In the last two series on open enrollment, we went over some health insurance benefits that could be a piece to your financial plan. In this final series on open enrollment, we are going to touch on other various employer benefits that can help you in protecting your health and financial situation.
Group Life Insurance
Depending on your employer, you may have the opportunity to obtain group life insurance. Group life insurance is a great way for those who need supplemental life insurance to get the additional coverage they need. Group life insurance coverage generally ranges from $50,000 of coverage and up, and coverage can be based on a multiple of your salary.
With group life insurance, your employer typically pays the premiums for the first $50,000 of coverage, and these benefits are tax-free to you. When there is coverage in excess of $50,000 and your employer contributes to paying for the premium, the portion of the premium your employer pays will be taxable income to you based on the IRS Uniform Premium Rate Table. Conversely, if you as the employee contributes to paying for the premiums, you will not have to pay tax on the portion of the premiums you pay for.
Depending on the coverage your employer provides, underwriting may or may not be required. If underwriting is required, it’s typically a more simplified process of answering questions rather than having do a physical exam.
Group Disability Insurance
Another group benefit that employers may offer is group disability insurance. Disability insurance is a way to replace your income for you and your dependents if you become disabled and can’t work. Generally, you have the option to obtain short-term and/or long-term group disability insurance coverage. Short-term coverage provides a benefit to you for about three to six months. On the other hand, long-term coverage provides a benefit to you that can last 2 years, 10 years, or even until you retire. The definition of disability depends on the type of coverage your employer provides, but typically group policies tend to have a stricter definition.
With group disability insurance, either you as the employee pays the premiums or your employer pays the premiums. If you as the employee pay the premiums, the benefits you receive will be tax-free. If your employer pays the premiums, the benefits you receive will be taxable as income. A huge advantage of group disability insurance is that you generally do not have the go through the underwriting process and going through physical exams.
Accidental Death and Dismemberment Insurance allows you or your dependents to collect benefits in the event of your death or if you get seriously injured in an accident. A common misconception is that AD&D insurance is the same as life insurance, when in fact it is not. With AD&D insurance, it can be difficult to collect benefits because of how specific the types of claims must be. Because of this, these policies tend to be less expensive than other policies such as life insurance or disability insurance.
An “accident” is strictly defined, and often includes accidents in which you lose a limb or finger, lose sight, speech or hearing, or suffer paralysis or coma as a result of an accident. Depending on the seriousness of the injury, you will be given a percentage of the face amount of your policy. For example, for death, your dependents will likely get 100% of your benefit amount. If you were to lose a limb, you could be given only 50% of your benefit amount.
Like group disability insurance, if you pay the premiums for the group AD&D coverage, the benefits you receive will be tax-free. If your employer pays the premiums, the benefits will be taxable as income to you.
Towards the beginning of the open enrollment period is when the IRS announces the elective deferral limits for the new year. For 2020, the 401k contribution elective deferral increased by $500 to $19,500. The catch-up contribution for those who are 50 years old and over also increased by $500 to $6,500. If you participate in your employer’s 401k plan, this period is a great time to determine how much you’d like to contribute for the year to better prepare for your retirement needs.
Another thing to consider during this time of year is whether you’d like to be contributing Roth dollars or pre-tax dollars. Roth contributions allows for you to pay tax now rather than paying tax in the future when you withdraw the funds from your account. On the other hand, pre-tax contributions allow you to defer taxation to the future.
Non-Qualified Deferred Compensation Plan
Open enrollment period is also the time that you can elect to participate in a Non-Qualified Deferred Compensation Plan, if your employer offers one. This type of plan allows you to defer compensation to the future so that you can avoid paying income taxes on that money now. By deferring your compensation to the future, you can pay the income taxes in the future when you are in a lower income tax bracket.
NQDC plans are typically for executives or highly compensated individuals who have already maxed out their 401k plans, and wants another tax-advantaged way to save for retirement. It is important to note that NQDC plans are non-qualified, which means that the plans do not fall under the umbrella of ERISA and are not subject to as strict of guidelines that qualified plans are.
We hope that this series on open enrollment has been a helpful resource to you! Everyone’s financial situation is different, so please feel free to reach out to us if you have any questions. This information is not intended to be substitute for specific individualized advice, and we suggest you discuss your specific situation with a qualified financial advisor.