How to maximize your employee benefits during open enrollment

It’s been a year unlike any other, and it’s not over. But now that fall is upon us, open enrollment season is, too. It’s not quite as fun as, say, watching the leaves turn or drinking a pumpkin-spiced latte, but it’s a lot more important. (No disrespect to trees or pumpkins.) And given the uncertainty brought on by the ongoing COVID-19 pandemic, you might be thinking about your open enrollment benefits in a new way, too.

That’s why we’ve created this guide to which benefits will have the biggest impact on your finances. It should help you ask the right questions and make key decisions as you sift through the information your employer gives you, and start making decisions about your health care plans, retirement savings accounts, life insurance and other workplace benefits.

Barring a qualifying life event — marriage, divorce, having a kid, changing jobs — the open enrollment period is likely the one window of opportunity you’ll get during the year to sign up for health benefits or make changes to the benefits you’ve already opted to receive. So it’s important to dedicate some time to reviewing your options carefully.

Here are the open enrollment benefits you may want to pay the most attention to — and the ones you might not need to agonize over at length.

Choosing the right health care coverage

If there’s one benefit you’ll probably pay the most attention to during open enrollment, it’s health insurance, and for good reason. That’s because the amount you pay could vary greatly depending on the type of coverage you choose. And let’s be honest — the past six months have reminded us all how important health coverage can be

A majority of companies surveyed by the Society of Human Resource Managers (SHRM) said they offered two or more types of health care plans. The most common are preferred provider organization (PPO) plans, followed by high-deductible health plans and health maintenance organizations (HMOs). PPOs tend to have higher premiums than HMOs but offer more flexibility for seeing specialists and out-of-network providers. High-deductible health plans have low premiums because the deductibles are high – meaning you have to pay more out of pocket before your coverage kicks in.

Katie Brewer, a CERTIFIED FINANCIAL PLANNER™ professional and president of Your Richest Life, says she has a lot of clients who are “gung-ho” about opting into a high-deductible health plan because the premium is lower. But these plans aren’t ideal if you have a lot of medical expenses — especially if you have young children who make lots of trips to the doctor. And again, the spread of coronavirus is a reminder that you can’t always predict when and if you might see an increase in medical expenses.

To figure out which plan is best for you, review your health care spending over the past year, Brewer says. This could be as easy as logging onto your health insurance website and looking at the claims you filed. Also, consider the cost of your prescription drugs and whether you’ll need any medical procedures in the coming year to get an idea of what your health care costs will be. If you expect to have high medical costs, a high-deductible health plan might not be right for you.

Even if you’re happy with your current health care plan, review it during open enrollment to make sure there won’t be any changes to your coverage or the cost, says Laura Gariepy, who worked in human resources for 10 years and now is a freelance financial writer. “Employees need to be aware of these changes so that they don’t encounter unpleasant surprises at the doctor’s office — or on their pay stubs.

Don’t miss out on workplace health care incentives. Your employer might offer rewards and bonuses for completing health and wellness programs. Nearly one-fourth of the employers surveyed by SHRM offer this benefit, while one-third offer a subsidy or reimbursement for fitness classes.

Take advantage of a health savings account

If your employer offers a health plan with a deductible of at least $1,400 for individual coverage or $2,800 for family coverage in 2021 and you enroll, there’s a good chance you also can take advantage of a health savings account. This account allows you to set aside money for out-of-pocket health care costs.

The money to fund an HSA typically comes out of your paycheck before taxes, which lowers your taxable income. And you don’t have to pay taxes on the money you withdraw if you use it for qualified medical expenses. “It’s like buying your health care on sale because you’re getting your effective tax rate as the discount,” Brewer says

In 2021, you can contribute up to $3,600 to an HSA if you have an individual high-deductible health insurance coverage and up to $7,200 if you have family coverage. If you don’t use all of the amount you contribute during the year, you won’t lose it. The money will remain in the account and grow tax-free

Your employer might even make contributions to an HSA for you. “Why not take advantage of that free money if you are young and healthy?” says Sean Mullaney, a CPA and president of Mullaney Financial and Tax, Inc.

Consider a medical flexible spending account

Even if you don’t have a high-deductible health plan and HSA, you might be able to set aside pre-tax dollars in a flexible spending account for medical expenses. As with an HSA, using pre-tax dollars in an FSA to pay for qualified medical costs means you’re paying less — based on the amount of your income tax rate.

You can contribute up to $2,750 to a medical FSA in 2020. The 2021 limit hasn’t been announced. Unlike an HSA, you must use all the funds in an FSA during the year or lose them – unless your employer has a carryover option that allows employees to carry over $550 of unused funds to the following plan year. So you need to carefully calculate how much to set aside in an FSA.

Save on child care costs with a dependent care FSA

“Child care costs are so high today that the monthly costs could be as much as mortgage payments for some families,” says Echo Huang, founder and president of Echo Wealth Management.  So Huang explains you should take advantage of a dependent care flexible spending account to help lower those costs.

Money contributed to a dependent care FSA comes out of your paycheck before taxes, which reduces your taxable income. When you use FSA funds to pay for child care, the tax advantages of the FSA can save you money. However, much like a medical FSA, you need to use this money by year’s end or you would lose it.

Review your retirement savings account options

You can review and make changes at any time to the amount you’re contributing to your 401(k) or similar retirement plan at work. “But why not take advantage of open enrollment to make sure you are optimizing your 401(k),” Mullaney says

For example, if you were automatically enrolled into your workplace retirement plan, the default contribution amount might be too low to get the full matching contribution from your employer, he says. If your employer matches contributions up to, say, 6% of your earnings, but you’re contributing only 3% of your pay to your 401(k), you’re missing out on free money.

Ideally, a good target for saving is 10% of your income annually. So if your employer offers an option to automatically increase your retirement account contribution annually by a percentage point or two, consider taking advantage of this feature to get to a point over time where you’re saving 10% or more, Brewer says.

You may want to check if your employer offers a Roth 401(k). Unlike a traditional 401(k), contributions to a Roth 401(k) are made with after-tax money, so qualified withdrawals in retirement are generally tax-free. (To avoid paying taxes on your Roth 401(k) withdrawals, your account must be held for at least five years and you must be at least 59½ or the distribution must be due to disability or death).  Brewer says you may want to consider contributing to both a Roth 401(k) and a traditional 401(k).

Also don’t miss out on financial planning offered by your employer. According to SHRM, 57% of employers surveyed offer retirement planning or investment advice as a benefit. Find out if your employer offers this benefit and consider taking advantage of it if you need help figuring out how much to save for retirement and which investments may help you reach your financial goals.

Don’t overlook disability insurance

Many employers offer group disability insurance. Disability insurance is an important benefit that often gets overlooked Brewer says. Disability insurance will protect a portion of your income lost if you should become too sick or injured to work. And as the pandemic has unfortunately reminded us, illness can strike when we least expect it.

If you already have disability coverage, consider whether you have enough, Brewer explains. Ideally, you want disability insurance with a benefit that will replace more than half of your income if you become disabled and can no longer work. Coverage varies, but generally, short-term disability insurance will replace a percentage of your income if you are too sick or injured to work for a shorter time period. Group long-term disability insurance generally pays out benefits if you meet the definition of disabled for longer time periods.

Be aware of group life insurance limitations

Don’t ignore the group life insurance offered by your employer, Brewer says. But don’t assume your employer’s basic coverage is enough, she explains.

The coverage will likely be an amount equal to two to three times the amount of your annual salary, which likely won’t be enough to cover your financial needs when you die. To avoid being underinsured, you could consider signing up for group life insurance then apply for an individual term life insurance policy, Brewer says. The individual policy can supplement your group coverage. Most group life insurance isn’t portable, so if you were to leave your job, your group life insurance would likely end. In that case, if you had purchased an individual life insurance policy, you would still have some coverage in place.

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Figure out if you really need accidental death insurance

Accidental death insurance is so cheap that many employees sign up for this benefit, Brewer says. However, they often confuse it with life insurance.

Accidental death insurance will pay out a benefit if you die — but only if your death is a direct result of an accident, Brewer says. “The probability of that paying out is small,” she explains. For that reason, you may want to consider whether you need this additional benefit.

Figure out if you really need vision or dental insurance

Dental insurance can seem like a no-brainer, but it turns out many dentists will accept out-of-pocket payments, and that this expense is actually less than what you would pay in premiums. In addition, any dental emergencies might already be covered by your regular health care coverage — and many dental plans have a coverage cap of $1,000 or $2,000, far too little for a true emergency

That said, dental (and vision) insurance can be included in many “family coverage” plans, which might prove beneficial if you have children (and therefore, multiple people getting their teeth cleaned twice a year). Pay close attention to what plans your employer offers, and what the cost of those plans might be.

Everything we just said about dental plans applies to vision plans. But unlike teeth — which everyone has, and which require regular maintenance — your vision might be in perfectly fine shape, in which case coverage would be unnecessary. Everyone’s situation is different; as with health insurance, it’s helpful to look at the previous year’s expenses and determine what works best for you and your family in the coming year.

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Legal services may be a toss-up

One-third of employers surveyed by SHRM offer a legal services benefit that gives employees access to legal assistance at affordable rates. If you know you’re going to need legal assistance in the next year – perhaps because you need estate planning documents drafted or you’re getting a divorce – you might want to sign up for this benefit. “Sometimes a prepaid legal plan is an inexpensive way to get access to an attorney,” Brewer says.

But if you don’t need any legal documents drafted and don’t anticipate legal troubles in the near future, you may want to consider whether you’ll need this benefit.

Exercise caution with pet insurance

That pet insurance plan your employer is offering might seem like a good deal if you want to make sure your furry friend is protected. Before you sign up, though, read the fine print to make sure you know what sort of coverage you’re actually getting, Brewer says. The premium you’ll have to pay might not be worth it if the maximum benefit isn’t enough to cover the cost of expensive procedures for your pet, she explains.

As you review these and any other benefits your employer offers, coordinate with your spouse or partner — if you have one — to ensure that you’re not duplicating benefits. Also, as tedious open enrollment might seem, resist the urge to rush through the process. As Gariepy says, it’s always a good move to see what your employer has to offer to ensure you’re taking advantage of the best possible employee benefits available.