When shopping for health insurance, it's difficult to look past the "sticker price." Although there is an obvious difference in the monthly premium amounts associated with low- and high-deductible health plans (HDHPs), the lowest premium plan isn't necessarily the least expensive overall. Having a "high deductible" means that your paycheck will be a bit larger, due to the lower monthly premiums, but you'll also need to shell out a greater dollar amount before your plan begins sharing out-of-pocket costs with you.
Low-deductible health plans sometimes offer Flexible Spending Accounts (FSAs) to help pay out-of-pocket expenses. Money is contributed to an FSA pre-tax and distributions are made tax-free when used to cover qualified expenses. But, FSAs work on a "use it or lose it" basis, meaning any funds not spent by the end of the year will be lost, unless the plan has a grace period or rollover feature.
Qualified high-deductible health plans (HDHPs) typically also offer access to a unique and often under-appreciated benefit: Health Savings Accounts (HSAs). Unlike FSAs, HSAs are not subject to a "use it or lose it" time horizon and come with a triple tax advantage: no tax on contributions, growth, or distributions (as long as the funds are spent on qualified medical costs). This means HSAs can be used to cover healthcare costs today and, when used similar to a retirement savings vehicle, can make it easier to save for healthcare costs in retirement.
While HSAs are a unique and powerful savings vehicle, that doesn't mean you should enroll in a HDHP for the sole purpose of HSA eligibility. HDHPs can leave workers exposed to higher costs for normal non-catastrophic illnesses, so it's important to consider not just the costs up front on a monthly basis, but also the potential costs you may incur in the event that you need care.
There's a reason why many Americans hold the bulk of their retirement savings in a 401(k) account: They provide an opportunity for tax-deferred growth that compounds over time, and in many cases your employer may match a share of your contributions, so failing to participate essentially means taking a voluntary pay cut.
Each tax-advantaged savings vehicle allows you to contribute to different types of tax treatments that are either tax-deferred or tax-exempt. If your employer offers a 401(k), it is likely a Traditional 401(k) where contributions are made on a pre-tax basis, investment earnings grow tax-free, and distributions taken in retirement are taxed at ordinary income tax rates. However, some employers also offer the option to contribute to a Roth 401(k) where contributions are made after taxes are withheld, but investment earnings grow tax-free, and qualified distributions are also free of income tax.
If you're choosing how much of your contributions to allocate to your Traditional or Roth 401(k) account, bear in mind that you may want to make changes to last year's elections. If you've moved to a higher-tax state, if you've been bumped into a higher income tax bracket, or if you're simply worried that taxes will be higher in the future, then adding tax diversification by spreading assets between tax-deferred and tax-exempt retirement accounts can help you manage risks around your tax liability.
Keep the conversation going
If your open enrollment period has already passed, you likely won't be able to make adjustments to your healthcare coverage or other insurance coverage. Even still, it's important to speak with your advisor about the workplace benefits you selected. This conversation will help to make sure the correct information will be included in your financial plan and they may also be able to offer solutions if you feel as though the disability or life insurance coverage you selected isn't enough to provide the protection you and your family need.
Main contributor: Ainsley Carbone
Product of the UBS Chief Investment Office.
Read the full report, including an open enrollment Q&A, Open enrollment: A checklist for 2021 benefits 11 Nov. 2020