Healthcare is complicated, so how can you get the most out of Open Enrollment 2021? We recommend narrowing down what information you need. Start by using this list of three questions you should ask yourself before signing up for your pre-tax benefits.
Question 1: What were my healthcare expenses last year?
It’s good to start with a general concept of what your overall medical expenses were last year. This gives you insights into your spending habits and lets you lay a foundation for what kind of money choices you might make in the future and how enrolling in a pre-tax account could help.
If you’re a detail-oriented person and already use a spreadsheet or budgeting app, you can spend a few minutes consolidating the information you have on file pertaining to medical expenses. Determine, at a 2,000-foot level, what your expenses were in the healthcare category. If you want to be safe, add an extra 10-20% to that number as a cushion for unexpected expenses.
If you have no idea what you spent on expenses last year and you’re not the budgeting type, don’t panic. While you may not know exactly what you spent last year on medical items, you can use a ballpark approach.
According to a recent Discover article citing a report from the Bureau of Labor Statistics, it’s wise to set aside 7% of pre-tax income or 8% of after-tax income. To get a picture of your pre-tax income, take a look at one of your recent pay stubs before taxes. To calculate your after-tax income, look over a bank statement showing your paycheck deposits.
These are general guidelines to give you a basic understanding of your healthcare expenses from the past year and guide your decisions for Open Enrollment 2021.
Next, you need to know if there will be any changes in your expenses for the coming year. Specifically, you will want to consider out-of-pocket expenses, which pre-tax accounts can help pay for.
Question 2: How much will I spend on out of pocket expenses this year?
An out-of-pocket expense is an amount you have to pay after insurance has covered a service. (Need a refresher on healthcare terms? Check out this blog on redefining jargon.)
Determining out-of-pocket expenses can be a bit more difficult. As a starting point, look at your current benefits to determine any co-pay or co-insurance amounts. You’ll also want to factor in your deductible. Your deductible is the amount of money you need to pay before your insurance begins to cover costs. As a general rule, plans with a lower deductible require you to pay higher premium costs.
For this reason, high deductible health plans (also called low-premium plans) have started to gain traction. These plans can also be paired with an HSA, which can be a great savings tool for employees.
To find out what these expenses are, you should be able to access these by logging into a benefits portal or asking your HR department for your company’s benefits information.
To land on a dollar amount for out-of-pocket expenses, multiple your co-pay amount by the number of times you expect to pay for healthcare visits. However, keep in mind that some healthcare visits are covered since they are preventative in nature.
For example, if you have one physical per year, one dental cleaning, and 12 physical therapy visits, you will probably only have a co-pay on the physical therapy. If your co-pay is $20, you would multiple 20 by 12 for your out-of-pocket costs.
And finally, number three…
3) What are my day-to-day healthcare costs?
This refers to money spent on everyday household items. Think of products like adhesive bandages, thermometers, and pain killers.
While these items should have been covered in your initial review of your expenses last year, it’s good to double-check to make sure you included them.
If you already accounted for day-to-day healthcare costs, the last category you’ll want to consider is unexpected or emergency costs. This can be hard to account for, as prices vary vastly across services and providers. To get started with a base understanding of what you should save for a medical emergency, check out this guide from Motley Fool.
Still need help prepping for Open Enrollment 2021?
Check out these other articles on lowering healthcare costs, understanding new benefits, and choosing the right insurance.