My husband recently started a new job and had to go through the benefits enrollment process and not surprisingly several questions came up. Should he enroll into a HSA? Can he add more money into a dependent care spending account even though I had already elected one. How much life insurance should he elect for? So, I thought it would be fun (is it only fun to me?) and helpful to write a post about the main aspects of a standard benefits package offered to new employees by large companies and what to enroll in and what NOT to enroll in.
Health Plans and the HSA: As the cost of health-care continues to rise, more and more of the costs are being shifted to the employee. If you are a healthy individual or couple and take no medications, strongly consider opting for a high-deductible health plan (HDHP) + healthcare spending account (HSA) or the cheapest health coverage available through your employer. While I definitely wouldn’t recommend foregoing health coverage altogether and some employers I think require you to show proof of health insurance if you opt out, there’s also no point in electing to pay a higher premium for more comprehensive health coverage if you don’t need it. However, if you have a family with kids or have ongoing medical conditions, or take medications, then you should opt for a more full coverage plan. Remember also to check to see if your medication is covered by your health plan. It might’ve been covered under your previous plan, but it might not be covered under your new plan. If it’s not covered and can’t be changed to an alternative and it’s expensive, you can plan to fund a health-care FSA to help offset the costs. Also remember to make sure and double check to see if your spouse isn’t already enrolled in a health plan, because then if your employer offers the option, you may be better off opting out of electing into a health plan. In my experience, people don’t often benefit much from having double coverage unless you have a lot of health problems and/or take a lot of medications. The money you save on monthly health insurance premiums can be better put elsewhere instead of wasting on double coverage. Now if you get free or nearly free health coverage offered as part of your benefits package than that’s a different story as is the case with a lot of health-care providers.
A quick few words on the HSA. A HSA is a special tax-advantaged medical savings account that works like a triple-tax advantaged healthcare IRA. How? You get to put in pre-tax money, that you can then invest with significant flexibility and that investment grows tax-free. If used for qualified health-care expenses, the distributions from a HSA are also tax-free. That means the money you put into a HSA and use for health care expenses that you would probably have to pay for anyways, is completely tax-free! There is no other account I know of that offer this triple tax-advantage (with one very special exception Roth IRA for a child). Sign me up right? Not so fast. In order to be able to contribute to a HSA, you must have a high deductible health plan (HDHP) and not be covered by another health plan such as a spouse’s or Medicare. For 2016, the IRS defines a HDHP as any plan with a deductible of at least $1,300 for an individual or $2,600 for a family, however you pay a lower premium than you would with a traditional plan. If you can afford a higher deductible and/or are pretty healthy with low healthcare utilization, a HDHP is a great choice, if for nothing else than to be able to invest in a HSA. HSA’s are often colloquially known as a “stealth-IRA” because the funds in a HSA unlike in a FSA do not expire, but roll over year to year and therefore can serve as a smart way to save for post-retirement health care expenses, where it is highly you will need it. If you leave your employer, the HSA goes with you as well. My husband’s new employer would also contribute a $1000 into the HSA. That’s free money right there! Unfortunately and fortunately, we get free healthcare coverage through me and therefore no HSA for us.
Going back to checking with your spouse, if you are married or in a registered domestic partnership, you should double-check what kind of benefits your partner has elected. If one of you have better benefits, then you might be able to enroll all the benefits you need through one partner and the other partner can possibly receive a higher wage/salary in lieu of a benefits package. For example, my employer allows us to opt out of our entire benefits package and instead choose to receive higher pay. Remember to do some calculations to make sure it’s in your best financial interest to do this since the extra money you receive is rarely equal to the price tag of the full benefits package.
Life Insurance: Many employers offer a small amount of free life insurance coverage, generally $50,000 to $100,000, which if you have people dependent on your income, is not that much. The professional advice is that you need 7-10x your income in life insurance, which personally I feel depending on your situation is a little excessive. Some employers might offer more. Just make sure it’s free. However, when considering if you should purchase life insurance through your employer, first, determine if you even need life insurance. If you have no one dependent on your income to live, then you do NOT need life insurance. It’s as simple as that. However, if you’re married to a stay at home spouse, and/or have young children, or have sick and/or elderly parents you support financially, etc. then you do need life insurance. I am definitely in the “buy term and invest the difference” camp when it comes to life insurance. Very few people will benefit from any kind of whole life insurance and this includes its variants universal life or variable life insurance. Please do your research with an unbiased professional (that means not the life insurance broker/agent or a even a financial advisor who might be getting a commission) before purchasing any type of whole life insurance.
In general, I’d say do not buy life insurance through your employer. Here are my reasons why. If your employment gets terminated for any reason, you will most likely lose the term life insurance policy you’ve been paying for. I called my employer’s life insurance provider MetLife and they told me should I terminate my employment with my employer, I will have 30 days to purchase the term life insurance policy with them, but they can not give me even a rough estimate on the cost since all of that will be variable based on my age and health condition at that time in the future. Since generally life insurance gets more expensive with age and you never know if you’ll develop a medical condition down the line, if you are young and in good health, it’s best to purchase an outside policy instead since once you lock in that price, it will stay that price for the term you purchased it for, regardless of your employment status. For example, using Term 4 Sale site which gives quotes for term life insurance, a 38 year old female, non-smoker in excellent health can obtain a 20 year term life insurance for $500,000 coverage for $255/year from an A+ rated insurance company. As long as you pay your premiums, you’ve locked in the $255/year price for 20 years. That’s probably the same or even cheaper than what’s offered by your employer’s group term life insurance coverage as was the case in my experience, but I recommend to always do the math and compare your situation. The only time you should be looking into your employer’s group term life insurance coverage is if you are older and/or in poor health and can not qualify for a good rate from an outside policy. I ran another quote through term4sale.com and kept the same age and sex, but this time I selected smoker and average health. Now the premiums shoot up to $1250/year! So run a quote on yourself and compare against the costs of what your employer is offering, but unless it’s significantly cheaper, in general you’ll be better off purchasing an outside policy.
Flexible Spending Accounts (FSA), Health-Care & Dependent Care: Ahh flexible spending accounts (FSA), a benefit I feel is underappreciated and often overlooked by employees. I wrote about my love for these two accounts before here in my post, Save Money with FSA’s. To summarize, FSA’s allows you set aside pre-tax money in an account that you can then use to reimburse qualified expenses. Contributions to an FSA are taken out of your paycheck and escape federal and state income taxes, as well as Social Security and Medicare taxes. The higher your income tax bracket, the more you save. They do have some caveats, the biggest one being the use or lose it rule which means that if you have any funds left over in the account at the end of the calendar year, you lose that money. It does not roll over to the next year for you to use, so keep that in mind when deciding to elect how much you want to contribute into the plan. For 2016, the maximum contribution to a health-care FSA is $2550 and to a dependent care FSA is $5000 and this limit applies to everyone in the household. So between you and your spouse, you can both only elect up to $2550 for a healthcare FSA and $5000 for a dependent-care FSA total. So as I mentioned above, double check that your spouse hasn’t already elected the maximum contribution limit to these two FSA’s before you elect into them too.
Almost anyone can benefit from a health-care FSA since you can put in as little as $100 or up to the contribution limit of $2550 for 2016. Health-care FSA’s cover a myriad of qualifying health-care expenses such as copays for office visits, prescriptions, deductibles, eyeglasses, contact lens and a lot more all of which you would have to pay for anyways, so might as well get a tax break. A dependent-care spending account can soften the blow of the high cost of childcare, but the caveat is that both spouses have to be working or one must be a full-time student or disabled for the expenses to qualify. If one parent works part-time, only the days both parents are working are covered expenses. For an example on the cost-savings, we elected $1000 for the healthcare FSA and $5000 for the dependent care FSA for a total of $6000 and we saved about $2400 as a result. How awesome is that!
Direct Contribution Retirement Plans 401(k)/403(b)/457: Most employees should be enroll in the automatic paycheck deductions into their company sponsored retirement plan such as a 401(k) or 403(b). Having direct contributions taken out of your paycheck will help make saving less painful since it’s automatic and you don’t ever see the money so it doesn’t hurt as much. If you have the option you should also consider electing the automatic increase as well since let’s face it most of us will forget to increase the amount/percentage to contribute year to year. Deductions into a 401(k) are also pre-tax money, which reduces your taxable income. If you are a high income earner, you should be maxing out your 401(k) as I wrote about here. If you can’t max out, then you should contribute at least up to the full employer match. An employer match to a 401(k) is literally free-money that you really shouldn’t pass up. Even if the match is small, it still adds up over time and with compound interest.