A Checklist for Open Enrollment Season
If you're signing up for employer-provided benefits, don't just re-up for last year's choices; read this first.
A version of this article was published Oct. 17, 2019.
One of the best aspects of full-time employment is being eligible for employer-provided benefits: health insurance, participation in a 401(k) plan, and so on. That's particularly true in 2020, given that so many workers have experienced job losses due to the coronavirus crisis and related economic downturn.
But as grateful as you may be to have access to those benefits, registering for them can be a bit unnerving, too. The terminology may be unfamiliar unless you work in HR, and the menu is apt to change, at least a little, from year to year. The fact that you can typically adjust your benefits only during open enrollment season in the last few months of the year, before coverage begins for the following year, just adds to the unease. If you choose wrong, you're stuck with your benefits elections until next year. I'm sure I'm not the only one who makes benefits elections, reviews them, and reviews them again before finally hitting "OK" and then printing out the screen shot for good measure.
And the uncomfortable reality is that healthcare insurance--the main item on the employee-benefits menu during open enrollment--has been getting more costly. While inflation on the whole has been fairly benign, total employee healthcare costs have been rising steadily and are estimated to increase by 5.3% in 2021, according the annual survey from the National Business Group on Health. Of course, employers absorb the biggest share of healthcare costs--about 70%-80%, on average--but employees are still on the hook for a sizable share. Employees with self-only coverage will pay about $3,000 in premiums in 2021, and those with family coverage will pay more. Total out-of-pocket costs, including deductibles, are even higher.
If signing up for employer-provided benefits is on your to-do list in the waning days of 2020, don't just re-up for whatever you did last year--as tempting as that might seem. Here are some of the key steps to take to ensure that you make the most of your benefits package.
Step 1: Take Stock of Your Own Situation
Before you even get into reviewing changes in your benefits, take stock of your own needs, including changes in dependents and the healthcare needs for yourself or your family. Of course, you can add or subtract dependents at any time; you don't have to wait for open enrollment to do so. But having children, for example, can ramp up healthcare consumption. Have your prescriptions or doctors changed? Do you expect your own healthcare consumption and spending will increase, decrease, or stay the same in 2021 versus what it was in 2020? Has your doctor urged that you go ahead with a big elective procedure next year? Don't try to forecast your spending down to the penny; a rough estimate is fine.
Step 2: Familiarize Yourself With Any Plan Changes
The next step is to take a closer look at what benefits are on offer through your employer and how they've changed since the previous year. You'll naturally focus on how your healthcare premiums are changing, but don't stop there. Take into account the whole spectrum of healthcare outlays, including deductibles, copays, and out-of-pocket maximums.
In addition, survey the types of plan on offer. High-deductible healthcare plans, or HDHPs, have been common additions to many employers' healthcare coverage in recent years. In 2019, 30% of workers were covered by an HDHP, according to the Kaiser Family Foundation. The good news for fans of choice is that fewer large employers are expected to offer a high-deductible plan as the sole option than in years past. Just a fourth of the firms polled in the National Business Group on Health said they planned to offer only an HDHP in 2020, down 14 percentage points from 2018.
In addition to reviewing the baseline healthcare coverage options that are available, be sure to read up on any changes to or new ancillary benefits that are available to you: vision and dental care, flexible spending accounts, dependent care flexible spending accounts, life insurance, and so on. Companies will often offer education sessions and materials when they introduce new benefits; if you have additional questions after surveying these materials, reach out to your benefits administrator.
Step 3: Assess Healthcare Options
At the top of the to-do list during open enrollment season is selecting the right healthcare plan. Unfortunately, choosing well isn't as simple as picking the plan with the lowest premiums, as many different factors can affect your total outlays: deductibles, copays, and out-of-pocket maximums. In addition, you'll want to factor in the providers available through each of the plans. If you absolutely must see certain doctors, check to see that they're available in the network that you're considering and factor in how much you'll pay if you need to venture outside of that network.
If you have a choice between an HDHP and a PPO, don't reflexively choose one or the other without running the numbers first. Premiums are usually lower with the HDHPs, making them a logical choice for people who don't have a lot of healthcare expenses on an ongoing basis. Some preventive care is apt to be covered under the HDHP irrespective of the deductible, too. But out-of-pocket costs may also be higher: For 2021, the maximum out-of-pocket cost for single coverage under an HDHP is $7,000 and $14,000 for family coverage. (Your own plan's out-of-pocket max may be lower, however.)
You often hear the quip that HDHPs are best suited to "the healthy and the wealthy," and there's some truth to that. But employers may give incentives to employees to sign up for coverage under the high-deductible plan by contributing to their health savings accounts, which employees covered by the HDHP can use to cover out-of-pocket healthcare costs. That helps reduce the risk of high out-of-pocket costs that employees often associate with HDHPs.
Step 4: Make FSA/HSA Elections
Because healthcare coverage usually entails at least some out-of-pocket spending, companies frequently offer health savings accounts or flexible spending accounts to help cover such costs; they may also contribute on employees' behalf. Both HSAs and FSAs offer tax benefits, but there are significant differences.
With a flexible spending account, you can save for out-of-pocket healthcare expenses on a pretax basis; the IRS hasn't released maximum FSA contributions for 2021 yet, but they're projected to remain at $2,750. The money you save in an FSA doesn't roll over from year to year, however, and you don't need to be covered by any particular type of healthcare plan to contribute.
By contrast, you can contribute to an HSA only if you're covered by a high-deductible plan. Because out-of-pocket outlays with HDHPs can be meaningfully higher, the HSA contribution limits are substantially higher, too: In 2021, single people covered by an HDHP can contribute $3,600 to their HSAs, while people with family coverage can contribute $7,200. Assets in an HSA roll over from year to year. Indeed, major tax savings can accompany HSAs if the money is invested in long-term securities and left undisturbed for many years; the growth is tax-free and so are withdrawals for qualified healthcare expenditures. (In that case, the HSA saver would use non-HSA funds to cover healthcare costs as they arise, the better to harness the long-term tax benefits of the HSA.)
If it turns out your employer-provided health savings account isn't the best, don't let that deter you from contributing to it. It's possible to contribute to your employer-provided HSA and then periodically transfer the funds to the HSA of your own choice. Given that flexibility, Morningstar's annual research on the best HSA plans is especially useful; Fidelity's HSA rose to the top in 2020.
Note that it's possible to have both an HSA and an FSA, but if you're covered by a high-deductible plan and are contributing to the HSA, your FSA must be designated a "limited purpose FSA." That means the funds must be used for nonmedical expenses like vision and dental.
Step 5: Assess Dental and/or Vision Coverage
Dental and/or vision coverage are often on the menu alongside healthcare coverage. Costs are often quite reasonable, but be sure to read the fine print about what's covered and at what rate. Preventive dental care is typically covered under most plans; that includes two checkups and cleanings a year. Other types of dental care will only be covered at a discounted rate. As you survey your choices, be sure to factor in which providers are covered and at what rate; as with doctors, this is crucial if you're wedded to a certain provider.
Step 6: Select Disability Insurance
Disability insurance, which provides you with a percentage of your income if you're unable to work because of illness, injury, or accident, is hands-down one of the most underrated items on employee benefits menus. According to the Social Security Administration, one in four workers age 20 or over will encounter a disabling condition that lasts a year or longer. Meanwhile, 5.6% of workers will experience a short-term disability (six months or less) owing to illness, injury, or pregnancy on average every year.
The good news is that most employers offer short-term disability insurance, covering periods of three to six months, free of charge. Long-term disability insurance kicks in when short-term disability ends, providing 50%-70% of income during the disability period. The employee typically pays a premium for long-term disability, but the cost is generally much lower than for individual coverage.
One fork in the road for purchasers of long-term disability insurance is whether to pay premiums using pretax or aftertax dollars. If you opt to pay with pretax dollars, your benefits will be subject to federal income tax. If you pay premiums with aftertax dollars, any benefits would be free of federal taxes. My bias is to go the aftertax route to enhance the eventual benefit in case of disability, especially given that disability insurance replaces only a percentage of your income to begin with.
Step 7: Review Life Insurance Coverage
Your employer may offer a small amount of life insurance free of charge; many employers provide a benefit equal to 1 times salary. But should you purchase additional coverage through your employer? The question comes down to need, first and foremost. If you have dependents, you have good reason to add additional coverage, either through your employer or on your own. It's worth noting that the underwriting process for a group policy is apt to be less stringent than would be the case for a policy that you purchase on your own, and the cost may also be more attractive. If you're purchasing a significant amount of life insurance, however, it pays to comparison-shop among insurers to ascertain whether the coverage offered through your employer is indeed a good deal.
Step 8: Review Other Benefit Options
Last but not least, take stock of additional benefits that might be on offer, including dependent care FSAs, student-loan repayment programs, public transit assistance, and long-term care insurance. Your employer's menu may change from year to year, and so might your own needs.