By Joel Chouinard, ChFC®
October 1, 2024
For most Big Law firms, open enrollment is right around the corner. This means you should soon receive (if you haven’t already) a 50-plus page employee benefits guide with every benefit your firm offers. As an employee, you’re not only expected to read this document from front to back and know every benefit available, but also to know all the jargon. But make sure you don’t mess up your elections because you’re not allowed to make changes for another year!
You may sense some sarcasm in my tone. The reality is you are very busy (especially this time of year with the Holidays and year-end billable hour requirements), and learning all the different options and nuances of your employee benefits might not be feasible. This could lead to missed opportunities that could have a long-lasting impact. In this blog, I discuss five tips that will help you understand the major components of your benefits package and ensure you get the most out of it.
1. Understanding Your Health Insurance Options
First, let’s review basic definitions for some of the main components of a health insurance plan:
- Deductible: The amount you pay out-of-pocket for healthcare services before your insurance starts to cover costs.
- Copay: A fixed amount you pay for a healthcare service (e.g., $25 for a doctor's visit).
- Coinsurance: The percentage of costs you pay for covered healthcare services after meeting your deductible, with the insurance covering the rest.
- Out-of-Pocket Maximum: The most you will pay in a year for covered services. Once reached, insurance pays 100% of covered expenses for the rest of the year.
- Network: A group of healthcare providers (doctors, hospitals, etc.) that have contracted with your insurance company to provide services at discounted rates. In-network services usually cost less than out-of-network services.
Now, let’s dive into the different options that you will likely see on your benefits package:
Preferred Provider Organization (PPO): This plan offers flexibility to see both in-network and out-of-network providers without referrals. PPOs typically have higher premiums, but they also include copays for most in-network services, making routine care more predictable.
High-Deductible Health Plan (HDHP): This plan has lower premiums but higher deductibles compared to PPO plans. There are typically no copays for services until the deductible is met, meaning you may pay the full cost of medical care upfront. After reaching the deductible, coinsurance may apply, and the plan covers most additional costs. HDHPs are often paired with Health Savings Accounts (HSAs) (more on HSAs below).
The decision of which plan to select comes down to your medical needs. If you are young and healthy, the HDHP may be the best option. You may incur more out-of-pocket costs than you would incur with the PPO plan, but you are also saving on premiums. In addition, HDHP plans should allow you to contribute to an HSA, while PPOs typically do not. HSAs not only save you on taxes, but some firms may contribute to it on your behalf. When making your election between PPO and HDHP, make sure you understand the overall cost of both options, not just what you pay out-of-pocket for medical services.
2. Choosing Between a Health Savings Account and Flexible Spending Account
Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are both tax-advantaged accounts that are used to save and pay for eligible medical expenses. However, they are different in many ways.
HSAs are only available to individuals with High-Deductible Health Plans (HDHPs). Contributions are tax-deductible, and distributions are tax-free. Funds roll over year to year and can be invested in mutual funds and ETFs, making them a valuable long-term healthcare savings tool. In 2025, the HSA contribution limits will increase to $4,300 for individuals and $8,550 for families, with a $1,000 catch contribution for individuals who are 55 and older.
FSAs are typically only available through PPO plans. Unlike an HSA, funds in an FSA must be used within the plan year, or they are forfeited (with some plans offering a grace period or carryover option). In 2025, the contribution limit to FSAs will be $3,300.
Since HSAs are only available with HDHPs, you decide between the two options when you elect your health insurance plan during open enrollment. If you choose the PPO option and contribute to an FSA, make sure you estimate your medical costs for the year. Otherwise, some of those funds might be forfeited.
If you elect the HDHP option and contribute to an HSA, I encourage you to consider thinking of it as another retirement savings account, rather than using it to pay for your ongoing medical expenses. In retirement, when healthcare costs are typically at their highest, you can use your HSA funds free of taxes for things like doctor visits, prescription medication, Medicare premiums, and long-term care. However, if you are lucky to be very healthy in retirement, after reaching age 65, you can also use the funds inside your HSA for non-qualified expenses (i.e. not for medical expenses) penalty-free. You simply pay taxes on your withdrawals, essentially acting just like another 401(k).
Keep in mind that even if you use your HSA as a long-term savings vehicle, you can always access the funds, penalty and tax free at any time to pay for large medical bills if you cannot pay for them out of pocket. It acts as your secondary emergency account!
3. Take Advantage of the Dependent Care Flexible Spending Account (If Applicable)
If you have young kids and you and your spouse both work, this section is for you. A Dependent Care FSA is a special tax-advantaged account that helps working parents pay for childcare services while they’re working. It allows you to contribute a portion of your paycheck on a pre-tax basis (i.e., you get a deduction), and you get to use the money for childcare expenses free of taxes. The contribution limit for 2025 is $5,000 for a family.
It’s important to note that Dependent Care FSAs are meant to cover childcare expenses, not school tuition. Your child also needs to be under the age of 12 to qualify. The list of qualified expenses includes daycare, preschool tuition, summer camps, and nanny services. Again, these costs must be incurred to allow you and your spouse to work (or look for work). If your spouse stays at home with the kids, you are not eligible for a Dependent Care FSA.
4. Ensure You Have Adequate Life and Disability Insurance Coverage
There is a good chance your law firm pays for your life and disability benefits, or at least a portion of them, so you might overlook this section of your benefits, assuming you are covered. However, I would encourage you to dig a little deeper by doing the following assessment:
Life Insurance: There are several ways to calculate how much life insurance coverage you need.
- Multiple of Salary: The quickest way to know how much coverage you need is to use the industry rule of thumb, which is to have 7-10 times your annual salary.
- Capital Needs Analysis: This method determines the amount of insurance required to cover an individual's financial obligations, such as debts, income replacement, education expenses, and other future needs. You can use this great Capital Needs Analysis calculator from Life Happens.
- Human Life Value: The human life value method calculates life insurance needs by estimating the present value of an individual's future earnings and financial contributions to their dependents over their remaining working years. Here’s a great Human Life Value calculator from Life Happens.
Disability: Calculating your disability insurance needs is a bit simpler than calculating your life insurance needs. First, you need to find out what your monthly essential expenses are (i.e., mortgage, insurance premiums, groceries, student loan payments, etc.). You can do this by creating a budget and separating your essential and discretionary expenses. Then, simply make sure you have enough post-tax disability benefits to cover those expenses. For example, if your essential expenses are $10,000/month, your post-tax disability benefits must be at least $10,000. If your spouse earns income, you can include their income in the calculation. Note that if your firm pays for your disability benefits, your benefits would be taxable. If you want to look further into your disability insurance needs, I do a deep dive into the subject in this blog.
5. Look Into Your Spouse’s Benefits
Let’s be honest: Big Law firms aren’t known for providing the greatest subsidies for their employee benefits. Many firms choose to be more competitive with their compensation, and benefits are often left in the dust. This means for the same level of coverage, Big Law attorneys will pay more for their benefits. This is even truer for Big Law firm partners, who often get no subsidies and must pay one hundred percent of the premiums.
Therefore, looking into your spouse’s benefits could save you and your family hundreds, if not thousands, of dollars each year. Large corporations and government entities usually have great benefits that are heavily subsidized, so don’t just assume that because you are the breadwinner of your family, your family should use your benefits.
Also, it might make sense for a family to split benefits between the two spouses. For example, one spouse with the best benefits could cover themselves and the kids on one policy, and the other could elect for single benefits on their own benefits. The disadvantage to this strategy is you have separate deductibles, so if you go this route, make sure you are saving enough money to warrant potentially having to meet two separate deductibles.
Final Note
As you can see from this 1,700-ish word blog, employee benefits can be quite complex. And I’ve barely scratched the surface on most of these strategies. As I mentioned above, the best place to start educating yourself is your employee benefits guide. If you simply don’t have time to go through it, reach out to your financial planner, and they should be able to guide you through your decisions.
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