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Healthcare is a significant investment for your clients, and it’s important that their employees understand coverage options and see value in their benefits. To ensure employees have the proper health coverage and are protected from unexpected expenses, it’s best if they thoroughly review their budget and healthcare needs. The three questions below will help employees prepare for open enrollment before signing up for pre-tax benefits.
Start with looking at how much was spent on healthcare last year. Reviewing spending habits will provide a foundation for the types of financial choices that might be made in the future and how enrolling in a pre-tax account could help.
It may be helpful to place healthcare costs into three categories:
If a spreadsheet or budgeting app was used, consolidate the medical expenses. Then determine, at a high level, what the healthcare expenses were. Make sure to understand how much was paid out of pocket by reviewing exactly what insurance covers annually, and factor that into the plan for healthcare costs. To be safe, add an extra 10-20% to the estimated costs to account for unexpected expenses.
If last year’s medical expenses are unknown, no worries. Review all of the insurance company and healthcare provider receipts and go through bank and credit card statements to identify healthcare costs paid out of pocket last year. Or contact the insurance and healthcare providers for documentation.
According to a report from the Bureau of Labor Statistics, on average, healthcare costs account for about 8% of annual household spending or nearly 7% of pretax income. Even if health insurance covers an expense, the budget for healthcare costs still needs to include health plan premiums.
To determine pre-tax income, look at a recent pay stub before taxes. To calculate after-tax income, look at a bank statement showing paycheck deposits.
These general guidelines will provide a basic understanding of healthcare expenses from the past year and help guide the decisions for open enrollment.
Next, determine if there will be any changes in expenses for the coming year. Specifically, consider out-of-pocket expenses which pre-tax accounts can help pay for.
An out-of-pocket expense is an amount paid after insurance has covered a service.
Determining out-of-pocket expenses can be more difficult. As a starting point, look at current benefits to determine any co-pay or co-insurance amounts. Also factor in the deductible – the amount needed to pay before insurance begins to cover costs. As a general rule, plans with a lower deductible require a higher premium.
For this reason, high deductible health plans (HDHP), also called low-premium plans, have become more popular. HDHPs can also be paired with a Health Savings Account (HSA), which can be a great savings tool for employees.
An HSA lets the employee put money away on a pre-tax basis for eligible healthcare expenses, including certain dental work, eyeglasses, and prescriptions. Contributions can come from the employee, employer, or a relative—anyone who wants to fund the account. Also, the funds roll over from year to year with an HSA, which makes it a great long-term tool for budgeting for medical expenses. Note there is an annual limit for how much they can contribute.
The employee should log into a benefits portal or ask their HR department for their company’s benefits information to find out what these out-of-pocket expenses are.
To determine a dollar amount for out-of-pocket expenses, multiply the co-pay amount by the number of expected healthcare visits. However, keep in mind that some healthcare visits are covered since they are preventative in nature.
For example, if there’s one physical per year, one dental cleaning, and 12 physical therapy visits, most likely only the physical therapy would require a co-pay. If the co-pay is $20, then multiply 20 by 12 for the out-of-pocket costs.
These are expenses for everyday household and personal care items such as adhesive bandages, thermometers, and pain killers.
While these items should be included in the initial review of expenses last year, it’s best to double-check and make sure they’re included.
After accounting for day-to-day healthcare costs, consider unexpected costs for medical emergencies (such as a procedure or medication that is not fully covered by an insurance plan) and create an emergency fund. While the size of the emergency fund will vary depending on lifestyle, monthly costs, income, and dependents, the rule of thumb is to save at least three to six months’ worth of living expenses. A starter emergency fund of $1,000 is recommended.
To budget for healthcare costs effectively, evaluate health insurance options to find the best plan for the employee and their family. For each plan, consider the type of plan (are preferred doctors, hospitals, and pharmacies covered?), as well as the cost of premiums, deductibles, copays, and prescriptions. Health history may also be an important factor when considering different coverage options.
With a healthcare budget in place, employees will be better empowered to make decisions that are good for their health and finances.
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