Financial Planning for Open Enrollment: A Guide to Making Smart Choices
Open enrollment is your annual opportunity to review and select your employee benefits for the upcoming year. While it might seem like just another task on your to-do list, the choices you make now can have a significant impact on your health and finances. Don’t simply “roll over” last year’s elections without a review. A proactive approach will ensure your benefits align with your needs and goals.
Analyzing Your Health Insurance Options
Start by assessing your current situation. Think about your health needs from the past year: how many doctor’s visits did you have? What were your prescription costs? Do you anticipate any major life changes, such as getting married or having a baby? These factors will help you choose the right plan.
Understanding Key Terms
Before diving into plan specifics, it’s crucial to understand a few key terms:
- Premium: The fixed monthly cost you pay for your insurance plan.
- Deductible: The amount you pay out of pocket before your insurance coverage begins.
- Copay: A fixed amount you pay for a doctor’s visit or prescription after your deductible is met.
- Coinsurance: A percentage of costs you pay for covered services after the deductible is met.
- Out-of-Pocket Maximum: The maximum amount you will pay in a year before the plan covers 100% of costs.
Comparing Plan Types: PPO vs. HDHP
The two most common types of health plans are a Preferred Provider Organization (PPO) and a High-Deductible Health Plan (HDHP).
- A PPO typically has a lower deductible but higher premiums. It also offers more flexibility for seeing out-of-network doctors. This type of plan is generally best for people who use a lot of medical services, as the costs are more predictable.
- An HDHP has a higher deductible but lower premiums. While you’ll pay more upfront for care, this type of plan makes you eligible for a Health Savings Account (HSA). An HDHP is often a great choice for generally healthy individuals or those who can comfortably afford the higher upfront costs if a major health event were to occur.
To help with your decision, compare the total estimated annual cost of each plan. For example, calculate the premiums plus potential out-of-pocket costs for a year with no major health events versus a year with a major surgery. This simple exercise can reveal which plan offers the most financial sense for your situation.
Maximizing Your Tax-Advantaged Accounts
In addition to health insurance, open enrollment is your chance to enroll in or update contributions to valuable tax-advantaged accounts.
Flexible Spending Accounts (FSA)
An FSA allows you to use pre-tax dollars for qualified medical or dependent care expenses, which lowers your taxable income. The key rule to remember is “use it or lose it”—funds typically do not roll over from one year to the next. Carefully estimate your upcoming year’s expenses to avoid forfeiting any money.
Health Savings Accounts (HSA)
An HSA is a powerful financial tool with a triple tax advantage:
- Contributions are pre-tax.
- Funds grow tax-free.
- Withdrawals for qualified medical expenses are tax-free.
Unlike an FSA, an HSA is portable, meaning the account belongs to you even if you change jobs. This makes it an excellent long-term savings tool. After age 65, you can withdraw funds for any reason without penalty, although non-medical withdrawals are subject to income tax. Remember, an HSA is only available if you are enrolled in an HDHP.
Reviewing Other Important Benefits
Don’t stop at health insurance; open enrollment is the perfect time to review your other benefits.
Retirement Contributions
Check your retirement contributions to your 401(k) or 403(b). If your employer offers a matching contribution, be sure you’re contributing at least enough to get the full match—it’s free money! Consider increasing your contribution rate by at least 1% each year. Small, consistent increases can make a huge difference over time.
Life and Disability Insurance
- Life Insurance: Review your coverage needs based on your dependents and debts. Your employer may provide basic coverage, but you might need supplemental, voluntary coverage to fully protect your loved ones.
- Disability Insurance: This benefit protects your income if you are unable to work due to illness or injury. Review your short-term and long-term disability options to ensure your income is protected.
Final Steps and Action Plan
Making your benefit selections requires a few final steps to ensure you’re fully prepared.
- Check Beneficiaries: In case of a major life change like a marriage or divorce, update the beneficiaries on all your accounts (retirement, life insurance) to ensure your assets go to the right people.
- Gather Your Information: Have all your plan documents, a list of your regular doctors, and an estimate of last year’s medical expenses ready. This information will help you make a more accurate and informed choice.
- Make Your Choices and Submit: Be mindful of the deadline and submit your final selections on time.
By taking the time to review your options and make informed decisions, you can ensure your benefits package is working for you and your financial well-being. Be sure to reach out to your advisor to discuss any of these items in more detail.
Justin D. Rucci, CFP®
Wealth Advisor, Warren Street Wealth Advisors
Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor
The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.
