Tax Considerations to Consider for Open Enrollment

November marks open enrollment season for a whole host of employee benefits including health care plans, flexible spending accounts and (our favorite at McCarthy Tax) Health Savings Accounts. Did you know there are tax considerations to consider during open enrollment?

While it’s really easy to simply roll with last year’s elections for the same benefits, it’s best to take some time and consider any changes to your circumstances (and changes to the benefit plans!) to ensure you are maximizing your tax benefits.

Let’s talk about a few considerations!

Health Care, FSAs and HSAs

Your health care plan is one of the most important decisions to make during open enrollment. Health care plans and premiums change rapidly from year to year (Hello, higher prices!). It’s important to review all healthcare options and consider your family’s history of illness when choosing a plan.

If your family is generally healthy, it might make sense to choose a high deductible health plan. These plans are generally less expensive than PPO / HMO plans but work subsidies can vary widely. Try to estimate what your family’s total healthcare spend would be in a “normal” year by totaling up the cost of your health insurance premiums, co-pays and deductibles. This will help you make the best guess as to which plan would benefit you the most.

If this turns out to be a high deductible plan, consider adding a Health Savings Account (HSA) to the mix. HSAs are great from a tax planning perspective. You can set aside up to $4,150 (single) and $8,300 (family) for health care costs for 2024 and reduce your taxable wages. These amounts can roll over to future years as well, allowing your money to grow tax free in the interim. 

An advanced planning tip is allowing your HSA money to grow tax free over several years (maybe even until retirement!) and saving all your healthcare receipts so that you can make a tax free withdrawal at any time up to your qualified medical receipts. 

If you choose a plan that isn’t considered a high deductible plan, you will likely have the option to contribute to a flexible spending account (FSA). FSAs also reduce your taxable wages, but Be Careful! These are “use it or lose it” plans. You must use all the flexible spending account monies before year end or risk losing it.

Retirement Accounts

While you can generally make retirement account elections at any time throughout the year, open enrollment is a good time to check in and make any changes needed before year end.

First, consider if you are on track to maximize your retirement contributions for the year. The maximum employee contribution for 2023 is $22,500 ($23,000 for 2024). Now is a good time to increase contributions if you aren’t set out to max this out before year end.

Keep in mind, however, if you have worked at two employers this year that both have 401(k)s, you need to coordinate the maximum contribution between the two. Your new employer won’t know to stop contributions early since they have no insight into your prior employment. If you contribute more than the maximum contribution for the year, you’ll need to get a refund of the excess before April 15, 2024. If the excess contributions aren’t withdrawn, you will end up paying tax twice, once this year and another time when you withdraw the contribution in retirement.

Open enrollment is also a good reminder to check your beneficiary designations for your 401(k), IRAs and life insurance. Take this opportunity to review your designations to make sure you don’t leave money to someone you don’t want to!

Tax Withholding

Fall is also a great time to check your paycheck withholding. It’s not too late to make some changes to lower an underpayment penalty if you haven’t had enough tax withheld.

If you have equity compensation (like RSUs), many companies are now allowing a once a year election to increase your withholding on “supplemental compensation.” The IRS considers supplemental compensation to be anything other than your regular salary wages. Bonuses, sales commissions and stock compensation are withheld at a special 22% rate (for employees with less than $1M in compensation) which leads many of our clients to be underwithheld at tax filing time.

If you’ve received a substantial amount of equity compensation this year, you might want to inquire if your company allows for a higher rate of withholding to prevent surprises next April.

Summary

Make sure you don’t just let your employee benefit elections “ride” this open enrollment season. If you need assistance with benefit elections, please reach out to our team!