As hard as it’s to believe and accept, Summer 2021 is on its way out. I hope each of you made 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, health care, life and disability insurance coverage, and often ancillary benefits such as pre-paid legal plans. The window if 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.
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 have increasingly appeared on the scene. These can be confusing, as they present a higher potential initial out of pocket, but also contain a total stop loss on payments, potentially a cash employer contribution to a Health Savings Account, and then the ability for a person to accumulate money completely tax free for use for 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. https://www.michaelwlynch.com/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. 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, co-pays and other medical services. The IRS offers a splendid publication https://www.irs.gov/publications/p502 that details all that can be purchased under the umbrella of health care. Typically, you will elect either a Health Savings Account or Flexible Spending Account. The former accompanies a high deductible plan and the money will remain in plan from year to year. The latter sits aside a more traditional health care plan and the money is use it or lose it.
Another way to save on taxes—but certainly not money—is to have children who need day care. If you are a Dependent Spending Account, which allows up to $5,000 in contributions in 2021, will let you spend this tax free. It can also apply for a disabled spouse who needs attention or even 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.
Don’t Die for Free
We are increasingly getting more of our life insurance through our employer. This has some fantastic benefits, less hassle to obtain initially and easy payment terms, as the funds come from our paychecks. It also has some downsides, as I see it often leading to complacency that can put your family at risk if you’re under covered or leave your job and your coverage behind and your pocketbook in peril if you pay too much in premium as you age.
Prepare yourself prior to that ten-day period when you must elect coverage. First, determine how much life insurance you need with a detailed analysis of what happens to the people you love if you die tomorrow. Again, we are happy to help you with this. Contact Sarah at my office to schedule a call. 203-513-6058 or sarah.rizk@barnumfg.com.
Second determine how much of this can be acquired through your group plan and, most important, under what terms and at what cost. Group plans typically increase premiums every five years as we age. It’s starts cheap at the beginning of our careers and often ends up expensive.
At one company for which I have rates, a 25-year old non-smoker will pay $31.50 a month for $500,000 in coverage while a 55-year old will pay $145 a month.
Third, determine the range of premiums you would pay if you went into the private marketplace and secured a policy. This can be done many ways, including online or by contacting an independent insurance agent who has access to quotations from multiple companies.
Once you have figured out the likely private costs—it’s always a guess until the companies get a medical on you—you can compare the overall value of covering all or a portion of your protection need though group or private or a combination thereof. Be sure to calculate the group premiums for the duration of the expected term. A private plan may start out more expensive but provide big savings over the last decade of coverage.
Key action item: If it appears private insurance is a better value for you, you need to apply early enough that you are approved by the end of the open-enrollment period. A cornerstone concept is protection planning is don’t give up any insurance until you have the replacement contract fully executed.
Protect the Money Machine
Disability Income Insurance is increasing becoming an option to elect at open enrollment. With disability, as with life, you should also 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 they won’t replace 100 percent of your income. Given that most people live on all their income—when essential savings in 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 income to support themselves and sometimes workers past age 65 for whom the group coverage would only pay out of 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, which is small, the benefit which is large is income tax free. 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.
Bells and Whistles
You company may offer other valuable benefits, in addition to these core offerings. Common free offerings include Employee Assistant Plans that provide professional help in tough times. A potentially valuable offering I’ve myself used in the past is group legal plans—I think of them as HMOs for lawyers—that provide you will 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 the offering booklet your employer provides carefully. 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 your last year’s elections. These may serve your needs. They 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, a member of Ed Slott’s Elite IRA Advisor Group and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020. You can find more articles and videos at michaelwlynch.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.
Securities, investment advisory and financial planning services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to complete or cover every situation, and should not be construed as legal, tax or accounting advise. Clients should confer with their qualified legal, tax and accounting advisors as appropriate.