Open Enrollment Time

It’s time to enroll in employee benefits again. There are two benefits I’d like you to pay special attention to this year. The Health Savings Account and Long-Term Disability Insurance.

Health Savings Account

A Health Savings Account (HSA) is the most tax-advantaged investment option available for medical expenses and retirement. You don’t pay taxes on earned income going in, you don’t pay taxes on growth (interests, dividends and capital gains), and you don’t pay taxes on funds coming out of your HSA as long as you use the funds for qualified expenses (we’ll cover those in a moment). If the money goes in via payroll deduction, you also don’t pay FICA tax on it. 401k and IRA contributions may be pre-tax, but they don’t avoid FICA. Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) are also excluded from your gross income. There is no required minimum distribution when you turn 70.5 like there is with a 401k and IRA. The money in an HSA can be invested in mutual funds, stocks and other securities. And an HSA is "portable" meaning it stays with you if you change employers or leave the work force. Not surprising, more and more workers are using a HSA to save for retirement. With all that it has going for it, depending on your situation, it may be more beneficial to invest in an HSA rather than a 401(k) or IRA without matching.

Qualified medical expenses are those expenses that generally would qualify for the medical and dental expenses deduction. Non-prescription medicines (other than insulin) aren’t considered qualified medical expenses for HSA purposes. A medicine or drug will be a qualified medical expense for HSA purposes only if the medicine or drug requires a prescription, is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or is insulin.

In order to qualify for the HSA, you must be enrolled in a high-deductible health insurance plan (HDHP) as defined by the government. For 2019, the IRS defines an HDHP for an individual as a plan with an out-of-pocket maximum of $6,750 and a minimum deductible of $1,350. For a family plan in 2019, the out-of-pocket maximum is $13,500 and the minimum deductible is $2,700. The 2019 annual HSA contribution limit is $3,500 for individuals with self-only HDHP coverage, and $7,000 for individuals with family HDHP coverage. You cannot be covered by another healthcare plan except what is permitted.

Before you select your health insurance option this year, be sure to factor in the benefits of an HSA when considering the high-deductible health insurance plan. The HSA is the perfect vehicle for saving for long-term care and other retirement medical expenses.

One last benefit, at age 65, you can withdraw your HSA funds for non-qualified expenses at any time although they are subject to regular income tax. If you withdraw your HSA funds before age 65 for non-qualified expenses, you will pay ordinary income tax plus a 10% penalty. You can avoid paying taxes and penalty by always using the funds for qualified medical expenses.

Long-Term Disability Insurance

One of your most precious assets as a working-age adult is the ability to earn income. When tragedy strikes, the impact to your finances can be devastating. The best way to protect yourself and your family from this financial disaster is to maintain adequate disability insurance. Disability insurance does not replace all of your income if you become ill or injured. Generally, it replaces a portion up to 70%.

Insurance companies price these policies relatively high because the likelihood that you may need this benefit is relatively high. In fact, the 2017 Disability Statistics and Annual Report by the Rehabilitation Research and Training Center on Disability Statistics and Demographics (this is the most recent one available) found that in 2016, 10.6% of adults between the ages of 18 and 64 were disabled and the percentage increases with age.

It is so important that you have the right coverage and that you understand the coverage you have that I have prepared this worksheet to help you evaluate your long-term disability coverage. This worksheet can be used for a policy you own outright or one that is provided to you through your employer. After you have completed the self-evaluation, you may find that you need additional coverage. If you’d like me to help you with that or if you have any other financial questions, please don’t hesitate to contact me.