It is that time of year again, Open Enrollment. The time of the year where all of us corporate automatons get to pick which benefits will impact us for the next year. For most people this period represents the only point when they can choose their benefits for the coming year. There are of course some exceptions for those who change jobs, or have a major life event, but for the most part this is your chance. So let’s dive right into some of those options, shall we?
- HMO or PPO – An HMO or Health Maintenance Organization limits your coverage to doctors and hospitals in their network only. They also usually require a referral to see a specialist. They do tend to be the cheaper option.
A PPO provides a lower rate for in network coverage but will cover out of network visits. Also you are free to see doctors and specialists in the network. This usually costs more than an HMO. The choice between the two comes down to how often you may be traveling to an area out of network and how much flexibility do you expect in needing to see specialists or switch doctors without a referral. Finally, of course cost is a consideration. We currently utilize a PPO.
- High Deductible or Low Deductible Health Insurance – Many people assume if they expect significant health costs for a given year they should pick the low deductible. I have found the reality is more of a donut hole situation. For higher health costs the high deductible is usually equal all things considered. For lower health costs the high deductible is better. Somewhere in the middle the low deductible comes out ahead, usually somewhere between the lowest deductible and the out-of-pocket max.
The key here is to evaluate your expected medical expenses for next year. The first step is to determine the deductible out-of-pocket costs. To do so, take the amount over the deductible multiplied by the deductible percent. Add this to the amount under the deductible. Then take the lesser of this number and your out-of-pocket maximum to represent each plan’s Out of Pocket Costs.
Once you have this you need to add back into the low deductible the difference in yearly premium between the high deductible (H.D.) and low deductible(L.D.) plans. Next, remember only high deductible plans qualify for HSA Contributions. So take any HSA contribution you may make and multiply it by your marginal tax rate. Add this to your low deductible plan as well. Finally, to the high deductible plan you can add your marginal tax rate multiplied by any potential FSA plans. Now compare both numbers and choose the option with the lower cost. We currently utilize a High Deductible plan as we tend to have low yearly medical costs.
Out of Pocket Costs= Lesser of Out of pocket maximum or (Amount over Deductible *deductible %) + Amount under deductible.
H.D. = Deductible Out of Pocket Costs+ (FSA contribution * Marginal tax rate)
L.D.= Deductible Out of Pocket Costs + Yearly Premium Cost difference of plans+(HSA contribution*marginal tax rate)
Step 3: Compare H.D. and L.D.
- Dental Care – Usually you do not have many choices here. Still it is in your best interest to have dental insurance in case of surprise expenses so I will not say much more here.
- HSA – In most cases you want this. Up to $6,750 per household tax free usage for health care and you can leave it to accrue year on year even if you do not use it for it’s intended purpose now. So long as you have high deductible insurance you qualify for an HSA and can contribute either through your employer or directly with a deduction. It really is one of the best tax advantaged accounts out there. The only issue I have ever encountered with these is for a pharmaceutical purchase they require a prescription, over the counter or otherwise.
- Flexible Health Spending Plans – Tax advantaged like an HSA, but only for a period of one year and then for the most part you lose remaining funds. Some exceptions are provided for up to $500 depending on your employer. This plan is only available through your employer and allows contributions of up to $2,500 per year. If you choose a high deductible and your employer offers an HSA you want it over this. You may only choose one. If an HSA is otherwise not available directly from your employer I might still suggest looking for one from a private company and deducting your contributions. The only scenario for which I would recommend a Health FSA is if you have a low deductible and thus do not qualify for a HSA. Why? This is a use it or lose it account. It also has lower yearly limits. As such you are hit with a double whammy of less tax free space and a requirement to be accurate on how much to deposit so your money does not disappear.
- Vision Plans – I use to think these plans were like health insurance for your eyes. They are not. What you actually get for your money is a stipend for glasses or contacts. You also will have the cost of a yearly eye doctor appointment reduced to 0 or a co-pay. So you need to ask two questions. The first is will you be getting new glasses or contacts from one of their in network providers next year? I’ve found my plan requires us to buy from the most expensive places so I’m better off paying full price at a discount provider. The second is will the cost of the plan be less than your annual checkup. For that you should check with your doctor about how much they would charge without insurance. It’s important to note they often discount the cost to the insurance price when paying as such, so you really need to ask. If the premiums cost more than the what you expect to use then you should forgo this option. I am running the numbers again this year to decide if we keep the plan. It is usually close for my family.
- Dependent Care Flexible Spending Accounts – I will admit I have much love for this one. This plan allows you to pay for child care in a given year tax-free in a use it or lose it approach. There are some pretty strict requirements, among them ensuring that the primary purpose of the care is to allow both you, and if you are married your spouse, to work. Both parents must be employed. These are generally more valuable than the child care credit since there are no income phaseouts. If available and you have young kids you should definitely check these plans out. You can read more about restrictions here: https://www.fsafeds.com/explore/dcfsa
- Disability insurance – In my experience most corporate employers throw this one in for free. Of course you must be aware of the gotchas. Particularly these policies tend to only payout if you are incapable of doing any work, not if you are incapable of doing your specific job. This means payouts are far less likely. Still if you require such insurance then your employer’s plan may cost you less than other options.
- Life Insurance – Most large employers offer some sort of life insurance for free. Typically 1x your pay to start. It is important to note that anything over 50K you will pay imputed taxes against . Some employers allow you to reduce the amount to avoid the tax. Depending on your financial situation this may or may not be a good idea. We maintain a decent size private life insurance and are getting close to self insuring. As such we have lowered this amount to 50K.
- Additional Life Insurance – Most employers also offer to sell you additional life insurance coverage. As I’ve stated in the past I recommend against purchasing these options. Unless you are already sick and facing a hard time getting a plan on your own you should get a stand alone term life insurance policy. Why? Depending on what takes your life you may need to stop working before you pass. No work means no life insurance (or your work may allow an overpriced conversion to a term life plan at potentially usury rates).
- Retirement Contributions – Now is also usually a good time to consider increasing your retirement account contributions. While you can modify these throughout the year unlike the rest of these items, it’s a good reminder. Raise time is another potential time to modify these amounts.
- Other Benefits – I’ve found most employers offer other benefits, whether it be sales discounts, Family Counseling, or even over the phone medical advice. Your work is providing theses benefits to you free of charge. Take the time to look them over and determine if any of them will provide you value. I have personally bought a Corvette using a GM supplier discount from a former employer. I have also used numerous other discounts over the years.
What options have you decided to enroll in during open enrollment?