If you're among the approximately 170 million Americans who receive health insurance through an employer-provided plan, you'll probably receive your 2014 open enrollment materials in the next few weeks. Although it's a pain to wade through all that information, simply opting for your current coverage could prove to be a costly mistake. Here's why:
Health insurance has undergone major changes since the 2010 Affordable Care Act was passed, including the elimination of annual and lifetime coverage limits and preexisting conditions exclusions, expanded free preventive care and allowing children up to age 26 to remain on parents' plans.
In response, many employers have altered their benefit plans. Plus, if your family or income situations have changed since last year, your current plans may no longer be the best match. And, if your employer offers flexible spending accounts and you're not participating, you're leaving a valuable tax break on the table.
Here's what to look for when reviewing your benefit options:
Plan changes. Carefully compare all costs and features of the different plans offered and note how your existing coverage may be changing next year. Common changes include:
- Employers sometimes drop or replace unpopular or overly expensive plans; plus, insurers themselves sometimes drop coverage in certain geographic areas.
- Increased monthly premiums, deductibles and copayment amounts for doctor visits, prescription drugs, hospitalization, dental or vision benefits, etc.
- Revised drug formularies (the list of covered medications, including copayment levels for different drug classifications).
- Favored doctors or hospitals sometimes withdraw from a plan's preferred provider network, boosting your cost to see them or even eliminating them as an option.
- Changing the number of allowed visits for certain types of care such as acupuncture, chiropractic or physical therapy.
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 copayments; or maybe your kid's asthma medication isn't covered.
Flexible spending account (FSA) options. If offered by your employer, healthcare 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 healthcare FSA to pay for IRS-allowed medical expenses not covered by your medical, dental or vision plans, including deductibles, copayments, orthodontia, glasses, prescription drugs, chiropractic, smoking cessation programs and many more. 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. Note: 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:
- Employee contributions to health care FSAs are limited to $2,500 a year; the dependent care FSA limit is $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 check your company's policy.
- 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.
Family status changes. If you marry, divorce, or gain or lose dependents, it could impact the type -- and cost -- of your coverage options. For example:
- Compare maternity and pediatric benefits offered by the different medical plans. 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.
It's worth spending a few minutes to review your benefit coverage options for next year, especially when you consider the potential financial consequences.
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.