INSURANCE

Most people tend to get their health insurance plans through their work, such as medical, dental, and vision coverage. It is important to understand how this adds to your compensation package. Sometimes your compensation package increases your pay not because of the money you are receiving, but rather the money you are saving as a result of your job benefits. If you pay less for health insurance with your job compared to what you would pay if you were getting a plan on your own, the amount saved can be significant. In order to understand how insurance works to save you money, you first need to understand how policies, premiums, and deductibles work. Beyond health insurance plans, some jobs also offer tax-advantaged accounts such as a Health Savings Accounts (HSA) or a Flexible Spending Accounts (FSA). These are described later on below. 

INSURANCE POLICY

An insurance policy is the contract issued by insurance companies to you as the policy holder. Due to employers having multiple employees that they can get to sign up for insurance plans, insurance companies offer favorable rates to businesses that their employees can take advantage of. 

INSURANCE PREMIUMS

Premiums are the amount that you will pay to the insurance company on a regular basis to keep your insurance active, usually on a monthly basis. This payment is the cost of having insurance itself. Your employer may pay a portion of the premium for you anywhere between 1%-100% of the total cost. The amount saved adds to your compensation package. For example, if the insurance policy costs $12,000 a year, then your monthly premium would be $1,000. If your employer covers 75% of your premium, you would be responsible for $3,000 annually or $250 monthly. Even though you do not receive the $9,000 that your employer paid on your behalf, you can now consider this as part of your compensation package because you did not have to pay this money out of your wages. You are typically given a few different insurance policies to pick from that cover a range of medical necessities. The premium that you pay on these policies will depend on the deductible that you want to pay.

DEDUCTIBLES

Deductibles are the amount of money that you are required to pay before your insurance starts paying for expenses. This amount is separate from insurance premiums as that is your payment for having insurance and this is your payment for using that insurance. When you utilize your insurance over the course of a year for doctor visits, exams, treatments and other medical needs, your bill will be sent to the insurance company. Once your insurance company receives the bill, they will send you the portion of the bill that you are responsible for paying. If for example your deductible is $1,000, then they will keep sending you the bills till you have paid $1,000 for these expenses. Once your total reaches the deductible, your insurance company will pay the rest of your medical bills for the remainder of the year or an agreed upon split such as them paying 80% and you paying 20% till you’ve reached an annual out of pocket maximum. After you reach the annual out of pocket maximum, the insurance will pay 100%. The deductible will then reset at the end of the year and your insurance company will follow this same procedure the following year. 

You can decide what you want your deductible to be and this will impact what your insurance premium costs. For example, let’s say you are offered two different versions of an insurance policy, Policy A with a $1,000 deductible and Policy B with a $3,000 deductible. With Policy A you will most likely reach the deductible quickly in the year and then the insurance company will have to pay the remainder of your medical bills; the insurance company may charge you $200 a month as a premium to offset their costs. With Policy B you may or may not reach the deductible by the end of the year and the insurance company may not have to pay anything; the insurance company may only charge you $100 a month as a premium because their cost for insuring you is low. The higher your deductible, the lower your premium. People who are young and healthy tend to consider a high deductible plan and those who feel they will utilize their insurance beyond the deductible tend to consider a low deductible plan with a high monthly premium to spread out the cost of care. 

HEALTH SAVINGS ACCOUNT (HSA)

If the insurance policies offered by your employer have a high deductible, they may offer a tax advantaged Health Savings Account (HSA). With an HSA, you can contribute money up to a limit each year with pre-tax deductions. You can then utilize this money to pay for certain medical needs and you will not have to pay taxes when withdrawing the money. Some HSA accounts also allow you to invest the money that is in those accounts. These investments will now grow tax free in this account.

HSA are a great tax advantage account, and they also offer a few more benefits. Once you reach the eligibility age for Medicare, currently 65, you can now begin withdrawing this money for non-medical reasons as well. However, you will need to pay income tax for using this money for non-medical purposes. Employers have the ability to contribute to your HSA plan as well so they may fund it directly by adding money or indirectly by allowing you to complete health benefit programs such as health coaching classes to earn money to be added to your account. If you leave your employer, the money remains yours. Lastly, if you do not use funds by the end of the year, the money does rollover to the following year. There is a tax loophole with this rollover that some people utilize. Currently, you do not have to use the funds from your HSA in the year that you funded the account. Some people will save all their medical receipts for years and then get them all reimbursed at once from their HSA for a large payout since the money has been growing as a tax-free investment during this time. Others will completely avoid reimbursing money from their HSA and then just start using the funds once they reach 65 years old. 

FLEXIBLE SPENDING ACCOUNT (FSA)

Employers may offer their employees a tax advantaged Flexible Spending Account (FSA). With an FSA, you can contribute money up to a limit each year with pre-tax deductions into a health savings account. You can then utilize this money to pay for certain medical needs and you will not have to pay taxes when withdrawing the money. Some employers, especially if you only have access to insurance policies with high deductibles, may contribute to an FSA. You have to annually elect how much you want to contribute to your FSA and your employer will deduct the amount from your wages. A great advantage of this account is that you will have access to the entire amount at the start of the year, even though you haven’t fully funded your elected contribution yet. For example, if you enroll into an FSA account with an election to contribute $1,000 next year, you will have access to all $1,000 on January 1^st. The money does have to be used in the calendar year the account was funded, however, there may be a small grace period at the beginning of the following year when you can spend that money as well. Any unused money does disappear, so you want to make sure you plan out your expenses properly and avoid overfunding the account. If you leave your employer, you will lose the account and any remaining balance.

Other Job Compensation Components