Open Enrollment Checklist: HSA, HCFSA, DCFSA, Disability Insurance, Life Insurance

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We just finished our open enrollment paperwork, and like many other workers we faced a long and confusing list of instructions. They tried to distract me from the increased health insurance premiums by adding a bunch of optional “perks” like universal life insurance and paid identity theft protection. Christine Benz has a thoughtful Checklist for Open Enrollment Season. Here are my own thoughts as I went through the options:

Health Savings Accounts (HSA). Doesn’t “triple tax-free” sound good? HSA contributions are tax-deductible (pre-tax money), they grow tax-free once there, and your withdrawals are tax-free when spent on qualified healthcare expenses. However, you have to be enrolled in a qualified high-deductible health plan (HDHP) to be eligible, which means your higher out-of-pocket costs might not offset the cheaper premium plus upfront tax savings. Depending on your estimated healthcare costs, tax rate, and how much your employer pays, you may be better off with a traditional HMO or PPO plan. A bit of math will be needed.

In order to maximize the HSA’s long-term advantages, you will also want to treat the HSA as an investment account. This means you’ll you need to cover the higher annual out-of-pocket costs yourself and still have money left over to fund the HSA.

Healthcare Flexible Spendings Accounts (HC FSA). I’ve said it before, but these can be a bureaucratic mess. The benefit is “use-it-or-lose it”, but for me it has been “use-it-and-lose-my-mind”. Third-party benefits administrators have given me several bad experiences with submitting my receipts and ensuring they are approved. If it takes me an hour to submit/check/argue/re-submit/check a $50 medical expense, then in my opinion the tax savings of $10 was not worth it at all. But if I don’t follow through, I lose the entire $50. Asymmetric risk in a bad way.

There are also some finer details if you want to have both an HSA and an FSA (look up limited-purpose or post-deductible FSAs).

Dependent Care Flexible Spendings Accounts (DC FSA). These are better. You can have both an HC FSA and a DC FSA as they cover separate things. If you have eligible childcare costs (or adult dependent care), it is quite possible you reach the $5,000 annual maximum. I usually wait until I’ve already paid out $5,000 in preschool tuition, and then I just submit a single receipt for a potential $1,000 tax savings (assuming 20% tax rate on $5,000). Now that’s a good per-hour rate.

Employer-sponsored disability insurance. The best thing about group disability insurance through your employer is that it’s easier to qualify and the cost may be subsidized by your employer. However, if you switch or lose your jobs, you might lose your group disability insurance at the same time. This won’t happen with your own portable plan. Specialized workers can purchase riders that will pay out as long as you can no longer perform your specific occupation (as opposed to any lower-paying job). However, it’s so easy to put this off that getting some employer-sponsored disability insurance can be a good first step.

Life insurance. A common offering is a year of your salary in life insurance. Beyond that, you should always compare with an individual term life insurance plan. That way, if you have a special medical condition that makes your private premium somehow crazy expensive, then you can always fall back on the group plan. For most healthy folks, finding your own portable term life policy will be cheaper and it won’t go away if you lose your job. If you get a 20-year level term policy, your premium also stays fixed for those 20 years. No surprise increases.

Other benefits. The menu seems to expand every year. 401k investment advice. Commuter benefits. Student loan repayment assistance programs. Accidental death and dismemberment (ADD) insurance. Critical illness insurance. Long-term care insurance. Identity theft insurance If it’s free, I’ll take it but in general I decline the ones that require a premium.

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  1. Don’t forget when you turn 65 and go on Medicare you can slowly withdraw funds from your HSA tax free by reimbursing yourself for annual Medicare and Medicare Supplement premiums (Medicare Advantage premiums don’t qualify).

  2. My understanding is that ‘To get DCA , both the parents should be working or looking for jobs or going to school’. How do you show the proof of ‘looking for job’ , ‘working’ etc ?

    Thanks for your website. Recently used the your reference for SoFI.

    • Someone else brought that up, but it’s never been an issue for us. The only reason you get a DCFSA is from your employer, so by definition aren’t you working? Both of us work but we’ve never been asked for employment verification (or proof of looking for work) for the other spouse. I don’t see why someone would pay so much for childcare and they don’t need it, right? How is that a problem?

      • I am working but my spouse is in and out of work. She works in retail and that too normally during seasons but not during other times.

        • The official answer would always be to ask your HR benefits administrator what they usually ask for. To me, it sounds like your spouse works and wants to be available to work when the opportunity rises. Personally, I have never had to submit any paperwork for a spousal work verification. Maybe someone else has had a different experience.

  3. Thanks Jonathan – appreciate all your tips!
    Agree, the Flex accounts are a mind-numbing experience. They just had me re-send receipts for a Kaiser visit because the code was not verified. I wonder why they accounts can not roll over year to year? And where does the money go that is left? I still do this to get tax free medical but like you – wonder if my time is worth it.

    • Starting next year, my HC FSA allows to roll forward up to $500 to next year and continue rolling it from one year to the next. That is a very positive development.

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