If you’re among the 170 million Americans who receive health insurance through an employer-provided plan, you’ll probably receive your 2014 open enrollment materials shortly. Although it’s a pain to wade through all that information, simply opting for your current coverage could be a costly mistake. Here’s why:
Health insurance has undergone major changes since the 2010 Affordable Care Act was passed, including the elimination of annual and lifetime coverage limits and preexisting conditions exclusions, expanded free preventive care and allowing children up to age 26 to remain on parents’ plans.
In response, many employers have altered their benefit plans. Plus, if your family or income situations have changed since last year, your current plans may no longer be the best match.
And, if your employer offers flexible spending accounts and you’re not participating, you’re leaving a valuable tax break on the table.
Carefully compare all costs and features of the different plans offered, and note how your existing coverage may be changing next year. Common changes include:
•Dropped or replaced medical plans.
•Increased monthly premiums, deductibles and copayment amounts.
•Revised drug formularies.
•Favored doctors or hospitals withdrawing from a plan’s preferred provider network.
•Changes to the number of allowed visits for specialty care (acupuncture, chiropractic, physical therapy, etc.).
If offered, health-care and dependent-care flexible spending accounts (FSAs) can significantly offset the financial impact of medical and dependent care by letting you pay for eligible out-of-pocket expenses on a pre-tax basis; that is, before federal, state and Social Security taxes are deducted from your paycheck. This reduces your taxable income and therefore, your taxes.
You can use a health-care FSA to pay for IRS-allowed medical expenses not covered by your medical, dental or vision plans. (Check IRS Publication 502 for allowable expenses.) Dependent care FSAs let you use pre-tax dollars to pay for eligible expenses related to care for your child, spouse, parent or other dependent incapable of self-care.
How FSAs work
Say you earn $42,000 a year. If you contribute $1,000 to a health-care FSA and $3,000 for dependent care, your taxable income would be reduced to $38,000. Your resulting net income, after taxes, would be roughly $1,600 more than if you had paid for those expenses on an after-tax basis.
Remember these FSA restrictions:
•Employee contributions are limited to $2,500 a year for health-care FSAs and $5,000 for dependent care.
•Health-care and dependent-care contributions are not interchangeable.
•Estimate planned expenses carefully because you must forfeit unused account balances. Some employers offer a grace period of up to 2 1/2 months after the end of the plan year to incur expenses, but that’s not mandatory, so check your company’s policy.
•Outside of open enrollment, you can only make mid-year FSA changes after a major life or family-status change (marriage, divorce, death of a spouse, birth or adoption, etc.). If one occurs mid-year, re-jigger your FSAs accordingly for maximum savings.
•You must re-enroll in FSAs each year – amounts don’t carry over from year to year.
Compare your employer’s plans alongside those offered by your spouse’s employer, particularly when deciding where to insure your children.
Also remember that if you marry, divorce or gain or lose dependents, it could impact the type — and cost — of your coverage options.
It’s worth spending a few minutes to review your benefit coverage options for next year, especially when you consider the potential financial consequences.
JASON ALDERMAN directs Visa’s financial education programs.
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