In the world of wealth management, fall season is synonymous with open enrollment. Many people choose to simply re-elect last year’s elections without giving them a second thought. Yet, taking full advantage of your employee benefits can provide an opportunity to maximize your savings. We hope you find these tips on optimizing common benefits helpful in leveraging your financial goals.
Most companies offer health, dental, and vision insurance at no cost to employees and subsidize a portion of family coverage. To optimize your health insurance benefit, we typically recommend choosing a High Deductible Health Plan (HDHP). A HDHP offers lower monthly premiums and allows you to access a Health Savings Account (HSA). An HSA can be a powerful savings vehicle where your funds can grow tax-free until withdrawn.
Other healthcare plans include:
- Health Maintenance Organization (HMO): HMOs have their own network of doctors, hospitals and other healthcare providers who have agreed to certain payment levels. HMOs are generally more affordable, but they cover less and have more restrictions.
- Preferred Provider Organization (PPO): PPOs provide greater coverage and flexibility (you can receive care from any provider—in or out of your network), but it comes at a higher cost and deductible.
People often shy away from HDHPs due to the significant out-of-pocket costs to satisfy the deductible. However, it’s worth looking at the annual deductibles and out-of-pocket maximums on all your company offered health care plans. Most companies have started offering HDHP plans at comparable deductibles to traditional plans.
Health Savings Account (HSA) and Flexible Spending Account (FSA)
An HSA is a medical savings account where your pre-tax money can accumulate tax-free and be used indefinitely – even if you switch health plans or employers. Three significant tax benefits of using an HSA are:
- Contributions are pre-tax (lowering your taxable income)
- Funds can be invested and grow tax-deferred
- Withdrawals are tax-tree if used for qualified medical expenses
Again, it’s important to note that contributions to your HSA are only tax-free if you’re enrolled in a HDHP.
Unlike an HSA, flexible spending accounts (FSAs) are available with nearly any health insurance plan but come with a ‘use it or lose it’ clause. For example, if you contribute $1,500 for the calendar year but only use $1,300, you will lose $200.
Dependent Care FSAs can be a valuable resource if you have children in daycare. You can defer $5,000 for individuals or married couples filing jointly, or $2,500 for a married person filing separately. This type of account also has a ‘use it or lose it’ clause, but for parents with known childcare costs, this is an excellent resource to lower your taxable income.
Life Insurance and Other Coverage
Life insurance coverage offered through your employer is generally based on a multiple of your salary and can vary for basic life and AD&D (accidental death and dismemberment) insurance. When basic plans offer a low amount of coverage, supplemental life insurance can be purchased at discounted rates through your employer. Additional coverage can reach up to five times your annual salary. Purchasing higher coverage may require filling out a health questionnaire or completing a medical exam – the results of which determine your rates and eligibility for coverage.
The most common types of employer-offered retirement accounts are 401(k) and 403(b) plans. The key difference in which program you are eligible to participate in depends on the for-profit or not-for-profit status of your company.
When it comes to contributing to your retirement accounts, many employers provide a matching benefit. In a typical matching situation, the employer matches 50% of employee contributions for the first 6% of salary. In this scenario, the company caps its match at 3% of the employee’s salary. Some companies will provide a straight 100% match up to a certain limit, while others (who may not qualify for Safe Harbor) will simply make an outright contribution to a 401(k).
On the opposite end of the spectrum, for-profit companies can choose to only contribute to retirement through profit sharing. At the end of each period (e.g., month, quarter, or year), employees enrolled in the profit-sharing program receive a contribution to their retirement account. Generally, the contribution amount is based on a percentage of your annual salary. Depending on the share amount, this could end up being more or less valuable to you than a matching program.
Mega Backdoor Roth Conversion
Some employers offer 401(k) plans with criteria to do a Mega Backdoor Roth Conversion. This is a powerful employer benefit within your 401(k) to convert your after-tax dollars into a Roth 401(k) for tax-free growth and access in retirement. This is ideal for people who currently have a 401(k) plan at work. In 2022, you could contribute up to $40,500 of post-tax dollars into your 401(k) plan and then roll it into a mega backdoor Roth (Roth IRA or Roth 401k). Creating a mega backdoor Roth can be a complicated tax planning process. If done incorrectly, you could get hit with unexpected tax bills. We recommend consulting with your financial advisor or tax professional before exercising this option.
How a Mega Backdoor Roth Works
The mega backdoor Roth allows you to save a maximum of $61,000 in your 401(k) for 2022. How does this add up? The maximum 401(k) contribution for 2022 is $20,500 ($27,000 for those 50 and older), and you can put an additional $40,500 of after-tax dollars into your 401(k) account assuming you don’t get an employer match. If you do receive an employer match, you’ll need to deduct your employer contributions from $40,500. For instance, let’s say you make $250,000 per year and your employer offers a 3% match. You’d subtract the $7,500 ($250,000 x 0.03) match from $40,500. You’d only be able to contribute an additional $33,000 in after-tax dollars.
Other Benefits and Employee Discounts
Larger companies offer a wide array of savings on outside services through their negotiated discount codes (e.g., special rates or discounts with major hotel chains or airlines). Many employers allow these discounts to be used for leisure travel.
It is worth looking into your company’s portal for potential areas to save on travel, insurance, sports tickets, entertainment arenas, preferred bank lending rates, mobile phone services, and more.
Additional benefits companies may offer:
- Adoption assistance
- Athletic facilities
- Commuting benefits
- Paid moving expenses
- Financial planning services
- Tuition reduction
- Home office allowance
- Memberships and subscriptions
To make the most of your employee benefits and maximize your savings, reach out to a Coldstream wealth manager for additional guidance.