A Year-End Guide to Employer Benefit Elections
With year-end approaching, many will soon find themselves navigating the open enrollment window for employer-provided benefits. This often comes with a host of available options. Some choices can seem straightforward, while others can prove more difficult.
Most commonly, we understand the broad choices to be made – Yes, I should enroll in a health insurance plan and contribute to my 401(k) – but we may struggle with the details. What type of health insurance plan? How much do I contribute to my health savings plan? Should my retirement contributions be to a pre-tax or Roth account?
While the appropriate choices are specific to each individual’s circumstances, the below outline can help provide guidance during this process.
Qualified Retirement Plans
The Basics: Most employees are eligible to contribute to a 401(k). The annual contribution limit is currently $20,500 with an additional $6,500 ‘catch up’ contribution available to employees aged 50 and over. These limits increase over time with inflation.
- Pre-tax or Roth?: For those that may be in their peak earning years, pre-tax contributions can be an attractive way to defer income out of high marginal tax brackets. That said, your income during retirement years may be higher than expected due to required minimum distributions, social security, pensions, etc.
- After-tax contributions: You may be able to contribute more than the standard and catch-up contribution limits. These are deemed ‘after-tax’ contributions and have a unique set of rules. This may also open the door to other options such as the ‘mega backdoor Roth’ contribution.
- Employer Matching: Many employers will match a certain portion of your contributions. Be aware of these limits to ensure the match is received.
- Investment Selection: Review your investment choices to ensure they still align with your goals and risk tolerance. This should include any previous employer’s retirement accounts, which often go overlooked.
The Basics: Most employers offer a range of health and dental plans. Common health plans are PPO, HMO, POS, and EPO. These vary in coverage and cost. Dental plans are often offered separate and with fewer options.
- Understand the Coverage: It may be attractive to select the plan with the lower premium, but we urge clients to consider the robustness of coverage. Prioritizing health may mean paying the additional premium.
- Understand the Costs: Costs are typically the monthly premium, the deductible, and the max-out-of-pocket limit. The lower the premium, the more likely you will have higher deductible and max-out-of-pocket limits. The lower-deductible policy can often become the most expensive in the event of larger medical bills.
- Savings Accounts: Plans are often accompanied by FSAs, HRAs, or HSAs. These plans can be used to cover certain health expenses. They are uniquely beneficial from a tax perspective, as contributions are tax deductible and distributions are tax-free. The HSA can also be used as a tax-free savings vehicle, but is only available with high-deductible health plans.
The Basics: Employers regularly provide optional life insurance coverage. These are often group policies that may not require any underwriting.
- Coverage limitations: Many employer-provided policies have limited coverage amounts. Your situation may require a death benefit in excess of what your employer can provide.
- Review Necessity: As you continue to work and save, life insurance may not be the necessity it once was. Consider your evolving financial picture before determining insurance amounts.
- Portability: Employer coverage can be attractive but may not follow you if you leave your job. It may be worth comparing employer options against a personal policy that is not impacted by your employment status.
The Basics: You may have the ability to defer a portion of your 2023 income and have it paid out in future years. You will likely be given options as to the timing of the future payout. In the interim, the funds can be invested in a tax-deferred account.
- Tax Planning: Understand your current marginal tax rate compared to your projected future tax rate. It may be beneficial to shift income into future years if your tax rate will be lower.
- Understand your Cash Flow: Deferring income can be attractive, but it can be a strain on cash flow. Understand how your upcoming cash needs will be met before finalizing your deferral election.
- Employer Solvency: The deferred payments are the liability of the employer. If the employer were to go bankrupt, your future payments may be in jeopardy.
- Additional Benefits: Be aware of other benefits that may be provided. These often include disability insurance, legal services, financial planning reimbursement, adoption aid, fertility resources, and many others.
- Additional Compensation: Your employer may offer you other types of compensation, such as incentive stock options, non-qualified stock options, or restricted stock units. These can be powerful drivers of income but come with nuanced tax implications. Make sure you thoroughly understand these benefits.
- Annual Review: Take this time to review other parts of your plan. This can include beneficiary designations, retirement accounts from former employers, or coordinating benefits across two employed spouses.
If you would like help navigating your benefits, please reach out to your JMG advisor. The contents of this article may or may not be directly applicable to your situation. In either case, we invite you to pass this along to someone who may find it helpful.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by JMG Financial Group Ltd. (“JMG”), or any non-investment related content, made reference to directly or indirectly in this writing will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this writing serves as the receipt of, or as a substitute for, personalized investment advice from JMG. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. JMG is neither a law firm, nor a certified public accounting firm, and no portion of the content provided in this writing should be construed as legal or accounting advice. A copy of JMG’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a JMG client, please remember to contact JMG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. JMG shall continue to rely on the accuracy of information that you have provided.
To the extent provided in this writing, historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings correspond directly to any comparative indices. Indices are not available for direct investment.