Open Enrollment Time for 2023 Employer Provided Benefits

It’s that time of year again where daylight is getting shorter, temperatures are getting cooler, and it will soon be open enrollment time for your 2023 benefits.

We provide the following information to remind you of some important decisions you may be faced with and to encourage you to reach out to an SWA advisor with any questions you have.

Important Items to Consider and Take Advantage of:

• Health / Dental Insurance and Health Savings Accounts (HSA):  Many employers are now offering an HSA option, which could potentially decrease the out-of-pocket premium cost to their employees.  The trade-off for this type of policy is that the out-of-pocket deductible and maximum out-of-pocket cost for an HSA plan is typically higher than a traditional health insurance plan.  That said, in 2023, a family can contribute up to $7,750 ($3,850 for an individual) to an HSA on a pre-tax basis, to help cover the deductible and copays they have.  A big bonus with an HSA is that you are not required to spend every dollar in the HSA by year end.  You can accumulate unused dollars and use them at a later date, even after you leave your current employer, or retire.

NOTE:  For those age 55+, there is an HSA “catch up” contribution maximum of $1,000, in addition to the maximums outlined above.

• Health Care Flex Spending Account (FSA):  Like an HSA, an FSA allows you to set aside pre-tax dollars to cover out-of-pocket medical and dental expenses.  Many employers, but not all, have FSAs for their employees.  For 2023, the projected FSA maximum you can set aside is $3,050 (if married, you can each set aside $3,050). Unfortunately, an FSA is a “use it or lose it” proposition meaning if you don’t spend what’s in your FSA, you lose it.  It is important that you estimate your out-of-pocket costs the best you can when contributing dollars to an FSA and, of course, spend those dollars before the deadline.  Keep in mind that should your employment end during the year, you can only be reimbursed from the FSA for expenses incurred prior to termination.

NOTE:  You should know that if you are contributing to an HSA, you are not allowed to contribute to a general FSA, but you can contribute to a Limited Purpose FSA that is set up to reimburse only dental and vision expenses.

NOTE:  Depending on your employer’s plan, your FSA may now have some leeway with the “use it or lose it” rule for FSAs. For 2023, you may be allowed to carryforward $610. Review your employer’s plan to confirm whether this option is available to you.

• Dependent Care Flex Spending Account (DFSA):  Many employers offer the ability to set aside up to $5,000 per family in a pre-tax dependent care account for children up to the age of 13.  If you (and your spouse, if married) are working and have children in daycare, summer camps, etc., you may want to take advantage of this pre-tax option.  However, there are some downsides to the DFSA.  You typically have limited ability to change your contribution amounts during the year and this is a “use it or lose it” account.  The Coronavirus pandemic exposed these downsides for many parents in 2020, who ended up not using all of the funds in the account due to camp cancellations or other changes in plans.  If you choose to opt out of the DFSA, you are still likely to be eligible for a Child and Dependent Care Expense credit when filing your tax return.  The value of the credit may be lower than what you would save on the DFSA, but you can capture it without the risk of loss of your funds.
• Short- and Long-Term Disability:  In most cases, we encourage each employed client to have this coverage in place.  You should note that if you pay for disability coverage with pre-tax dollars or your employer pays for the coverage for you, any disability benefits you receive will be taxable to you.  If you pay the premiums with after-tax dollars (or your employer pays the premiums and subsequently adds the cost to your W-2), any disability benefits you receive will be income tax-free.
• Group Term Life Insurance:  Many employers offer a base level of life insurance, free of charge, to their employees¹.  Some employers also offer a “buy-up” option for additional life insurance.  Often, the cost per $100,000 of coverage under the “buy-up” plan can be quite expensive.  We typically encourage clients to work with a life insurance broker to determine whether outside coverage may be a more cost-effective solution.  In many cases, employer group term policies are terminated (i.e. not portable) should you choose to leave the employer, while outside life insurance policies are portable and transition with you.  This advantage makes outside coverage more attractive as well.

NOTE:  The same commentary applies to life insurance coverage your employer offers for your spouse or dependents.

• Retirement Plan Contributions: We generally advise clients to maximize their contributions to an employer sponsored retirement plan (e.g. 401(k), 403(b), 457(b)), which reduces their taxable income when making pre-tax contributions.  The maximum contribution for 2023 is $22,500, plus an additional catch-up of $7,500 for those over age 50. Given that the top income tax rates remain relatively high (in our opinion) and may be going up even further, we feel it is important that you take advantage of the pre-tax retirement plan opportunity your employer is offering, with or without a company match.  Keep in mind that with the contribution maximum increasing to $22,500 from $20,500, you may need to adjust your deferral percentage to make sure you get to the $22,500 level.

Also of note is that many employers offer a Roth 401(k) / 403(b) component to their retirement plan whereby contributions are made on an after-tax basis to accounts, and those contributions grow (and can be withdrawn) tax-free in retirement, assuming certain parameters are met.  The total of your pre-tax and Roth contributions is applied toward the annual contribution limits – you can’t max out on both!  However, some employers may offer a separate after-tax 401(k) savings opportunity, which can further increase the amount you can contribute (beyond the $22,500 and $7,500 limitations).

IMPORTANT NOTES:

• In some instances, maximizing contributions to your company retirement plan too early in the year can limit your ability to get the maximum company match.  If you have questions about this issue, please consult your SWA advisor.
• Please let your SWA advisor know if your employer sponsored retirement plan offers Roth 401(k) and / or after-tax contribution options.
• Prior to adjusting your retirement plan contribution rates, we encourage you to contact your SWA advisor to receive his / her recommendation.

• Deferred Compensation Plan for Highly Compensated Employees:  We are noticing more employers are beginning to introduce deferred compensation plans for employees.  These plans may be also referred to as a 457(f) plan.  These programs can be beneficial as a “salary continuation” option (once retired), and they should be considered if available to you as they might allow considerable opportunities for additional pre-tax savings.  However, they have several downsides that other retirement plans do not, including less flexibility to access funds and exposure to the credit risk of the employer. Therefore, it is critical to consider the pros and cons of such plans before enrolling.

IMPORTANT NOTE:  If your employer begins offering a deferred compensation program to you, please discuss this opportunity with your SWA advisor.

• Employee Stock Purchase Plan (ESPP):  Some publicly traded companies offer an ESPP, giving employees an opportunity to buy company stock at a discount to the market price (15% has been a common discount, but will vary by plan).  While this may present a great opportunity to accumulate company stock at a discounted price, employees should take caution not to become too exposed to any single stock, particularly when it’s from your employer.  In addition, ESPP’s have unique tax rules that should be understood before purchasing shares.  If you have any questions about an ESPP program your employer offers, please let us know.

Please contact us if you or someone you know would like further information about any of the topics discussed in this bulletin or if you have a benefit question that is not covered here.

Notes:

¹ Employer provided life insurance is generally free to the employee.  However, for employer group life insurance in excess of $50,000, the cost of the coverage above $50,000 (less premiums paid by you) is considered taxable income to you.  Employers generally include this cost as an addition to your taxable income each payroll period.

Tax Planning and other updates are provided as a part of Summit Wealth Advocates ongoing Wealth Management Service.  We provide this update to Investment Management clients to offer a flavor of what is available with a Wealth Management Service relationship.  If you are interested in discussing our Wealth Management Service offering, please contact Bruce Primeau or Becky Botzet for further information.