By Michael W Lynch
As hard as it is to believe and accept, summer will soon be on its way out. I hope each of you is making the most of it. Hello football, falling leaves, and, for those working for large institutions, open enrollment for benefit elections. It’s this once-a-year opportunity on which I will now focus.
Employees of large institutions, government, corporations, and non-profits such as hospital chains typically enjoy a period in the fall of each year in which they can adjust their benefit elections, including health care, life and disability insurance coverage, and often ancillary benefits such as prepaid legal plans. The window is often tight—ten days for example—so it’s prudent to be prepared for the offering when it comes. These benefits are a key component of most people’s financial plans and it’s important to optimize them. (Our friends who are retired get a typically later and usually longer open enrollment period for Medicare, from October 15th to December 7th.)
Healthy Choices
Health coverage is traditionally the dominant benefit elected in open enrollment. The coverages and costs of the plans offered are compared in side-by-side tables. In recent years, high-deductible plans with health savings accounts (HSAs) have increasingly appeared on the scene. These can be confusing, as they present a higher potential initial out-of-pocket cost, but also contain a total stop-loss on payments, potentially an employer cash contribution to the HSA, and then the ability to accumulate money completely tax-free for spending on health care in the current or future years. As a financial planner, I value these flexible tools and have written about them. You can find my article here: Tax Me Never, Yeah Baby! It does require some analysis to know if such a plan will fit a person. We are happy to help you with this. Contact Sarah at my office to schedule a call at 203-513-6058 or sarah.rizk@barnumfg.com.
Who Doesn’t Like Tax-Free Money?
One way to spend $1 for every $1 you earn is to funnel it through a flexible spending account for health care. This is typically “use it or lose it,” so you need to figure out how much you are likely to spend on deductibles, copays, and other costs associated with the account. The IRS offers a splendid publication that details all that can be purchased under the umbrella of health care. Typically, you will elect either an HSA or a flexible spending account. The former accompanies a high-deductible plan, and the money will remain in plan from year to year. The latter sits beside a more traditional health care plan, and the money is “use it or lose it.”
Another tax break is available to those with children who need day care. A dependent spending account, which allowed up to $5,000 in contributions in 2021, will let you purchase child care tax-free. It can also apply to a disabled spouse who needs attention or even to dependent parents. At a 35 percent marginal tax rate, moving $5,000 this way saves you $2,700 in income, Social Security, and Medicare taxes.
Protect the Money Machine
Income if You Can’t Go to Work
Disability income Insurance is increasingly becoming an option to elect at open enrollment. With disability, as with life, you should conduct a thorough needs analysis to determine how much after-tax income your family needs if you can’t work. Insurance is always an expense, so you want to make sure you obtain the proper amount. Here too we can help. Contact Sarah at my office to schedule a call, 203-513-6058 or sarah.rizk@barnumfg.com. Plans vary widely, but one thing they all have in common is that they won’t replace 100 percent of your income. Given that most people live on all their income—when essential savings are included—I typically recommend taking as much as possible. Your needs analysis will determine if this is true for you. Exceptions to this include people who don’t need their full income to support themselves and sometimes workers past age 65 for whom the group coverage would pay out for only a few months or years. The second election that is increasingly common is whether to have the benefit paid by your employer or have you pay it or pay tax on the premium. Counterintuitively, you usually should pay it or have the employer’s payment count as taxable income to you. Here’s why. If you pay the premium or have it included in taxable compensation—a small amount--the benefit, which is large, is free of income tax. If your company does not pass the premium through to you as taxable compensation, the benefit is taxable. Finally, if your group plan is insufficient to meet your needs—or unusually expensive—you should look to the private marketplace to secure an individually owned policy.
Money if You Don’t Return from Work
Don’t neglect your potential need for life insurance. Make sure you’re not paying too much for it. Most employers offer some group term life insurance. It’s typically easy to enroll and, when you’re young, it’s very inexpensive. There is a catch, however, which is that the cost increases as you age, and you may lose it or its low price when you leave the company or experience a long-term disability. Now is the time to determine two things. First, how much insurance do you need and for how long do you expect to need it? Ask yourself what happens to the ones I love financially if I’m gone. Second, is it more cost-effective over the expected time I need insurance to acquire it through my employer, the private marketplace, or a combination? If you’re in good health and you expect to need insurance into your 50s and 60s, the private marketplace is usually substantially less expensive. It also provides you with ownership and control of the valuable policy. If you need help with the analysis, contact Sarah Rizk at 203-513-6058 or sarah.rizk@barnumfg.com and our team will be happy to assist.
Bells and Whistles
Your company may offer other valuable benefits in addition to these core offerings. Common free offerings include employee assistance plans that provide professional help in tough times. A potentially valuable offering I’ve used myself in the past is group legal plans—I think of them as HMOs for lawyers—that provide access to pre-paid legal services based on a low payroll contribution. Common uses for this include real estate transactions, wills and estate planning, and even traffic violations. Be sure to read carefully the offering booklet your employer provides. You never know when you may need to rely on some of the services. They are part of your overall compensation package.
Don’t Delay
Life’s busy and open enrollment comes and goes quicky. The default is typically last year’s elections, although some benefits may expire unless renewed. The status quo may serve your needs or it may not. Do yourself and your family a favor and take the time to thoroughly analyze your employer’s offerings and compare them to private alternatives. It may just make a big financial difference someday. As always, we are here to help.
Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT, and the author of three books: It’s All About The Income: A Simple System for a Big Retirement (2022), Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and most recently Taking Care of Your Future: The Yale New Haven Nurse’s Guide to Retirement (2024). You can find more articles and videos at michaelwlynch.com. He can be reached at mlynch@barnumfg.com or 203-513-6032. CRN202511-6990081