Open enrollment for marketplace health insurance is underway until Dec. 15.
At the same time, many employer plans are also in their open enrollment period, allowing you to modify your benefits selections. This is an opportunity to take a fresh look at your employer-sponsored benefits each year to assess whether to add or drop any for the coming year.
Your employer-provided benefits are more than just a reward for your hard work. From a broader perspective, these benefits provide an important way to identify and cover risk in your financial plan, as well as receive certain monetary or tax benefits for you and your family.
Managing tax benefits
The monetary aspects of each employer-provided benefit are usually the most obvious, such as lower health care premiums or employer-provided life and disability insurance. A bit subtler are the tax savings provided by certain benefits. For instance, you can derive financial benefits by participating in retirement plans that allow you to save pretax dollars or pay for expenses with pretax cash flow. Some examples include:
- Maximizing 401(k) or other retirement plan contributions to reduce your taxable income. Over the years, I’ve heard many clients say they “can’t afford to maximize” their retirement plan contributions. The reality is that the tax benefit received from deferring income into a qualified retirement plan makes the contribution cost less from a pure cash flow perspective. For example, if you defer $24,000 per year the real loss in cash flow is closer to $14,000 because your taxable income is reduced by $24,000. Assuming you’re in the highest married filing jointly tax bracket, when you do the math, your tax payments will be reduced by $10,000. At the very least, contribute to the level of any available employer match so that you’re not leaving free money on the table. Think about the last time someone gave you money for free!
- Other ways to reduce taxable income include Health Savings Account contributions, or Flexible Spending Account contributions. Each of these provide tax benefits to you by having you defer money from your paycheck, pretax, to use throughout the year to pay medical bills or child care expenses, if you have an FSA for that purpose. Read: 7 things you need to know about Health Savings Accounts.
Let’s turn our attention to the less obvious benefits of your employee benefits plan — to help you manage a variety of risks to your long-term financial plan.
- Health insurance and family coverage:
In our article, “5 steps to maximize the value of your health care plan,” we provided ideas to help you maximize your insurance plan, whether it’s through your employer or purchased by you through the exchange.
You may want to schedule any elective procedures early in the year. You can begin thinking about things you want to handle in January or February to increase the chance of meeting your deductibles during the year. We also suggest you take the time to audit all your medical bills.
Finally, consider whether circumstances may change during the upcoming year and begin to plan accordingly. The birth of a child, retirement, a divorce or other family change will have implications, and the sooner you consider options, the better you’ll be able to handle the transition.
- Life insurance:
If you’re the sole breadwinner, and especially if you have children, consider adding life insurance either through a term policy, or buy the coverage you need through your employer plan.
Two advantages of employer-provided plans are that costs are often lower than an individual policy, and oftentimes, underwriting requirements are less stringent in a group plan. So, if you have a medical history that either prevents you from getting coverage or makes it very expensive, an employer-provided group plan could be your best or only option.
- Disability insurance:
Related to health risks is the risk of disability, which could cause you to lose earnings during a time that health care costs and support services may be increasing.
Some employers provide a base level of disability insurance coverage and often allow you to purchase additional levels of coverage that would increase the income you receive should you become disabled. This type of insurance is very important for primary breadwinners or if you are single. This is one of the first insurance coverages I look at when working with divorcees or individuals who suddenly become the primary breadwinner for their family.
While we think of 401(k) and other retirement plans as a way to support our spending in retirement, we often miss the importance these plans have in maintaining our future purchasing power.
This assumes that you are investing your 401(k) in equities and other investments whose growth outpaces inflation. While recent market volatility may cause some people to feel uneasy and sideline some of their retirement savings in a money market option inside their plan, chances are the low interest that money fund is paying won’t outpace inflation over the long-term.
Unless you’re within five years of retiring or needing the funds, you should consider these accounts as longer-term investments that are designed to tolerate short-term market fluctuations.
Whether you own your own business or are an employee, now is a good time to review all of your benefits. Ask yourself two simple questions:
- Has anything changed in the past year that may suggest a change is in order?
- Do I anticipate anything in the coming year that may warrant different selections?
There’s a small time frame during which you can change your benefit selections, so stay aware of those deadlines and budget time to review your options. That’s the only way you’ll identify ways to address risk in your financial plan while also confirming you’re taking advantage of potential tax benefits for you and your family.
Dawn Doebler, CPA, CFP®, CDFA® is a senior wealth adviser at The Colony Group. She is also one of the founders of Her Wealth®.