Open enrollment is most commonly known as a time to revisit your health insurance options but as the employment landscape gets more and more competitive, employers are now adding legal benefits, gym reimbursements, among a slew of other nifty options that employees might want to really consider. Open enrollment is also a crucial time to consider your financial well-being, as employers may offer additional life or disability coverage at a fraction of the cost you would pay otherwise with options to continue the coverage if you ever leave the company. Let's dig into what you should be on the lookout for from a financial perspective:
- Health insurance costs: The most associated coverage that comes along with open enrollment, and one of the most important. Make sure to compare monthly premiums, deductible amounts, maximum out of pocket and coinsurance costs for different plans. You’ll want to find one that fits your budget and medical needs.
- Tax Advantaged Accounts: Health Savings Accounts (HSA) are often associated with “high deductible plans” but with the 2024 contribution limits increasing by 7% up to $4,150 for individuals and $8,300 for families, they are an attractive alternative to the more traditional Flexible Spending Account (FSA) accounts plans. FSA’s are often referred to as “use it or lose it” accounts. HSA contributions are tax deductible and can be invested and grow tax fee. When you take the funds out to pay for qualified medical expenses those distributions are also not taxed. There is no other account that the IRS treats better than this one. The biggest drawback of the HSA plan is that the deductible is often $3,000 and the maximum out of pocket costs are also on the higher end being around $6,000-8,000 annually. Understanding the trade-offs involved when choosing a health insurance plan is essential.
- Retirement Contributions: ALWAYS review your retirement contributions. 2024 retirement plan contribution limits are $23,000 for employee contributions and those who are 50 years of age and older can make additional catch-up contributions of $7,500. As none of my clients have ever told me “I wish I saved less for retirement”, your employer may also allow additional “after-tax contributions” which do not have a contribution cap. Earning on these contributions grow pre-tax but can be converted to a Roth IRA to be distributed tax-free if certain requirements are met. Often times your employer defaults your investments into a target date fund mutual fund. This option is a “one size fits all solution” and may not be indicative of your personal situation, time horizon or risk tolerance. We often will rebalance our client's workplace retirement accounts into an asset allocation that is more reflective of their goals and doesn’t follow a herd mentality with the captive investment options offered. The moral of the story is trying to max out your retirement benefits as much as possible, capturing the full match that the company may give and making sure your investment options are reflective of your long-term financial goals and risk tolerance.
- Life and Disability Insurance: Employers usually cover 1-2 times your salary in the event of your death but as you assess your financial responsibilities and family situation, you may need more coverage. Some employers offer term life insurance policies for a fraction of the cost that you would pay elsewhere with an option for continuing coverage if you were to leave the company, but you would have to pay the fair market value premium. This is a decision to weigh as you discover the amount of coverage you may need to support your family. Things major needs you want to consider with life insurance are replacing your future income to pay for essential and discretionary expenses for any partner or spouse, the cost of childcare (if relevant) and covering funeral expenses. In the same breath, you want to evaluate your disability insurance to make sure you are comfortable with the default coverage your company may or may not give and supplement with internal or external coverage if necessary.
- Dependent care expenses: Some companies will allow you to put dependent care expenses into an FSA with pre-tax dollars to cover child or adult expenses. Remember if you take advantage of the dependent care FSA and the Child and Dependent Care Tax Credit you cannot claim the same expenses for both benefits.
- Overall Financial Impact: Make sure that you are calculating the overall cost of each benefit and aligning your financial plan with your budget. The cost of these benefits can add up quickly so make sure you also have adequate emergency savings for unexpected expenses that may arise. We recommend having 3-6 months of expenditures in an emergency fund. Try keeping it in a high yield savings account or money market fund. At the same time, you want to plan for your future financial goals like retirement, purchasing a home or another big-ticket item, saving for education, the list can go on and on. There are a lot of priorities to juggle here, and everyone’s situation is different.
Open enrollment is a time to optimize your benefits to help you achieve your financial objectives and protect yourself and your family. Carefully review all options and consider seeking guidance from a trusted financial advisor. Our clients have complex needs and we help them navigate life’s uncertainties, giving them tangible goals and steppingstones to accomplish what they want. Partner with an advisor that gives you the confidence in knowing you are tangibly working towards achieving your definition of financial freedom.
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