Open Enrollment: Employee Benefits You May Not Know About

 

Got employee benefits? That means when fall rolls around, you have something else: open enrollment season.

Think of open enrollment as an employer-sponsored buffet. Laid out in front of you is a spread of benefits relevant to different aspects of your life, including health, retirement and transportation. As you go down the line, you can pick and choose what suits your tastes and needs.

While health insurance is the centerpiece of open enrollment, it’s usually only one of many offerings on the table. To varying degrees, all are intended to bolster your financial well-being, often by lowering your taxes. And sprinkled among them may be particularly good deals, paid for wholly or in part by your employer.

 

 

But don’t wait to dig in. Once your employer’s open enrollment period is over—it usually lasts at least two weeks—it’s too late for you to scoop up or switch many important benefits. You may have to stick with what you’ve chosen in the past or be locked out altogether. And while you may be able to add or drop other benefits throughout the year, open enrollment season is a great time to step back and reassess your needs.

Of course, the exact menu you’ll see at open enrollment varies among employers. Here are some popular options you might want to consider if they are available to you.

 

Health savings account

If, during open enrollment, you opt for a high-deductible health plan (HDHP)—the fastest-growing type of employer-provided health insurance—get ready for a, well, high deductible. In 2020 (and 2021), you’ll have to spend at least $1,400 out of pocket for an employee-only plan ($2,800 for a family plan) before your insurer starts to kick in payments.

You may find that tough to swallow, but helping an HDHP go down easier is another account you can open up, or add to, only if you have an HDHP: a health savings account, or HSA.

One big advantage of an HSA is the tax break you get from making a contribution. Here’s a simplified description: Let’s say you are in the 25% tax bracket. That means for every additional $1,000 you earn, you owe the IRS $250. Put another way, every time your boss pays you another $1,000, you end up with only $750 you can spend on health care or other costs. (Actually, you’ll get $673.50, since you’ll also owe Medicare and Social Security taxes. But we’ll skip that in order to keep the illustration to big, round numbers.)

Put that $1,000 from your boss directly into your HSA, however, and you’ll have that same amount to spend on health care—office visits and prescriptions, for example. That’s because the IRS doesn’t count as income, or tax, contributions to your HSA (which, in 2021, you can max out at $3,600 for a single-person plan, $7,200 for a family, and an extra $1,000 if you’re 55 or older by the end of the year). Three-quarters of employees with HSAs also get contributions from their employers (in 2016 those averaged $916 for single coverage and $1,617 for family coverage). So, HSAs can help you really stretch your health care dollars.

 

While health insurance is the centerpiece of open enrollment, it’s only one of many offerings. All are intended to bolster your financial well-being, often by lowering your taxes.

 

Once money is in your HSA, you can keep it there for as long as you want until you need the cash for healthcare costs. And if you’re really confident about your health, you can invest some of it in mutual funds or other securities; that potentially lets you build up your HSA to handle medical expenses years down the road.

 

Health flexible spending account

If you don’t have an HDHP, you can still get a slice of the benefits of an HSA by contributing to a health care flexible spending account (or “flexible spending arrangement”—FSA for short). During open enrollment, you can designate pretax income (up to $2,750 in 2020 and 2021) to be set aside in an FSA to pay for various medical and dental expenses (notable exceptions: over-the-counter drugs, and cosmetic surgery unrelated to an injury or medically necessary surgery).

In the past, people have been reluctant to order up FSAs because of their “use it or lose it” feature. That is, if they didn’t use the money set aside for a calendar year for medical expenses incurred that year, they forfeited the money. Good news: Employers are now allowed to let you extend that deadline. Either you can have until the middle of March of the following year to use up your FSA, or you can carry over up to $500 in unspent FSA money to that year. (Not all employers cut you these breaks; the ones who do will give you only one of those options.)

 

Dependent care FSA

If you have children younger than 13, or a dependent of any age unable to care for himself or herself, you can set aside up to $5,000 in a separate FSA for dependent care. You get the same tax breaks that you might get from a health care FSA or an HSA, as long as you use the money for qualified expenses like after-school programs, adult day care, a babysitter (while you’re at work, not for date night) and summer day camp (but not overnight camp).

Unlike with a health care FSA, you can’t get around the calendar-year “use it or lose it” rule. So, don’t bite off more than you can chew by contributing too much. If your child is enrolled in an after-school program this fall, you can estimate the weeks (and cost) of that program in the new year (and perhaps the fall after that). If you’re thinking about using the FSA for summer camp, keep in mind that the average cost of day camp is $271 per week, according to 2015 figures, and can go higher than $800 per week.

 

Retirement

Almost as popular a dish as health care is retirement: Nearly six in 10 employees have access to a 401(k) or similar retirement savings plan at work. During open enrollment (or actually at anytime during the year) you can choose to contribute part of your salary into a tax-advantaged investment account. The money you contribute is tax deferred; the 2020 and 2021 contribution limit is $19,500 (plus $6,000 if you’ll be 50 or older by year-end).

Within the 401(k), you have a selection of funds to invest in; if your choices overwhelm you, you might want to consider a target-date fund, which will automatically change the asset allocation mix over time. Any growth in your investment over the years is tax deferred, and you pay taxes only upon withdrawal (ideally at retirement time). (If you're in a Roth—vs. a traditional—account, withdrawals are federal tax free if you meet certain criteria.)

The icing on the 401(k) cake is that if you put money in, your employer probably will too. Formulas vary, but a common one is for your employer to contribute 50 cents for every dollar you put in, up to the first 6% of your pay that you contribute. So even if money is tight, try to put enough in your 401(k) to max out your employer’s contribution. That could give you an instant 50% return or better on your money. Sweet!

 

Life insurance

Life insurance can be an inexpensive open-enrollment benefit. Nine out of 10 employers surveyed by insurance broker Arthur J. Gallagher in 2014 offered their employees life insurance, with 90% of those offering managerial employees free term life policies in the amount of one to two times their base salary. At most of those companies, employees could also buy additional insurance, often at competitive rates and without any medical check-up.

If your employer offers this supplemental insurance, consider taking it. Pricing tends to be good, and often you can retain the coverage even after you’ve left your job. (There’s no carry-out option for employer-provided coverage.)

These policies, however, might not satisfy all your insurance needs. If you are married and have children at home, for example, even two years’ salary might not be sufficient to sustain your family’s financial security.

 

Disability insurance

Putting food on the table is a tall order if you’re disabled and no longer able to go to work. But disability insurance can really help. Short-term disability insurance pays you a percentage of your salary if you’re unable to work for a short period of time—say, in the neighborhood of 26 weeks. Long-term disability can compensate you for years, until you either can return to work or reach retirement age. Both usually pay around 60% of your base salary.

Most employers who offer employees any form of disability insurance usually do it for free; in that case, taking it is a no-brainer. But if your policy requires a contribution, consider it anyway, since buying on your own will probably be more expensive. In fact, the risk of disability is higher than that of death. The Social Security Administration Opens in new window estimated in 2016 that a 20-year-old male has a 14% chance of dying before reaching retirement age, but a 28% chance of becoming temporarily or permanently disabled.

 

Commuter benefits

If you have an uncomfortably long commute (or expect to once COVID-19 is history), you can make it more palatable with commuter benefits. Your employer may allow you to set aside pretax money for transit passes or for commuter vans or buses. You can also set an amount for parking, whether it’s near your workplace or close to the spot where you catch your train (or bus or ferry). The total you can claim for commuter benefits is $260 per month.

Do you bike to work? You can get reimbursed at the rate of $20 each month that you ride in to work, as long as you aren’t collecting any of the other commuter benefits for that month. You can use that money to buy a bicycle, repair it or store it.

Not sure how you want to get to work? You can change your commuter benefit throughout the year, not just during open enrollment. And as long as you’re with the same employer, use-it-or-lose it rules don’t apply.

 

Footnotes

 

George Mannes, a former senior editor at Money, has been writing about investing and personal finance since 1998.

 

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