go and enjoy the holidays knowing that your family is protected.
The views of the author of this article do not necessarily represent the views of Gradifi. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. Readers should consult their own attorneys or other tax or financial advisors to understand the tax, financial and legal consequences of any strategies mentioned in this article.