Redwood Wealth Management

A fee-only, independent advisory firm

Benefiting From Your Company Benefits

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It’s that time of year again – the leaves are falling, there’s a slight chill in the air and you’ve just received your open enrollment packet to sign up for next year’s company benefits. While every company offers a different array of benefit options, we thought it might be helpful to provide you with some additional information on the benefits we see most often.

FSA (Flexible Spending Account) vs. HSA (Health Savings Account):

Although these accounts seem to be very similar to one another, there are significant differences between the two.  Both of these accounts allow you to set money aside to use for qualified health care expenses and provide a tax benefit to the employee/account owner.  Examples of qualified health care costs include health care deductibles, co-payments or co-insurance, prescription medications, and dental procedures.  You can find a complete list of qualified medical expenses for FSAs and HSAs on the websites listed below:

https://www.irs.gov/publications/p502/

https://www.irs.gov/publications/p969/ar02.html

Each account’s features are below:

FSA

  • Must be enrolled in the company insurance plan to be eligible to open an account.
  • The 2016 FSA contribution limit is $2,550.
  • Contributions are pre-tax and generally deducted directly from your paycheck.
  • Distributions are tax free for qualified medical expenses.
  • Contribution amounts are set at open enrollment and can only be adjusted during the year if there is a change with your employment or family status.
  • FSAs are either “use it or lose it,” or allow for a $500 carryover to the new year. If you have a balance over $500 or any balance at all for plans that don’t allow for the $500 carryover at year end, your unused account balance is forfeited.
  • You will no longer have access to your FSA account if you leave your job (One exception is if you’re eligible for FSA continuation through COBRA).

HSA

  • Must be enrolled in a high-deductible health insurance plan (HDHP) to be eligible to open an account.
  • The 2016 contribution limit is $3,350 for individuals and $6,750 for families.
  • Contributions are pretax 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 for qualified medical expenses.
  • Contribution amounts can be changed throughout the year.
  • Any remaining balance within the account at year end will roll over into the next year.
  • You can take your HSA account with you if you leave your job.

It’s important to understand which plan you are eligible to participate in so that you can plan appropriately for your annual healthcare costs and maximize the accounts’ tax advantaged benefits.  One last item to point out – you are not able to participate in both plans unless you are eligible to open a HSA plan that allows you to also open a “limited purpose” FSA.  Most “limited purpose” FSAs only cover dental and vision expenses.

Disability Insurance:

There are a few key points to understanding the benefits of company provided disability insurance.

  • Disability insurance will provide income protection if you are unable to work for an extended period of time due to an illness or injury that occurred outside of your job (car accident or falling from a ladder at home). It is not the same as worker’s compensation insurance.
  • Disability insurance typically covers a percentage of your income and may not cover any income from commissions or bonus payments.
  • Long term disability insurance policies usually require a 60 – 120 day waiting period before paying any benefit, while most short term disability policies require a 7 – 30 day waiting period.
  • The cost of purchasing disability insurance tends to be more expensive outside of a company or group policy.
  • If your company pays the policy premiums, your benefit payments will be taxed as ordinary income. If you pay the policy premiums, your benefit payments will not be taxed.

Due to the increased cost of purchasing disability insurance outside of a group plan, we usually recommend electing the highest benefit amount available through your company plan.  It’s important to review your total amount of disability coverage on a regular basis to ensure that you have enough coverage to protect you and your family from a significant loss of income.

401(k):

The 2016 contribution limits for company provided 401(k) plans will remain at the 2015 limits – $18,000 plus an additional $5,500 catch-up contribution amount if you are age 50 or over.  The contribution limits only apply to your contributions to the plan and does not include any company contributions or match.  There are several other points to review each year when it comes to your 401(k) plan, including:

  • The company match – at a minimum contribute enough to receive the full company contribution.
  • The vesting schedule – know when you will have full ownership of all assets in the account. You will always be 100% vested (have full ownership) of any contributions you make into the plan, but there might be a waiting period before you are fully vested for the company contributions.
  • Your investment allocation – is your account appropriately invested for your risk tolerance or should it be more or less conservative or aggressive? Your wealth advisor can assist you with those decisions.
Additional Takeaways:
  • Do I anticipate any major life changes this year (getting married, having kids, retirement)?
  • If I had to miss several weeks of work due to an injury or illness, would I be able to cover my month to month expenses?
  • Do my beneficiary designations on my 401(k), IRAs, and life insurance align with my wishes and estate documents?
  • Do I have enough disability and life insurance coverage, or am I at the point where I can self-insure against these risks?
  • Am I on track with my savings to meet my future financial goals?
  • Are my investments in line with my risk tolerance?
  • How much do I anticipate spending on out of pocket health care costs (doctor’s visits, prescriptions, vision and dental costs, non-routine medical procedures)?

The biggest takeaway is to not rush through your open enrollment packet and use this time to review your elections and fully understand your benefit options.  If you don’t fully understand your company benefit options, you could be missing out on fully maximizing their value for you and your family.