A Guide to Helping You Make the Right Choices During Open Enrollment
By Brittany Goodwillie, CFP®
Open enrollment is the time of the year when most employers allow employees to make changes to their workplace benefits. It can be overwhelming when your employer gives you what may seem like thousands of options with limited time to pick the "best" option, whatever that means. Instead of feeling anxious about all of your choices, focus on the big decisions you need to make and work through them one by one.
For several employees, open enrollment is in the Fall but the exact dates of when it starts and ends varies from company to company. The first step you should do is figure out when your open enrollment deadline is and put it on your calendar. You don’t want to miss the deadline, since you likely won’t be able to make changes again until the next year unless you have a qualifying event, such as marriage, birth of a child, or job loss.
Once you know your deadline, make time for each big decision one at a time so you aren’t as overwhelmed. Even if you think you will just make the same choices as last year, be sure to review them because the coverage could have changed. The choices that are best for you depend on your specific financial situation, but let this serve as a general outline of the decisions you will have to make.
One of the big decisions you will likely need to make is which health insurance plan to select. This may be the most overwhelming since you may be bombarded by the alphabet soup of acronyms: HMO, PPO, HDHP, HSA, and FSA. Here is the simple explanation of each:
HMO: A Health Maintenance Organization provides health services to you through a network of healthcare professionals. In this type of plan, you usually are unable to use providers outside of the network and sometimes you need a referral from your primary care doctor in order to see a specialist.
Is an HMO right for me? If the doctors and medical facilities included in your network meet your needs, you will often save money choosing an HMO plan.
PPO: A Preferred Provider Organization allows you to receive health services outside of your network of professionals, which is less restrictive than an HMO, and also more expensive.
Is a PPO right for me? If it’s very important to you to use a specialist outside of your network, you may want to pay extra for a PPO plan.
HDHP: A High Deductible Health Plan is one where you will pay lower premiums but you will have a higher deductible than traditional plans. That means that if you incur medical costs, you will have to pay for uncovered expenses in full until your deductible is reached.
Should I choose an HDHP? This type of plan usually makes sense for healthy individuals since they don’t typically incur many medical expenses outside of their premiums. If you don’t incur many medical expenses, the money you save by paying lower premiums could offset the additional expense you have when you do need care. If you have a lot of known health costs, paying the additional premium for a plan that covers more may be the better option.
HSA: A Health Savings Account is an account that individuals with a qualifying HDHP can contribute to. All contributions are tax-deductible and grow tax-free and can be used to make qualifying medical expenses tax-free. HSA funds roll over year after year and the funds remain yours even if you leave your employer. The tax savings generated from these types of accounts can make an HDHP very attractive.
Should I use an HSA? As long as you qualify, there is generally not a reason not to take advantage of using an HSA. Because of the tax benefits, it can be beneficial to contribute the maximum allowable amount to your HSA and invest the funds. If you have the cash flow to do so, you can pay out-of-pocket medical expenses with other funds and allow your HSA assets to continue to grow tax-free. HSA assets can be used for qualified medical expenses during retirement, including Medicare premiums and expenses. Contributing to your HSA and choosing the investment allocation can typically be done during open enrollment and often other times during the year as well.
FSA: A Flexible Spending Account is typically funded by pre-tax salary reductions which can then be used to cover out-of-pocket expenses. There are two general types of FSAs: medical FSAs and dependent care FSAs. Basically, any money that you put into an FSA you will avoid paying tax on. Any money put into an FSA is use-it-or-lose-it, so you have to be disciplined about using all of the contributions made during the year.
Should I use an FSA? This type of account typically makes sense if you have a large amount of expenses you know will occur in the upcoming year. It is important to note that if you have an HSA, you cannot have a medical FSA as well. However, you can have a dependent care FSA or a limited-purpose FSA with an HSA at the same time.
When deciding between your health insurance options, some companies will provide you with a tool that helps you estimate your expected expenses in order to decide which option makes the most sense for you. These types of tools can be helpful and I encourage you to use them. If you don’t have such a tool, you will have to do a bit more manual work. Consider what you typically pay each year for doctor and specialist visits and prescriptions. If you are young and healthy, choosing an HDHP could save you money because of the lower premiums and tax savings of using an HSA. If your costs are quite high due to health issues, choosing an HDHP may not be the best option. Be sure to read through each available plan so that you know what is covered and what isn’t so there aren’t any surprises.
Along with medical insurance, you will have the option to opt-in to both dental and vision insurance. The coverage for these benefits isn’t as important as medical insurance. Generally, the purpose of purchasing insurance should be to prevent catastrophic financial situations. For most dental and vision policies, there is a coverage limit, and you are responsible for paying everything beyond that. So while they may pay some expenses, they don’t usually protect you on the upper end, like medical policies do. Because of that, the coverage is often more of a nice-to-have than a have-to-have. Read through your specific company’s offering to see what is covered and what isn’t to decide if you would benefit from the insurance personally.
Disability insurance protects your ability to earn an income. Unlike health insurance, this item doesn’t take much thought. When in doubt, it’s usually a good idea to opt-in for the most disability coverage you can get. The more working years you have remaining, the more important it is to be sure you have adequate disability insurance. Long-term disability insurance is most important because if you become unable to earn an income long-term, it can be catastrophic. Many people will become disabled every year so don’t assume it won’t happen to you. You know how the saying goes: hope for the best but be prepared for the worst.
Group disability insurance offered through your employer is often much more affordable than private disability insurance, which can be extremely expensive. Disability insurance typically covers a percentage of your income if you become disabled, usually 60% or 70%. Most of the time, I encourage employees to opt-in to the most income replacement they can get. If you pay the premium yourself, the benefit will be tax-free if you ever need it, so it’s actually desirable to pay your own premium. If your employer doesn’t offer coverage or you need additional coverage, you can look into getting a supplemental private policy.
If you don’t have anyone who depends on your income, you likely don’t need to worry about life insurance. However, if your spouse or children depend on your income, then you can use life insurance to replace any income that they would have otherwise relied on.
Several employers offer basic life insurance coverage at no cost. They also often allow you to opt-in to additional supplemental life insurance coverage. The supplemental coverage is often convenient because you don’t need to go through medical underwriting to opt-in to a certain amount of coverage. If you have any health issues, the coverage offered through your employer can be less expensive than private policies. However, if you are healthy, private term life insurance can be quite affordable and you won’t lose the coverage if you leave your job. It’s worth looking into private term coverage to see if you can get a better deal than what your employer will offer through supplemental coverage. Try using Policy Genius to answer a few questions and get a basic quote.
401(k) / 403(b) Contributions and Investment OPTIONS
Other choices you could have during open enrollment are how much you are contributing to your workplace retirement plan, if you are making pre-tax or Roth contributions, and which investments you have selected. Normally, you can make changes to this throughout the year, so it’s not as time sensitive as the prior elections. Still, it’s a good reminder to make sure you are making the correct type of contributions (pre-tax vs. Roth) for your tax situation that year, you are contributing the right amount for you, and your investment allocation makes sense for your time horizon and risk tolerance. These are all decisions that we help our clients make and review periodically.
Depending on the company you work for, there may be several other benefits offered by your employer. These other items are likely not as important as the core ones that I went over. However, I encourage you to read through the options and at least know what is available to you. Below are a few common benefits that your employer may provide but the possibilities are endless depending on your company.
Free or reduced legal advice
Tax-free transportation options
Discounts to community events
Fitness center perks or local discounts
Open enrollment may seem overwhelming, but you can make it easier by breaking it down to a few key decisions. After you’ve submitted your choices, you can move on to eating Halloween candy and preparing for the holidays.
Want help with your open enrollment choices? Email me at firstname.lastname@example.org or call me directly at (248) 716-8307. Helping you make sense of your employee benefit options is one of the many benefits of working with a financial advisor.