Over the next few weeks, millions of Americans will receive their 2013 open enrollment materials. Although it's tempting to simply check "same as last year," that can be a costly mistake -- especially if your employer is offering different benefit plans next year or your family or income situation has changed.
Plus, an important feature of health care flexible spending accounts, which many people use to reduce their tax bite, is changing next year (more on that below). Here's what to look for when reviewing your benefit options:Plan changes. Many benefit plans -- especially medical -- change coverage details from year to year. If you're offered more than one plan, compare features side by side to ensure you're choosing the best alternative. Common changes include:
- Dropping or replacing unpopular or overly expensive plans.
- Increased monthly premiums for employee and/or dependent coverage.
- Increased deductible and/or co-payment amounts for doctor visits, prescription drugs, hospitalization, dental or vision benefits, etc.
- New eligibility rules for dependent coverage.
- Revised drug formularies (the list of covered medications, including co-payment levels for different drug classifications).
- Favored doctors or hospitals sometimes withdraw from a plan's preferred provider network, boosting the cost to see them or even eliminating them as an option.
- Raising maximum yearly out-of-pocket expense limits.
- (Note: As part of health care reform, the annual maximum payout limit your insurance is required to pay has increased to $2 million.)
Review spouse's coverage. Compare your employer's plans side by side with those offered by your spouse's employer, particularly when deciding where to insure your children. Just make sure it's apples to apples. For example, one plan may charge lower premiums but have higher deductibles and co-payments or offer a more limited drug formulary.
Flexible spending account (FSA) options. If offered by your employer, health-care and dependent-care FSAs can significantly offset the financial impact of medical and dependent care by letting you pay for eligible out-of-pocket expenses on a pre-tax basis; that is, before federal, state and Social Security taxes are deducted from your paycheck. This reduces your taxable income and therefore, your taxes.
You can use a health-care FSA to pay for IRS-allowed medical expenses not covered by your medical, dental or vision plans, including deductibles, co-payments, orthodontia, glasses, contact lenses, prescription drugs, chiropractic, smoking cessation programs and many more. (Note: Except for insulin, over-the-counter medicines now require a doctor's prescription to be eligible.) Check IRS Publication 502 for allowable expenses.Dependent-care FSAs let you use pre-tax dollars to pay for eligible expenses related to care for your child, spouse, parent or other dependent incapable of self-care. Eligible expenses include:
- Fees for licensed day care and adult care facilities.
- Amounts paid for services provided in or outside your home (including babysitter, nursery school or summer day camp) so that you and your spouse can work, look for work or attend school full-time.
- Before- and after-school programs for dependents under age 13.
- Babysitting by relatives over age 19 who aren't your dependent.
For some lower-income families, the federal-income-tax dependent-care tax credit is more advantageous than an FSA, so crunch the numbers or ask a tax expert which alternative is best. Be aware that you cannot claim the same expenses under both tax breaks. (To learn more about the tax credit, read IRS Publication 503.)
Here's how FSAs work: Say you earn $42,000 a year. If you contribute $1,000 to a health care FSA and $3,000 for dependent care, your taxable income would be reduced to $38,000. Your resulting net income, after taxes, would be roughly $1,600 more than if you had paid for those expenses on an after-tax basis. Use this calculator to evaluate your own situation.Keep in mind these FSA restrictions:
- Important: Effective January 1, 2013, employee contributions to health care FSAs are now limited to $2,500 a year; however, if your spouse has FSAs at work, you still may contribute up to $2,500 to each account.
- The dependent-care FSA contribution limit remains unchanged at $5,000.
- Health-care and dependent-care account contributions are not interchangeable.
- Estimate planned expenses carefully because you must forfeit unused account balances. Some employers offer a grace period of up to 2 ½ months after the end of the plan year to incur expenses, but that's not mandatory, so review your enrollment materials.
- Outside of open enrollment, you can only make mid-year FSA changes after a major life or family status change, such as marriage, divorce, death of a spouse or dependent, birth or adoption of a child, or a dependent passing the eligibility age. If one of those situations occurs mid-year, re-jigger your FSAs accordingly for maximum savings.
- You must re-enroll in FSAs each year -- amounts don't carry over from year to year.
- Compare maternity and pediatric benefits offered by the various medical plan options. Slightly lower premiums might not be worth more restrictive coverage.
- Recalibrate life insurance and disability coverage if more dependents now rely on your pay.
- Also review beneficiary designation forms to ensure your life insurance, 401(k) or other plan benefits will go to the appropriate people if you should die unexpectedly.
Commuting cost benefits. Although it's not part of annual enrollment, many companies help employees reduce their commuting costs (via public transportation or qualified parking) through a tax-free employer-paid subsidy, a pretax employee-paid payroll deduction or a combination of the two. Unlike FSAs, commuter accounts can be changed on a monthly basis, as needs change.
Take a few minutes to review your benefit coverage options for next year -- and take advantage of any tax savings you might be missing.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.