We are in the heart of open enrollment season for employer benefits like health, life, and disability insurance. If you work for a company that offers these valuable enhancements to compensation, you’ve probably been given a menu of benefits from which to choose and a short window of time to make your selections for the year ahead.
These choices may seem inconsequential, especially those that cost a couple of dollars per paycheck, but many company benefits serve as a critical financial lifeline when unexpected challenges arise. Here, we’ll be focused on the most complex decision before you: health insurance.
This is undoubtedly one of the most important benefits employers offer but how do you know which healthcare plan is right for you? Affordability of premiums is a factor but it’s not as simple as choosing the option with the lowest premiums. To begin evaluating the best option for you, consider not only the premium costs but how much you are likely to pay on the deductible and co-insurance as well.
Premiums, Deductibles, Co-Insurance and Out-of-Pocket Maximums
The deductible is the amount of your expenses you must pay before the insurance company will help cover the costs of your care. Each person on your policy might have their own deductible or all expenses may apply toward a family deductible. Find out the rules for your plan as this difference alone can have a meaningful impact on your total out-of-pocket costs.
Once you’ve met the deductible, the insurance company will begin to pay a portion of your expenses. The portion is determined by the co-insurance amount; a 20% co-insurance rate means you will pay for 20% of your expenses and the insurance company will pay the other 80% until you reach your out-of-pocket maximum. The maximum is another important number to consider.
Assume, as an example, that you are the only person on your plan. The premiums are $1,500 a year, your deductible is $2,500 per year, your co-insurance rate is 20% and your out-of-pocket max is $6,000. If you spend $2,000 on medical costs, your total out-of-pocket costs will be $3,500: $1,500 for premiums and all $2,000 of expenses since you will not yet have met your deductible.
Assume, instead, you spend $7,000 on medical expenses. Your total costs would be $4,900: $1,500 for premiums, $2,500 to meet your deductible, and 20% of the remaining $4,500 costs, or another $900.
If costs are higher than $7,000, you would continue to pay the 20% co-insurance amount until you had paid the out-of-pocket maximum of $6,000 on top of your premiums.
Tax-Saving Health Insurance Features: FSAs and HSAs
Health insurance plans often come with the option to use either a flexible spending account (FSA) or a health savings account (HSA). Contributions to either of these accounts will reduce the amount of your income that is subject to federal and state tax but that is where their similarities end.
Flexible spending accounts are often available with traditional health insurance plans. You can contribute as much as $2,850 to an FSA for 2022 and the amount you choose should be close to the healthcare expenses you will pay for the year. If you don’t have enough qualifying expenses in the year to use up your entire FSA, the leftover money is usually forfeited by early March of the following year. In other words, it’s a use-it or lose-it benefit unless your employer allows you to roll some over to next year.
A health savings account is only available if you have a high-deductible healthcare plan (HDHP). The higher your deductible, the more you pay before your co-insurance rate applies. HDHPs are often less expensive than their FSA-eligible counterparts and can work well if you are healthy and have few medical expenses throughout the year. Since these plans also tend to save employers money on premiums, they may offer to contribute to your HSA (read: free money to use on healthcare expenses).
Access to an HSA is a significant perk of HDHPs. Unlike FSAs, contributions to your HSA are not use-it or lose-it. The money can remain in the account indefinitely and can even be invested and grown over time. The annual contribution limit is $3,650 for individuals and $7,300 for families of two or more, minus any contributions your employer makes. Not only do these contributions qualify for federal and state tax deductions, but distributions from HSAs are also tax-free if they are used for medical expenses. Even growth that occurs on invested HSA dollars escapes future tax, making this a rare triple tax threat with benefits at the time of contribution, the time the money is in the account, and at the time of distribution.
In most cases, the healthcare plan you choose will determine if you can use an FSA or HSA. You typically can’t use both, except in cases where you elect to fund a limited-purpose FSA along with an HSA and HDHP. These kinds of FSAs can only be used for limited expenses like dental and vision and are allowed to be combined with the use of an HSA.
When evaluating your total costs for coverage, it is important to factor in potential tax savings on either FSA or HSA contributions and any money your employer is willing to contribute to your HSA. If you are in the 22% tax bracket and contribute $2,500 to either of these accounts, the tax savings would be $550. Subtract tax savings and employer contributions from the out-of-pocket calculation above to get a true, all-in cost estimate of your medical costs for the year.
Of course, access to your preferred network of doctors is another important component of selecting health insurance but if multiple plans meet that criterion, you can use this framework to consider which plan is best financially. Start by estimating next year’s medical costs, calculate your out-of-pocket total on both premiums and medical bills and reduce that cost by your FSA or HSA tax savings and employer contributions.
As originally published on Forbes: https://www.forbes.com/sites/danielleseurkamp/2021/10/26/open-enrollment-how-to-choose-the-best-health-insurance-plan/?sh=4c359b084a20