Autumn is a time for pumpkins and fall foliage. It also is the season for open enrollment. Each can conjure up feelings of wonder; not always the same kind though.
To ease any perplexing thoughts you may have about the latter, here’s information about what open enrollment is and which benefit options can impact you the most now and in the years ahead. First, let’s cover the basics.
Usually held in October and/or November, open enrollment is a time period in which employees may select or change the benefit options they have through their employer. Each company offers different choices; the most common ones include: health insurance, dental insurance, vision insurance, FSAs, HSAs, disability insurance, group life insurance, accidental death and dismemberment (AD&D), and 401(k) plans.
From a financial-planning perspective, the options with the most significant impact include:
High-Deductible Health Plan (HDHP)
A high-deductible health plan requires you to reach a higher-dollar deductible amount than traditional plans (e.g., HMOs, PPOs) before your coverage kicks in. Full coverage applies only after you pay the out-of-pocket figure. Preventative care (e.g., annual physicals) typically is covered without meeting a deductible; however, visiting the doctor for anything else will cost you whatever the negotiated rate is for that provider (assuming he/she is in network). As an example, I recently paid $175 for a trip to the pediatrician for a strep throat culture for my son; with past traditional plans, this would have cost me a $20 or $30 co-pay.
The high-deductible amount you must meet depends on your plan. Your employer and provider have some flexibility in this figure, but the IRS has a say too. The IRS requires employees to meet minimum deductibles each plan year. (The amount for 2018 is $1,350 for individual HDHP plans and $2,700 for family-coverage HDHP plans.) In the strep throat example above, my son’s doctor visit charge would apply to the $2,600 family-coverage deductible and the $175 would be considered an out-of-pocket medical expense.
So why would I choose this option when it costs so much more to go to the doctor? The reason is that HDHP premiums usually are much lower than traditional plan options. That’s a big advantage to families who typically don’t visit the doctor often. Additionally, individuals with certain HDHP plans are eligible for health savings accounts.
Health Savings Account (HSA)
An HSA is an account opened and owned by an employee who is enrolled in a HDHP. As an HSA owner, you can set aside money on a pre-tax basis (i.e., no federal, state, Social Security, or Medicare taxes) to pay for out-of-pocket medical expenses not covered (or only partially covered) by insurance. That’s a great benefit to you, but what’s even better is how an HSA can be used as a financial-planning savings tool. HSAs are the only accounts that allow: a deduction upfront, tax deferral on growth, and tax-free withdrawal in the future. Here are some ways this can play out if you have one:
- Contributions are pre-tax or tax-deductible and can either be deducted directly from your paycheck or funded with a lump-sum payment.
- Distributions and any growth within the account are tax-free.
- When used for qualified medical expenses, money can be withdrawn tax-free at any time – even years later.
- Any remaining balance within the account at year-end will roll over to the next year.
- You can take your HSA account with you if you leave your job.
- You can change contribution amount throughout the year (the limit for 2018 is $3,450 for individuals and $6,900 for families).
- If you’re 55 or older, you can contribute an additional $1,000 per year.
Financial planners love HSAs. You can fund the account annually, invest it for several years (similar to a 401k) and, if you’re able to let that money sit and grow, you can use it for tax-free health expenses in your retirement years. What’s not to love?
Flexible Spending Account (FSA)
Like HSAs, FSAs allow you to set money aside for qualified health care expenses and provide a tax benefit to the employee (i.e., account owner). However, unlike HSAs, an FSA doesn’t require enrollment in a HDHP. FSA accounts typically are funded through your paychecks as a voluntary pre-tax deduction. Throughout the year, you make claims on qualified expenses that are reimbursed tax-free. This also is a cost savings because you pay for your qualified expenses with money that was never taxed.
There are two types of FSAs:
- Health care FSAs – reimburse you for health expenses, such as co-pays, deductibles, vision care, and dental expenses.
- Dependent care FSAs – reimburse you for care given to your eligible dependents for expenses such as: daycare, after-school care, and elder care.
Employers can set their own funding limits as long as it’s within the IRS maximum guidelines. For health care FSAs in 2017, the maximum was $2,600 annually; it’s projected to be the same for 2018. For dependent care FSAs, the maximum continues to be $2,500 per year for individuals or married couples filing separately, or $5,000 for a married person filing jointly in 2017 and 2018.
A key difference between FSAs and HSAs is what happens to unused funds at the end of the year; unlike HSAs that roll this money over to the next year, FSAs typically are “use it or lose it” at year-end. Therefore, FSAs cannot be used as a long-term savings strategy, like HSAs. Given this distinction, it’s important to consider the following if you select an FSA:
- Calculate your typical health care and/or dependent care expenses so as not to have funds left at year-end. (Some plans do allow you to carry over a maximum of $500 from one plan year to the next.)
- Ensure the IRS considers all your expenses a qualified expense.
- Submit all reimbursement requests in a timely manner so you don’t face insurmountable deadlines at year-end.
- If you plan to leave your job, use all your FSA funds before your last day. Once you leave, you’ll no longer have access to your FSA account. (One exception is if you’re eligible for FSA continuation through COBRA.)
One final point about HSAs and FSAs: you can’t participate in both an HSA and FSA unless you initiate an HSA plan that also allows you to open a limited-purpose FSA. (Most limited-purpose FSAs only cover dental and vision expenses.) If you’d like to participate in both, ask your HR representative what your place of employment offers.
We’re Here to Help
If you have questions while reviewing your 2018 company benefit election packet, don’t hesitate to use us as a resource. Our advisors will be happy to review your choices and discuss the best benefit options for you based on your current situation and goals.
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