We are in the midst of open enrollment season for employer benefits such as health, life and disability insurance. If you work for a company that offers these valuable compensation enhancements, you’ve likely been given a menu of benefits to choose from and a short period of time to make your selections for the coming year.
These choices may seem inconsequential, especially ones that cost a few dollars per paycheck, but many company perks provide an essential financial lifeline when unexpected challenges arise. Here, we’ll focus on the most complex decision facing you: health insurance.
This is undoubtedly one of the most important benefits offered by employers, but how do you know which health plan is right for you? Premium affordability is a factor, but it’s not as simple as choosing the option with the lowest premiums. To start evaluating the best option for you, consider not only premium costs, but also how much you’re likely to pay for deductible and coinsurance.
Maximum premiums, deductibles, coinsurance and disbursements
The deductible is the amount of your expenses that you must pay before the insurance company helps cover the cost of your care. Each person on your policy can have their own deductible or all expenses can apply to a family deductible. Find out the rules of your plan, because this difference alone can have a significant impact on your total payout.
Once you have reached the deductible, the insurance company will start paying part of your expenses. The portion is determined by the amount of coinsurance; a coinsurance rate of 20% means that you will pay 20% of your expenses and the insurance company will pay the remaining 80% until you reach your maximum payout. The maximum is another important number to consider.
Suppose, for example, that you are the only person on your plan. The premiums are $1,500 per year, your deductible is $2,500 per year, your coinsurance rate is 20% and your maximum payout is $6,000. If you spend $2,000 in medical expenses, your total outlay will be $3,500: $1,500 for premiums and the $2,000 in expenses since you will not have reached your deductible yet.
Let’s say instead that you spend $7,000 on medical expenses. Your total costs would be $4,900: $1,500 for premiums, $2,500 to cover your deductible, and 20% of the remaining costs of $4,500, or an additional $900.
If the costs are more than $7,000, you will continue to pay the 20% coinsurance amount until you have paid the maximum of $6,000 in addition to your premiums.
Tax-saving features of health insurance: FSAs and HSAs
Health insurance plans often offer the option of using 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 subject to federal and state tax, but that’s where their similarities end.
Flexible spending accounts are often available with traditional health insurance plans. You can contribute up to $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 eligible expenses in the year to use all of your FSA, the remaining money is usually lost at the beginning of March the following year. In other words, it’s a use-it-or-lose-it benefit, unless your employer allows you to carry some of it 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 coinsurance rate applies. HDHPs are often less expensive than their FSA-eligible counterparts and can work well if you are in good health 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 an important advantage of HDHPs. Unlike FSAs, contributions to your HSA are not use-it-or-lose-it. The money can stay in the account indefinitely and can even be invested and grow over time. The annual contribution limit is $3,650 for individuals and $7,300 for families of two or more, minus your employer’s contributions. Not only do these contributions qualify for federal and state tax deductions, but HSA distributions are also tax exempt if used for medical expenses. Even the growth that occurs on invested HSA dollars escapes future taxes, making it a rare triple tax threat with benefits at time of contribution, time money is in the account, and time of distribution .
In most cases, the healthcare plan you choose will determine whether you can use an FSA or an HSA. You generally cannot use both, except in cases where you choose to fund a limited-use FSA with an HSA and an HDHP. These types of FSA can only be used for limited expenses like dental and vision care and can be combined with the use of an HSA.
When evaluating your total coverage costs, it’s important to consider potential tax savings on FSA or HSA dues and any money your employer is willing to pay your HSA. If you are in the 22% tax bracket and contribute $2,500 to one 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, overall estimate of your medical expenses for the year.
Of course, access to your preferred network of doctors is another important part of health insurance selection, but if multiple plans meet this criteria, you can use this framework to determine which plan is best financially. Start by estimating next year’s medical expenses, calculate your total expenses on premiums and medical expenses, and reduce that cost by your FSA or HSA tax savings and employer contributions.