The Ultimate Guide to Open Enrollment and Work Benefits

Dear Decision-Fatigued,

Great question. Open enrollments season for most companies lands in October - December, so this is prime time to figure this out. The bad news: While I wish I could tell you "this is just a formality - you're okay to stick with the defaults", the real answer is there's important stuff buried in those e-mails. The good news: You likely have thousands of dollars of savings awaiting you for < 30 minutes worth of effort.

In this post, I'll share (a) why this is worth your time, then move onto (b) what you'll need to get this done quickly, and finally (c) share how with a step-by-step guide to optimize your choices.

Why is this worth my time?

(1) It could save you $10,000+ each year

It makes me crazy that employers bury the lead on the $10,000+ you could save with more proactive and personalized benefits choices...in loads of dry corporate emails, that don't...

....or in the case of Facebook, by sharing this "truth is stranger than fiction" corporate video that i currently making its way through the twitter-verse.

Jokes aside, I will be the first to confess that in my early working years, I just "archived" those emails from HR and stuck my head in the sand ostrich-style. In the wall of e-mails full of jargon on 401(k)'s and PPOs, I never realized that thousands of dollars were at stake. Bummer, but as one of my favorite Harvard Business School prof's would say "good judgement comes from experience, and experience comes from bad judgement." So let's prevent you from losing out this year! 

There are two major drivers of those $10,000+ in potential savings:
(a) Employee Perks - 401(k) matches, health savings matches, access to easily missed perks (e.g., free counseling, free legal advice, fancy gym memberships, charitable matching programs as a force multiplier on your giving etc.)  
(b) Tax Savings - open enrollment is a rare chance to opt-into a bunch of tax strategies, to lower your income tax bill.

A real example from a couple that's been beta early access Steward users can bring this to life. Ross and Rachel (names anonymized / Friends-ified), live in San Francisco with one child, and earn $450,000 as a household each year (for those keeping score at home, that means they have a marginal tax rate of: 35% federal, 9.30% state - welp!). They saved $25,000 when they optimized their open enrollment choices vs. sticking with defaults this year. 

2. It's Urgent

Open enrollment is likely one of the only times each year when you can make changes on your company healthcare plan and other annual benefits. There are some exceptions e.g., getting married, having kids, spouse losing a job, divorce, etc. that might give you another bite at the apple. But for most folks this ~10ish day period in October or November…is it!

3. New perks on the table this year

In the face of the "Great Resignation", many HR and Benefits departments are adding lots of new perks this year. Why? As a way to stay competitive in retaining talented employees (i.e., you). It's basically an arms race - and the good news is, you're the one who benefits. But only if you take advantage!

What you'll need to quickly optimize your selections

Only two things.

(1) Benefits At a Glance - a ~2-3 page summary of your full benefits book

Where to find this: On your company benefits site (e.g., Workday, Gusto etc.), attached to the company-wide email that accompanied the open enrollment season announcement, or by emailing HR or benefits,

 What you'll use this for: The TLDR of your full benefits book (often 100+ pages!).

(2)  What's new list - a one-pager highlighting changes since last year

Where to find this: This could be a one-pager (e.g. "What's New in 2022") HR attaches to your open enrollments announcement, a consolidated page at the front of your benefits booklet, or embedded in the text of the company-wide email that accompanied the open enrollment season announcement.

 What you'll use this for: This will allow you to hone in on a streamlined set of options to review, particularly if you're already happy with your prior choices.

How to make your open enrollment benefits selections

Let's start with the big picture. Employers offer benefits in 5 big categories, which we'll walk through in priority order, accounting for $ impact and spots where you need to take action, below.

You'll notice we skipped covering some awesome benefits your employer may offer that are fixed or that you don't have to make choices on during open enrollment...like vacation leave, paid mat/pat leave, flexible work options, or sending you quarterly cheese samplers. Let's separate signal from noise, and focus on the stuff where you need to make active choices in the coming weeks.

1. Select your Retirement Plan

Let's start with the biggest ticket item, with the largest lifetime savings opportunity, and the most room to personalize - retirement plans. While you likely can change both how much you contribute (finance-speak: your plan contribution rate) and if you contribute pre or post-tax (finance-speak: traditional vs. Roth) throughout the year, your employer might announce changes to your 401(k) plan during open enrollment, so this is a good time to make selections.

You have 5 basic choices to make here, which I'll walk you through step-by-step:‍

A) Which plan? - Traditional vs. Roth

Let's start by acknowledging that if your employer has a retirement plan (likely a 401(k) for the bulk of folks reading, so we'll just use that naming convention here)- you're already in a winning spot. Both traditional and roth 401(k) plans are both (a) great ways to save for retirement, (b) give you great tax perks from Uncle Sam in return for saving for your future, (c) have the same annual contribution limits, (d) don't have income limitations, (e) usually have the same investment options, and (f) offer the same employer match, if your employer does offer a match.

So what's the difference between traditional and Roth 401(k) plan? Roth 401(k)s were introduced back in 2006, are now offered by 70%+ of employers, and opened up a current-self vs. future self trade-off.

A traditional 401(k) allows you to contribute pre-tax, which in plain-English means you get the money slotted into your savings account without having to pay any taxes today, and you get to push the tax-can down the road until retirement when Uncle Sam will come calling to collect those income taxes at last! 

A Roth 401(k), in contrast "taxes the seed vs. the harvest". You take the income tax hit today (ideally at a lower than usual tax rate year), but in return all those savings, including their growth and compounding, come out tax-free in the future.

This ultimately boils down to one question. Do you expect this upcoming tax year (2022) will be a *relatively* low income year for your household in the context of your overall career?

If yes (e.g., you're early in your career and expecting higher pay in future, taking a sabbatical, going back to school, getting paid less than normal, starting a business, cutting back on hours, taking unpaid family leave) - choose Roth. If no or not sure - choose traditional. Most folks' income trajectories have peaks and valleys, and the Roth strategy allows you to take advantage of the valleys, while your income (and tax rate) is low. Going traditional does not mean you're abandoning a chance to save on taxes! It leaves the door open to do a "Roth conversion" in a future year when your income is relatively lower. For many of our readers, that's likely in the books if you're aiming to shift hit financial independence early, and intentionally earn lower income in a "passion job" as your second or third chapter of your career.

B) How much to contribute?

If your employer offers a match (woot!), contribute at least up to your employer's match. Most employers offer something between 3-6%. This is "free money" you don't want to walk away from. Jargon alert: Sometimes companies have confusing language and structures to their match programs. Say, for example, your company says they’ll match 100% of the first 2% you contribute, plus 50% of the next 4%.  In plain-English, that means you’ll have to contribute at least 6% to receive a 3% match. If you’re confused about how your company’s match works, reach out to your human resources department. 

If you have extra capacity to save , I'd suggest maxing it out all together (for 2022, that's $20,500 for 401(k) plans). Steward can help you calculate if you have the capacity to save this much, in the context of your budget and nearer-term goals. Contributing to a 401(k) is one of the best ways to lower your tax bill. If you're already maxing this out, take a moment to pat yourself on the back!

C) What to invest in?

I recommend (a) going with a low-fee (targeting <0.15% in fees) target date fund set for the year you're aiming to retire or (b) if you're the "I love getting my hands dirty in this" type - 2-4 low-cost index ETF (targeting fees of <0.15%) that give you broad exposure to the market.

A word of caution: 401(k) fees are "usual suspects" for sneaking in high fees, so this is a true "check yourself before you wreck yourself" space. The average 401(k) fee in the US  (0.45%) is around 3-9x what a diversified low-cost ETF based portfolio that Steward puts together our clients costs (0.05-0.15%). The investment industry hides behind those sneaky small numbers, and yet they can add up to millions of dollars over a lifetime.  This amazing John Oliver clip explains this in a hilarious way:

What makes this even worse...a recent government studies show that nearly half of Americans don't even realize they are paying fees on their 401(k) period! That's part of what got us fired up to start Steward , so we can help families an investment mix that's personalized for their specific goals, and that's much lower cost.

D) Determine who gets these $ in a "god forbid" situation

Make sure you quickly spot check that your retirement plan savings will go to someone you care about, in a "god forbid" situation for you. In finance-speak, those are your "named beneficiaries". You want to check that you have them on your retirement plan, and that they're up to date. Common mistakes here: forgetting to add a significant other or additional kids, and unintentionally creating major family drama.

E) Bonus - Check on after-tax 401(k) contribution options

If you really want to get fancy on tax-optimization and turbo-charging your savings....check if your employer offers - or is introducing an after-tax 401(k) option also known as a mega backdoor Roth. If you're looking for even more places to save in a tax-optimized way, after maxing out your 401(k) and other tax-saving accounts like an HSA (Health Savings account), 529 (college-savings account), or IRA (individual retirement plan)…this is your next destination.

2. Select your health / dental / vision insurance

The next big kahuna is selecting your health insurance, and I'll lump in dental and vision here too. In case the words co-pay and deductible makes you feel slightly nauseous, as they do for me, let's simplify this jargon-filled space into plain-English.

A. Select Your Health Insurance

This is a what are you getting vs. what are you paying question. The trade-off is, the higher your insurance coverage in case you end up needing healthcare this upcoming year (finance-speak: lower co-pays, deductibles, out-of-pocket maximums etc.), the higher the insurance fees you'll need to pay (finance-speak: premiums).

Your options will likely come down to 2 or 3 of the options below.

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The PPO is the default in many organizations, so let's go a little deeper on deviations from that plan.

The HDHP:  great for the "annual physical" only types. It's a gateway into the Health Savings account which is the ultimate unicorn of tax savings for retirement (more on the HSA, and how it's entirely different from but often confused with an FSA, below). The trade-off is higher costs if you do end up having medical issues. In other words, if there's a chance you'll get pregnant this upcoming year (...learn from my mistake!) or have major surgery, it's worth running the math before you choose this. You'll likely have to cover any out-of-network services on your own dime. The minimum amount you'll need to contribute before your coverage kicks in (finance-speak: deductible) in this type of plan is $1,400 for individuals and $2,800 for families. If meeting that high deductible would be a hardship, or would cause you to nickel-and-dime on health care, you’re probably better off choosing a lower-deductible policy like a PPO or HMO, and skipping the HDHP.

The HMO: quite similar to a PPO plan, but often limits you to coverage only for "in-network" physicians (plain-talk: narrower selection of doctors), and requires you to go to a primary care physician as a gatekeeper before you can go see a specialist (plain-talk: more doctor's visits in your future). In return, it's often less expensive than a PPO.

Still stumped? Many providers will link to an expense calculator to help members choose the right plan. If your spouse’s open-enrollment period doesn’t coincide with yours, sign up for one, then use the other as an opportunity to cost-compare.

B. Select Your Vision Insurance

This one's easy. I recommend opting-in, even if you're an smooth 20/20. For $3-5/month, you'll get  discounts on contacts, glasses, and eye exams each year, and given how much we're in front of screens these days…that's a no-brainer for most

C. Select Your Dental Insurance

Another easy and straight-forward one. Opt-in as the "responsible adult choice". Most employers offer a higher coverage (and therefore higher fee) plan, with "higher octane" benefits on things like orthodontia, alongside a more "standard fare" plan (e.g., two cleanings a year, 70% coverage on dental work, and a$100 deductible a year for $8 bucks). Personal pick here - you know yourself (or in this case, your mouth) best.

3. Actively Opt-In to Tax-Saving Health / Care Accounts

This is where we start getting fancy and saving on some taxes! Your employer likely offers you three ways for you to save on taxes and reduce your health care or dependent care expenses:
- a healthcare Flexible spending account (FSA)
- a dependent care flexible spending account (DC FSA), and
- the ultimate tax-saving unicorn, that's often completely squandered (more on that shortly) - a health savings account (HSA).

Let's figure out which ones make sense for you.

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A. Health Savings Account

I'll put in an extra plug here for the, and specifically investing your HSA,  since it's (a) probably one of the best tax strategies out there and (b) one of the first places I invest each year, but also (c) so wildly misunderstood. Why? Terrible branding that makes it easy to confuse with the healthcare FSA.

60% of companies offer an HSA, which is NOT the same thing as an FSA! It's much better. The "S" in each stands for something completely different. It's a Health SAVINGS account vs. a health flexible SPENDING account, and the HSA would honestly be better named a health INVESTMENT account, since the killer way to use this - that the "0.1%" uses - is to tear up the handy little debit card they send you, and use this as a long-term investing account.

Why invest your HSA vs. spend it on current healthcare costs? This will offer you triple-tax free benefits (tax-free contributions, tax-free growth, and tax-free withdrawals), which can add up to $40,000+ per year in tax savings.

It will also make you smarter and more strategic than 91% of people with HSAs who are keeping their HSA in cash and using it to cover current healthcare expenses vs. investing it for future healthcare expenses - squandering a killer opportunity! The average American couple spends $300,000+ on healthcare in retirement, so even if you're at the pinnacle of health now...there are low odds of your ever "over-funding" this account by investing it for the long-term.

Added perk - many companies (~ 40% according to the Society of Human Resources Management - SHRM) will even contribute a specific amount to your HSA each year (more free money!), with even more deposited for completing various health and wellness tasks.

Bottom line: If you're using a high deductible health care plan, I'd strongly advise you to take advantage of maxing out your HSA, getting your employer's contribution too, and investing it.  

B. Health Care Flexible SPENDING account

On the health FSA - we often get the question, how much should I contribute? This, unlike the HSA, is a use-it-or-lose it situation. You can use your healthcare FSA to pay for glasses, contact lenses, co-pays, deductibles, and insurance, not to mention COVID-19 at-home test kits, some OTC drugs, and even feminine products. If you have big-ticket predictable expenses beyond the max, feel free to max this out, but for most folks (a) your plan will allow you to roll over up to $570 into the next year if you don't use it in year (b) FSA-qualifying expenses don't surpass ~$500-600 per year, so contributing ~$500 is a safe spot to get started...as long as you're okay with filing some reimbursement claims. Otherwise, know thyself, and leave this one be. Potentially not worth the hassle factor.

A few changes to keep in mind, specific to 2021 Open Enrollment season. The IRS has informed employers that for 2022, workers can carry over the full amount of their FSA savings from this year. Check to see if your employer opted into this change. If you have lots of money left in your FSA this year, you might want to scale your contribution down.

C. Dependent Care Flexible Spending account

Being a working parent of a young child is one of the hardest jobs out there, not to mention...wildly expensive. This is one of the rare ways to reduce the cost of childcare, which Uncle Sam offers to you in the form of an employer benefit! It's worth exploring - which you can do in our detailed write-up and FAQs here.

4. Group life and disability insurance

A. Life Insurance

What this is: Many companies offer employees a token amount of free term life insurance (1-2x of your salary), negotiated at a group rate, with the option to purchase additional "supplemental life" coverage.

What to do with it: Our recommendation is to opt-into the basic group life (that's a no-brainer), but skip the supplemental insurance. Why? Many folks assume that their company's group discount is giving them the best rate for both themselves and their spouse. But buying a private policy is often (a) lower cost (b) locks in a lower rate - group plans through your employer often increase rates year on year (c) gives you optionality should you lose your job or move companies -  group plans through your employer won't move with you. There are, as with anything, always exceptions where taking the supplemental insurance could make sense - if you're in poor health, or are expecting a child, and/or can't buy a private term policy. But in general, for most folks the  to-dos here are to ensure (a) you're opted-in to the basic life insurance, and to (b) update your beneficiaries to ensure that the life insurance goes to who you want in a god forbid scenario.

B. Short-Term Disability Insurance

What is this: This types of insurance kicks in if you can’t work beyond the amount of your sick leave.

What to do with it: Ensure you opt-in to your group short-term disability coverage, which is often the cheapest you can find! Most employers enroll you in this benefit automatically for free to a very minimal amount ($5-10 / month). However, some require you to opt in, so this is worth-double checking.

C. Long-Term Disability Insurance

What is this: This type of insurance kicks in if you can't work after your short-term disability, and it's there to protect you from catastrophic injury or illness. Same as with short-term disability, most companies offer a "base" amount of coverage.

What to do with it: Ensure you opt-in or enroll for the "base" coverage. You usually won't have a choice to add coverage, but if you do, choosing the highest level of coverage is a good bet. Why?
- You're a young, vibrant human with many working years ahead of you. Your ability to earn income is likely your most significant and valuable asset (above and beyond a home!). This  insurance protects that asset in case you're unable to work for an extended period of time. I was shocked when I first learned that nearly 1 in 4 Americans take long-term disability before hitting age 67 (common causes: cancer, mental health issues, etc.), so this is more than an "off-chance".
- Your group long-term disability insurance offered through work is likely cheaper than purchasing an individual policy. The one spot where there's an exception here is if you're in a highly specialized field (e.g., doctors, dentists). In that case it's worth exploring buying a separate policy outside of work that will cover you if you specifically can't do your own occupation as opposed to any occupation (the latter's what's covered in most standard work policies).

If your employer allows you to pay for long-term disability insurance with after-tax dollars vs. pre-tax dollars, jump on it. It'll mean just a few extra dollars out of your pocket each pay period, but if you become disabled or need to use this benefit, that's a massive difference between all of your disability income being tax-free vs. not.

5. Extra Perks Treasure Hunt

At this stage, you've covered the big rocks of your benefits...but if, and only if, you have bandwidth - you can probably unearth some extra hidden gem perks your company offers.

Where to find these: Usually, you’ll find a laundry list of offerings at the back of your benefits booklet.

Favorites to look out for: 

A. Legal Benefits: A free or cheap way to draft a will, trust, and powers of attorney, via opting in to a voluntary group legal plan. For about $215 annually, you can tap into a network of attorneys that can help you draft all your important basic estate planning documents, including wills, powers of attorney, medical directives, and revocable trusts, if you haven't already. Once you've done that, you can simply decline the legal plan during your next open enrollment period. The market rate for basic estate planning ranges from $3000-$5000 depending on where you live in the country, so this represents $2800-$4800 in savings. Many folks in their 20s-40s often pushed this off before having kids (guardianship), or even for decades after, but this is a great opportunity to get them in place when times are good.

B. Fertility benefits: offered by many tech companies in particular, and can be hugely impactful.

C. Mental Health benefits:   A new pillar in many benefits programs. For example, therapy sessions are increasingly being offered as a response to COVID, and with therapy so rarely covered by insurance (as covered by the Wall Street Journal in this link), this can be quite valuable. According to SHRM's benefits survey conducted last year, 85% of responding organizations offer specific mental-health coverage, and 25% reported expanding those benefits for 2022.

FAQs

What's open enrollment and why does it matter?

The only time of year when you can make changes on your company healthcare plan and other annual benefits. There are some exceptions e.g., getting married, having kids, spouse losing a job,divorce, etc. might open up another bite at the apple. But this period in October and November (for most companies) is it for most people! Proactively selecting personalized benefits for you, can lead to $10,000+ in savings on both taxes and perks.

When is open enrollment in 2021?

Typically a ~two weeks (or less!) window in October - December 2021.

How long do I have to make these choices?

This varies by company, but often < two weeks. Double check with HR to ensure you don't miss the deadline.

I'm self-employed - what benefits should I be choosing?

This could be a blog post in and of itself, so we'll start with healthcare since that's the most pressing! Nearly 30% of Americans are self-employed, making obtaining affordable health insurance that much more challenging.  If you work for yourself, you can purchase insurance via the Health Insurance Marketplace®. This option is only available for those who don’t have employees, like freelancers, independent contractors, consultants, etc. Healthcare.gov has excellent information and steps to complete an application. 

Resources

We know that selecting your benefits in open enrollment can be overwhelming. If you’d like more support as you sort through the process, we’d love to be of help. Sign up for our waitlist below!