Healthcare Plan Elections and How They Impact Taxpayers
The elections a taxpayer makes when signing up for or renewing their healthcare plan have major consequences. Decisions about how much coverage to get, what benefits to enroll in and which family members to cover all have a rippling financial impact. Overspending on health insurance backfires when someone stays healthy all year; on the other hand, electing for minimal coverage can be financially devastating if a serious medical event happens. Because healthcare spending decisions are inherently tied up with tax and financial planning decisions, taxpayers need to tread carefully when making health plan elections.
The COVID Shakeup: Healthcare Plan Election Rules Now
Generally individuals enrolled in group health plans are only permitted to make election changes outside of their initial enrollment period when they experience a qualifying life event like the birth of a child or the end of a marriage. The IRS temporarily changed the rules around healthcare plan elections for the 2020 and 2021 plan years because of COVID, allowing employers to let employees make mid-year election changes. Employers with section 125 plans were empowered to let employees sign up for health insurance or change their plan elections at any point during the year, and bring increased flexibility to FSAs and HSAs.
These changes allowed workers to shift their healthcare coverage to meet their shifting personal needs as the pandemic upended everything. But it is back to business as usual now that the IRS’s temporary rules have expired. Most people who want to change elections to their healthcare plan will have to wait for their employer’s next open enrollment period, unless they have a qualifying life event.
Healthcare Plan Elections and Their Impact
Every organization has its own unique approach to benefits administration, and each individual’s healthcare needs, financial priorities and family structure will affect their decisions about benefits. So, the process of making plan elections during enrollment is different for everyone. Some of the most impactful choices that taxpayers may have to make during plan elections include:
Choosing healthcare plan type: When an organization offers multiple types of healthcare plans, choosing the right one can be the most fraught part of making plan elections. Opting for a PPO generally means a lower deductible and lower out-of-pocket maximums and is the preferred choice for patients who want a lot of flexibility around what doctors they see. Electing for a high deductible health plan may be more beneficial for someone who’s in good health and unlikely to hit their deductible in a plan year. Enrolling in an HDHP also allows a taxpayer to open a health savings account, which can help pay for health expenses now and/or function as a tax-advantaged way to grow retirement savings for later. Every plan type has pros and cons that taxpayers should weigh carefully and discuss with their financial and tax advisors.
Adding/removing family members: Any change in family structure might trigger a taxpayer to update their healthcare plan elections. Some of these choices are easy; a taxpayer who’s their family’s sole breadwinner and has a new baby is going to want to add their baby to the family’s health plan, for example. But some decisions about whether or not to include an adult child or spouse in a plan can be more complicated, especially if those family members can access insurance coverage through other sources. For example, take married taxpayers who are each eligible for employer-sponsored healthcare coverage. Should they be covered separately, or should one person add the other to their plan—and if so, which one? Their individual health needs, the costs/merits of each policy and their tax filing status may all affect their decision to be covered together under one policy or to enroll in their own healthcare plans.
Declining coverage: When a taxpayer opts to join their spouse’s healthcare plan, or feels that their employer-sponsored plan is not sufficient for whatever reason, they can elect to decline coverage. They may still be eligible to open a healthcare plan through the marketplace, but will not be eligible for premium tax credits to lower the cost of their coverage. Unless a taxpayer is going to be covered by a spouse’s superior plan, it is generally not a sound financial decision to decline healthcare coverage.
FSA elections
Because they are funded with pre-tax dollars, making contributions to a health flexible spending account gives taxpayers the ability to reduce their gross income and subsequently lower their taxes. Health FSA funds can be used to pay for a wide range of healthcare products and services, including copayments, deductibles, over-the-counter and prescription drugs, dental care and medical equipment. These accounts are especially attractive for employees whose employers offer a contribution match.
FSAs do carry some financial risk for healthy owners because the IRS has a “use it or lose it” policy for these accounts. Say a taxpayer elects at the beginning of the plan year to contribute the maximum to their FSA ($2,850 for 2022) but they have few out-of-pocket health expenses that year. They forfeit any unspent money left in the account, unless their employer offers a grace period that lets them roll funds over. Taxpayers should think carefully about how much they and their dependents are likely to spend on medical expenses before making FSA elections at the beginning of a plan year. Overfunding the account may not be worth the tax benefit of making the maximum annual contribution.
L&H helps taxpayers navigate the complicated financial questions that affect the rest of their lives, including healthcare spending. We are here to do the number-crunching and tax planning that give our clients the confidence to make the best possible healthcare decisions for themselves and their families. If you could use help evaluating the tax implications of health plan elections, contact us today.