Fall. It’s the time for homecoming, football, Halloween, and…open enrollment.
While specific open enrollment dates can vary from employer to employer, open enrollment allows employees to opt in or opt out of an array of benefits.
Elections are binding for a year, so it’s important to choose wisely to ensure proper coverage and to maximize tax savings.
The following questions and answers can guide your decisions.
High Deductible Health Plans vs. Traditional Plans
Q: Should I choose a high deductible health plan (HDHP) or a traditional plan?
Many employers offer a choice of health insurance options. A high deductible health plan (HDHP) has lower monthly premiums but employees pay more before insurance kicks in.
According to the Kaiser Family Foundation, employees pay an average annual premium of $6,400 for an HDHP and $7,700 for a traditional single coverage PPO plan, a difference of $1,300 per year.
This means if you expect to pay more than $1,300 in deductibles, you’d be better off going with a traditional plan.
Another consideration: HDHPs can be paired with a health savings account (HSA).
Q: Is an HDHP/HSA combination right for me?
It might be. HDHP/HSA combinations are best for healthy families that do not expect to have hefty medical bills.
To participate in an HSA, you must be enrolled in an HDHP.
And the icing on the cake: If the HDHP/HSA combination is right for you, you’ll also enjoy the only triple tax-free investment available.
HSA contributions—which can be used to cover deductibles or out-of-pocket medical expenses—are free from federal and most state taxes, earnings are tax deferred, and qualified withdrawals are tax free.
Health Savings Accounts
Q: How much can I contribute to an HSA?
In 2019, an individual can contribute $3,500 and a family $7,000 to an HSA. Folks over 55 can make an additional $1,000 catch-up contribution.
Q: What are the immediate HSA contribution tax savings?
Immediate tax savings are a function of your federal tax bracket, the state you live in, and whether you’re able to make contributions through a payroll deduction, which saves on social security and Medicare tax withholding.
Dependent Care and Deferred Compensation
Q: Is a dependent care flexible spending account (FSA) for me?
If you have kids in daycare, summer camps, or before/after school programs, this benefit is for you.
You can use pre-tax dollars (free of income tax and other payroll taxes) to pay for these expenses.
You’re capped at $5,000, but if your effective tax rate is 30%, taking advantage of dependent care FSA comes out to an annual tax savings of $1,500 per year.
Q: What about deferred compensation?
Some highly compensated workers have an additional benefit to consider—deferred compensation plans.
At Nike, for example, employees make this election in the fall for either their base pay in the subsequent calendar year, or their performance bonus, or long-term incentive plan.
We’ve written extensively on the pros and cons of deferred compensation plans to help you decide whether participating in one is best for you.
How Vista Can Help
By taking your specific situation into account, Vista can help you evaluate tax implications of your open enrollment choices and get you off to a healthy start in 2020.