Although it may not yet feel like fall outside, we are approaching the last quarter of 2016 and the time when employer benefits open enrollment occurs for the coming year. Before that benefits package hits your mail/email, here are a few things to consider in advance and discuss with your advisor.
Are you covered by a High Deductible Health Plan (HDHP)? An HDHP is defined as having a deductible of at least $1,300 for Singles or $2,600 for families. If your health plan qualifies, you are eligible to contribute pre-tax money to a Health Savings Account (HSA), up to $3,400 for Singles in 2017, or $6,750 for families per year. By contributing pre-tax money, you reduce your current taxable income, but more importantly, when the money is withdrawn from the HSA for qualified medical expenses, it comes out tax-free. There is currently no other investment vehicle in which pre-tax money goes in and tax-free money comes out.
- The ideal situation is to maximize contributions to the HSA each year you are eligible (by having a high deductible health plan) prior to age 65. During that time, you pay your medical costs from cash flow and leave the HSA alone. Once you retire, that account stays with you and is then used in retirement to pay qualified medical expenses, free of taxation.
- Even if you need to tap this account during a year while you are still working, you still benefit by having the withdrawals come out tax-free for qualified medical expenses.
- The cash in the HSA can be invested to help it grow for the future. Investing is typically allowed once the account balance reaches $1,000.
- Remember that HSA account balances carry over from year to year. There is no “use it or lose it” aspect to these types of accounts.
- Use of an HSA can also be a great way to save for the medical insurance costs incurred by a pre-65 retirement.
- You can typically change your deferrals to an HSA throughout the year, so this doesn’t need to wait for benefits open enrollment.
Long-Term Disability – Many employers offer long term disability as a part of their benefits package for employees. However, it is important to understand what you are getting with their offering and if that is sufficient to cover you in the event of a disability.
- Most LTD offered by employers is paid by the employer. While this may sound like a great deal, it makes any disability benefits you receive taxable income to you, thereby reducing the value of that benefit amount.
- Most LTD offered by employers has a relatively short benefit period for payment of benefits. In the case of a disability where you can’t perform your job, it typically provides benefits for 18-24 months. At the end of that period, many group LTD policies change over to the “Any Occupation” definition, which means if you are able to work at “any” job, your benefits will cease.
- Most LTD offered by employers covers only a percentage of your base salary. For those who earn a substantial portion of their annual income via bonuses or commissions, this can represent a severe reduction in monthly income in the event of a disability.
- As an example, assume your annual income is $150,000, where your base salary is $75,000, your annual bonus is $75,000 and you have an employer-paid LTD that states it covers 50%. If this 50% is calculated on just your base salary, then the most your benefit would be is 50% of $75,000, or $37,500. This is before income taxes are taken into account. This benefit is vastly different from the $150,000 you have been earning and may not be sufficient to even cover the basics.
- Check with your employer to see if they offer an additional level of LTD coverage that allows you to pay the premiums, so that any benefit received is tax-free to you. If they don’t have an additional level of coverage, you should consider adding a private disability policy to supplement what you would receive through work.
Life Insurance – group life insurance can be a great way to adjust your total insurance coverages from year to year. Ideally, you don’t want all your life insurance through your employer, to protect against a lapse in coverage if you change employers or retire. Additionally, a private, level-term policy will typically cost less than group coverage as you age. If you don’t know how much life insurance you need to protect your family, contact your advisor to perform a needs analysis prior to benefits open enrollment.
If you are still employed, open enrollment for your annual benefits is an important time. Make the most of it this fall by being educated and prepared to choose wisely among the benefits offered by your employer.