Once a year, employees get the chance to evaluate and choose their health care options for the following year — a practice referred to as annual open enrollment.
If only one spouse is employed outside the home, or if both work for the same employer, the choice can be simple. If multiple employers are involved, it can get complicated. When my wife (a CPA) and I looked at our information one year (after she had switched employers), I realized that I’d need to dust off my algebra to calculate break-even points.
Following are some tips and thoughts I have about getting through the jungle of annual enrollment. When you sign up for a health insurance plan, your first course of action is to become familiar with the costs you are responsible for.
Health-Related Costs We Typically Incur
- Insurance premiums — Plans can vary greatly in cost, depending on the benefits of the plan and degree to which it is subsidized by an employer. The recent trend has been to push more of the cost of insurance down to the employees.
- Deductible — The deductible is the amount you pay before insurance kicks in. There are plans with no deductibles and there are plans with deductibles of several thousand dollars.
- Co-payments / co-insurance — A co-payment is a fixed amount that you pay (example: $10 per doctor’s visit) while co-insurance is a percentage (example: 10%).
- Non-covered expenses — There may be caps on certain expenses, such as a maximum number of visits to a chiropractor. You’ll have to pay out of pocket for these expenses.
You must look at the combination of all of these expenses when comparing plans. Let’s step through the process of determining which insurance plan is best for you, particularly when you’re making your decisions during the open enrollment period.
Steps To Determine Your Best Health Insurance Options
- Predict your health care costs for the coming year. Wow. That’s a tough one. Where would you even begin? I’d suggest starting with last year’s expenses. Take a moment to analyze the Explanation Of Benefit statements from your insurance company. Use this as your baseline and adjust as needed. If you know you’re going to have carpal tunnel surgery in January, add this to your estimate. If you don’t expect to repeat the appendectomy from last year, then subtract this. Assume that each health plan is going to negotiate similar reductions to the gross charges (unless you have more precise information).
- Next, determine how each expense would be handled by each available health insurance plan. If you go to the doctor on January 2, you might pay the entire bill out of pocket under a high deductible plan but only pay a $10 co-payment under a different plan. Once you go through all of the predicted medical charges, you should have an estimated out of pocket amount for each of the available plans. Your out of pocket amount for one plan might be much cheaper — but it’s not necessarily the best option. Let’s keep going.
- Now, you’ll need to add these amounts to the annual costs of the health insurance premium. If your out of pocket costs for plan A are $1,000 less than plan B, but plan A costs $2,000 per year more, then plan A is the worse option. You need to look at both parts of the equation.
Things To Watch Out For When Dealing With Open Enrollment
Be aware of a few wrinkles that may need a little analysis before you make a decision about your coverage:
- Health reimbursement accounts (HRAs) — With an HRA, an employer funds an account that you can use to pay for expenses. You might have a plan with a $5,000 deductible and a $2,000 HRA account. The first $2,000 in expenses is paid from the HRA (at no cost to you), after which the remainder of the deductible — in this case $3,000 ($5,000 – $2,000) is paid out of your pocket. You can also carry forward the balance in an HRA to the next year, up to a maximum amount. Plans that offer an HRA can be very cost-effective for people with low medical expenses.
- Subsidies / surcharges — If you are in a two-income family, your employer would love for you to get insurance through your spouse’s employer. Many employers offer financial incentives to do this. The basic methods are to either reward the employee with a subsidy (extra cash in their paycheck) or penalize them with a surcharge. If you forgo a subsidy or incur a surcharge to choose a particular plan, add this to your cost calculation. Let’s say you are choosing between two plans with identical coverage. Plan A is $100 per month cheaper, so it seems to be the better option. However, employer B gives a $150 per month subsidy if you get insurance elsewhere. In this case, plan B is actually $50 cheaper (it may require $100 more in premiums, but the $150 subsidy more than offsets this).
- Flex spending accounts — With the flexible spending account, money is taken from your check each month pre-tax and put into an account you can use to pay for either dependent care or health care expenses. The downside of an FSA is that it’s a “use it or lose it” arrangement. If you don’t spend the balance in the account by the end of the plan year, you forfeit the money. A lot of my co-workers avoid FSAs because they see this as a big risk. However, you need to think this through. If you put $1,000 into an FSA and only spend $900, did you lose $100? No. You turned $1,000 in gross income into $900 net income. Take that same $1,000 and pay taxes on it, and you’re likely to end up with far less than $900. So even if you “lose” some of the funds, you may come out ahead.
- Exceptions to using pre-tax money for insurance — You should almost always use pre-tax money to pay for insurance. However, there is one case where this is not true — disability insurance. This is because if you pay disability premiums with pre-tax money, then the benefits are taxable. If you pay with after-tax money, the benefits are not taxed. I’d recommend paying a few bucks in taxes each month (that is, pay taxes first then use after tax money for disability insurance), as it could save you hundreds of thousands of dollars in taxes if you become disabled.
My wife’s employer (big enough to know better) actually advised people to use pre-tax money, with the rationale of “it is unlikely that you will become disabled”. Sure, that’s true, but if you’ve already decided that you want insurance against this possibility, then why not maximize the benefit? It’s also true that it’s unlikely your house will burn down next year, but I wouldn’t recommend dropping insurance coverage on your house. Ultimately, it’s up to you to decide if disability insurance is worth the cost and just how much you’re willing to pay for it.
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