Open Enrollment Moves That Will Improve Your Retirement

Last Updated Oct 17, 2011 11:25 AM EDT

It's open enrollment season, which means it's time to choose your package of employer health insurance benefits. You might have the opportunity to make smart selections now that will increase your retirement security.

Employers are increasingly offering consumer-directed health plans (CDHP) to their employees. CDHPs are medical insurance plans with high deductibles that are linked to a health savings account (HSA). According to worldwide HR firm Mercer, in 2012 CDHPs will be offered by 18 percent of firms with 10 to 49 employees and 58 percent of employers with 20,000 or more employees (these are the smallest and largest of the employers Mercer surveyed). The numbers have increased significantly from prior years.

In most cases, a CDHP is one of a handful of options, but a growing number of employers are offering a CDHP as the only medical plan available to their employees.

"We're expecting to see a spike in 2012 in both the number of employers offering CDHPs and in the number of employees enrolling in them," said Beth Umland, Mercer's director of research for health and benefits. "Employers see them as a way to provide more value to employees while at the same time managing cost."

So what's the benefit of using an HSA? As an employee, you contribute a portion of your paycheck to your health savings account; the money is then invested and you draw on it to pay medical bills. You can spend the money in the current year to meet your deductible or pay for medical expenses not covered by your plan. Alternatively, you can let the money stay invested and accumulate for the future, as many workers do. According to a survey by Fidelity Investments, one-quarter of HSA account holders spend less than 10 percent of their annual contributions, allowing the balance to be carried over for future qualified medical expenses.

There are two IRS rules for high deductible plans that allow you to contribute to an HSA:

  • In 2012, the deductible must be at least $1,200 per person or $2,400 per family, and
  • The maximum out-of-pocket limit must be no more than $6,050 for individuals and $12,100 for family coverage.
What's interesting is that employers often contribute to HSAs on behalf of their employees -- in many instances several hundred dollars per year. In addition, many employers will contribute extra amounts to encourage their employees to participate in their wellness programs, such as having an annual physical, participating in a disease-management program or a smoking-cessation program, or taking a health-risk assessment. According to that Fidelity survey, the average wellness incentive contribution was $430 per employee in 2010, up from $260 the year before. Half of all companies also offered incentives to dependents -- the average amount in 2010 was $420. That's real money you can spend on your family's health care expenses.

In 2012, the annual limits for contributions to HSAs will be $3,100 for a single person and $6,250 for a family. Add $1,000 to these limits if at least one person in your family is age 55 or older.

Warning: These limits include your employer's contributions, so you'll need to subtract any amounts contributed by your employer from the total limit, including any wellness incentives, to determine the maximum amount of your own money that you can contribute.

The good news? You can contribute the maximum amount allowed to an HSA and also contribute the maximum allowed to a 401(k) or 403(b) plan -- the limit for these two plans is $16,500 in 2011, or $22,000 if you're age 50 or older. If you're maxed out at your savings plan at work, it's a great way to save additional amounts for your retirement.

So should you spend the amounts in your HSA or leave them invested for the future? And why are more employers adopting these plans? In my next two posts, I'll provide answers to these questions and more. For now, let me just say that it's well worth your time investigating these plans and using them to your advantage in your retirement years.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.