Each year around November, many of us get an opportunity to enroll in our company’s employee benefit programs. You may receive a packet of information with health benefits, flexible spending account enrollment forms, life and disability insurance options and retirement plan information. It all can be a bit overwhelming. However, it is very important that you take the necessary time to understand your options and make your choices carefully so that you don’t miss out on an opportunity or run into an unanticipated problem later. Here are a few key items to consider.
1. Are Your Doctors in the Healthcare Plan You Are Choosing?
With the passage of the Affordable Care Act, most Americans are now required to have health insurance or pay a penalty. If your employer offers this valuable benefit, you should definitely consider enrolling — even if you have to pay a portion of the premium yourself. It is important to see if your healthcare providers participate in the plan that you choose. I have found it is much easier to call the doctor’s office and simply ask them if they are in the network rather than going through the insurance company’s website.
Before you call, make certain you know the specific name of the network, not just the name of the insurance company, since your doctor may not participate in all of an insurance company’s networks. You should then weigh the plan’s premium against the deductible, co-insurance and co-pays. While it is tempting to automatically select the lowest premium plan, this usually means you will have to pay more money when you receive care. Make certain that you choose an annual deductible that you can afford if you or a family member should have a significant illness or injury.
2. How Much Money Should You Put in Your Flexible Spending Account?
Flexible Spending Accounts (FSAs) allow you to voluntarily set aside up to $2,550 (the limit in 2016) each year without any federal or employment taxes deducted. The funds in this account can be withdrawn tax-free if they are used for qualified medical expenses for you, your spouse or your dependents. You should calculate the amount of these expenses carefully, since you must use all of your account balance each year or risk losing it.
Fortunately, effective 2014, employers have the option of allowing you to carry over up to $500 of unused FSA money into the next year. You can check to see if your employer offers this valuable option.
3. Do You Need Extra Life Insurance?
Some employers offer group term life insurance at no cost to the employee. While this is a great benefit, it does not mean that you should not consider additional coverage. Smaller employers typically provide only $10,000 to $25,000 of coverage, while larger employers may offer one to three times your base salary. If you have family members dependent upon you for financial support, then you might consider increasing this coverage.
However, be aware that not all group life insurance policies are the same. Some plans are actually more expensive than an individual plan purchased outside of your employer. You can shop around and compare premiums to determine if there is a lower policy available to you. It’s a good idea to make certain you stay with a reputable insurance company with “A” ratings from the three largest rating agencies: A.M. Best Company, Standard and Poor’s and Moody’s.
4. Does Your Company Offer Disability Insurance?
While disability insurance protection is certainly one of the most critical pieces of a financial plan, it is also one of the most overlooked risks. If your company offers this valuable protection, you may want to jump at the opportunity. Some employers provide disability coverage free of charge, while others may offer it as a reasonably affordable option.
If the company pays the total cost for you, then the benefit will be taxable when you receive it. If you pay the premium yourself, then you will generally have the choice to pay the premiums either pre-tax or after-tax. While it is tempting to select the pre-tax option in order to save a few dollars in taxes on the premiums, you will be taxed on any benefits you receive if you become disabled. In order to receive the benefits income tax-free, you may want to select the after-tax premium option.
5. How Much Should You Contribute to Your Retirement Plan?
The typical 401(k) plan allows you to contribute up to $18,000 (the limit in 2016) per year before tax. And, if you are 50 or older, you can typically contribute an additional $6,000. Since these deferrals are tax-free, your paycheck will not be reduced by the full amount of the contribution. Essentially, Uncle Sam is helping to fund your retirement with income tax savings on your contributions.
If your employer offers a match to your deferrals, you should always at least contribute the amount to capture the full match. However, make certain that you don’t contribute too fast. If you reach the $18,000 limit before the end of the year, then your employer will not be able to match your remaining contributions for the year. To ensure the maximum employer match, decide how much you would like to contribute annually and then simply divide it by the total pay periods for the year. You can enter this amount on your election form as either a dollar amount or a percent of pay.
The new year is also a good time to re-evaluate your investment allocations and to rebalance your investments to match your willingness to accept fluctuations in your retirement account. Your retirement provider should have questionnaires to help you determine what percentage to allocate to equities and fixed income. Alternatively, you could sit down with a financial planner (full disclosure: I am one) or another trained professional to help you with this important decision.
While preparing for next year’s benefit elections can be a daunting task, spending just one afternoon or evening sorting through them will allow you to take control of your finances and leave you the rest of the year to enjoy the holidays.
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Image: Todd Warnock