It’s Open Season!

Annual open enrollment for benefit plans typically begins on November 1. Everyone should spend 30 minutes annually on a review of your current and available benefits. If you hate waiting in an endless phone loop when you need an answer about your insurance or retirement, take advantage of the live experts who are available to advise you during open enrollment. Below are some tips to help you understand your options.

Flexible Spending Accounts: While many benefits, such as health insurance, have automatic enrollment, FSAs typically require you to proactively renew each year. An FSA allows an employee to contribute up to $5,000 annually to an account that is dedicated for reimbursing specific expenses on a pre-tax basis.

FSAs are “use it or lose it” and employees often bypass them for this reason but they are especially valuable to high-income professionals. Dollars contributed are considered “pre-tax” and can then be used for expenses that would otherwise not be deductible from your taxable income.

Plan carefully to not overcontribute to your FSA. Any balance over $500 will be absorbed into the plan, typically for administrative expenses. You have until 3/15 of the following year to spend down your FSA.

The three main types of FSAs are:

  • Healthcare FSA – you can contribute up to $2,650/yr. to pay healthcare expenses, including copays, for you and your dependents. You cannot use Healthcare FSA funds to pay for health insurance or any expenses covered under another health plan.
  • Limited Purpose FSA – This type of FSA is designed to be paired with a Health Savings Account (below) and is used to pay for dental and vision expenses. The contribution limit for a LPFSA is also $2,650.
  • Dependent care FSA – you can contribute up to $5,000/yr per family for child care costs.

Your employer may choose to make some part of your FSA contribution as a nontaxable fringe benefit.

Health Savings Accounts: An HSA is kind of like a combination TIRA and Roth IRA to be used for medical bills. Contributions are deductible and distributions (including growth) are not taxed as long as you use them for qualified healthcare expenses. You must pair it with a High Deductible Health Plan (HDHP) in order to qualify for this tax-free treatment and you cannot pay your health insurance premiums with distributions.

Most employer plans will offer a choice between an HDHP and a plan with lower deductibles plus co-pays (HSA-qualified HDHPs cannot have co-pays). If you believe your medical expenses for the upcoming year will be fairly low and you’re not expecting to have a baby or surgery in the next year, a high-income professional could very likely benefit with the HDHP/HSA combo. Many physicians consider their HSA accounts a bonus retirement account to be used for healthcare expenses after retirement.

The 2019 HSA contribution limit is $3,500 for singles and $7,000 for family plans. You have the right to move your HSA to another custodian if you choose, but you cannot require your employer to contribute to it. Employers often include HSA contributions as a non-taxable fringe benefit.

Group Disability: If you have a health issue that has limited you from getting good OO LTDI coverage, an employer offering group long-term disability as a perk can be the deciding factor on where you go to work. With a well-timed pregnancy, you can even get STDI coverage to cover part of your maternity leave.

Group disability policies are far more common at large healthcare systems than with small groups because small employers do not have the economies of scale to make a group policy feasible for the insurance carrier. Should you have a claim within the first year of signing up, you might be excluded from coverage based on having a “pre-existing condition”.

Some group disability is free for a minimal amount with an option to add additional coverage through withholding. It is very important to know what definition your policy applies to “disabled”, how long coverage would last, and what conditions would be excluded. Because group policies have binding strict disability definitions and because you’ll lose your coverage if you ever change jobs, I always recommend an additional Own Occupation (OO) individual policy.

Life, dental, and vision: You’ll likely be provided with a minimal amount of life insurance for free. I typically recommend buying more if you cannot buy an individual term at a reasonable premium. Whether you buy dental and vision depends upon how much you typically use these services, since they’re fairly predictable. Does the dental plan cover braces? How often can you replace your glasses and is there a maximum the policy will pay?

Retirement Accounts: My advice is to sign up to withhold as much from your paycheck as you can possibly afford for retirement. I have yet to meet any physician in their 40s or above who wishes they had saved less for retirement. Through your last year of training, it’s generally better to go with a Roth 401k contribution, if it’s available to you. In your first full year of attending and beyond, it’s generally better to choose a pre-tax contribution. All employer matching is treated as pre-tax, btw, whether or not you have chosen the Roth option.

Some out of the ordinary decisions you may have to make include:

  • 457b – These retirement plans are offered to executives and highly-compensated employees in some Non-Profit Organizations (NPOs). Before you sign up to participate, there are a few things you need know:
    • Your account is subject to a risk of forfeiture to your employer’s creditors. this means that, should your employer go belly up, your account can be seized to pay off debts. This is very rare, but I know of one hospital where it has happened.
    • Distribution rules are different. When you change jobs or retire, you will have to take money out of your 457b on the plan’s timetable, not your own. For example, you may be required to take a lump sum of the full balance within 60 days of separation from service. Be sure to read the Summary Plan Description (SPD) to learn the rules of your 457b plan before deciding whether to participate.
    • Rollover rules are different. Should you change jobs, you can roll your 457b over only to another NPO 457b plan and that only if the new 457b plan allows it. Otherwise, you’ll have to take your balance out based on the rules articulated in the plan’s SPD.

Should the above deter you from contributing to a 457b? Not necessarily – the annual pre-tax contribution space is extremely valuable to most physicians. But you don’t want a nasty surprise if your hospital is having financial difficulties or when you decide to change jobs. Sign up with your eyes open to the risks.

  • NRAT (Non-Roth After Tax) availability – If your 401k/403b offers this choice and you get to roll it to a Roth periodically (at least annually), go for it. The NRAT allows you to fill up any remaining space in your plan beyond your contribution and your employer match, then convert to a Roth. You’ll pay taxes only on any growth between time of contribution and conversion. NRATs are also nicknamed “Mega Backdoor Roth’s”- this explanatory post at Mad Fientists is my favorite.

NRATs are a fairly recent development in the retirement plan space, having been blessed by the IRS only in 2014. As a result, I have found most clients have received either incorrect or no advice from their HR departments regarding them. Be prepared to do your own homework, if necessary.

You should always review your plan’s SPD. Michelle explains what you should look for in this month’s vlog.

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