Section 125 Plans

Summary: If you aren’t taking full advantage of Section 125 plans, you’re giving money away.

125

Most school districts (and most employers in general) give you access to Section 125 plans which, much like the better known 401k plan, is named after a section of the federal tax code. Despite these being around for a while, many folks don’t completely understand them or take full advantage of them. While the specifics of what your employer offers may vary a little, most are pretty similar. I’ll use Littleton Public Schools as my example, but most likely your employer will be very, very similar.

The reason Section 125 plans are so useful for you is that they allow you to pay for various things pre-tax. How beneficial that is for you depends on what tax bracket you’re in, the more money you make, the more beneficial it is. Most educators are typically in the 25% or 28% federal tax bracket, and everyone in Colorado pays 4.63% in state income tax , so that means you’re typically saving between 29.63% and 32.63% in income taxes for every dollar you can put into a Section 125 plan. But, as an educator paying into Colorado PERA, you save an additional 8% because your Section 125 contributions also come out pre-PERA deduction, which brings your total savings to 37.63% to 40.63% (FYI – this also saves your school district money, as they don’t have to pay contributions on that amount either.)

So, what are these Section 125 plans? There are typically five components:

  1. Paying insurance premiums pre-tax (Premium Only Plan, or POP)
  2. Health Savings Accounts (HSA, goes with High-Deductible Plans)
  3. Health Flexible Spending Account (FSA). If you don’t have an HSA, can be used to pay for out-of-pocket medical expenses.
  4. Limited Purpose Flexible Spending Account (Limited Purpose FSA). Can be used in addition to an HSA to pay for out-of-pocket dental or vision expenses only.
  5. Dependent Care Flexible Spending Account (Dependent Care FSA). Can be used to pay for child care expenses.

Let’s look at each one briefly. (Note: this is not an in-depth look, just an overview, we can delve into much more detail in person.)

Premium Only Plan: Unless you are within 3 to 5 years of PERA retirement*, this one is a must. It takes whatever you pay in health, dental and vision insurance premiums and exempts those amounts from both income taxes and your PERA contribution. It’s basically free money – take it.

Health Savings Accounts: There’s a lot to say about High Deductible Plans and HSA’s but, to keep this brief, if you have a high-deductible plan an HSA is perhaps the best tax-advantaged option out there. It’s often referred to as a “triple-advantaged” plan, because contributions, earnings and withdrawals (for eligible expenses) are all tax free (as a bonus, your employer often contributes to this as well – more free money). Essentially, you never pay taxes on this money. Many folks just use it to pay their healthcare expenses on a yearly basis but, if you can afford to pay those expenses with other money, letting it accumulate and grow over time (invested in low-cost index funds) can be an incredible wealth builder. (2017 Contribution Limits: $3400 individual/$6750 family, additional $1000 if over 55, balance rolls over year to year.)

Health Flexible Spending Account: This existed before HSA’s and, for those folks who don’t have a high-deductible, this is still a great option. The money you put in and then use for eligible expenses is never taxed but, unlike the HSA, this is “use it or lose it” so you don’t want to put more in here than you can spend in a year. (2017 Contribution Limits: $2600)

Limited Purpose Flexible Spending Account: When paired with an HSA, this money can be used for dental or vision expenses. It’s a great way to put additional money aside tax free but, unlike the HSA, it is also use it or lose it (some employers allow you to carry over up to $500 from one year to the next). (2017 Contribution Limits: $2600)

Dependent Care Flexible Spending Account: If you have young children in day care, this is a great option to pay at least some of those expenses pre-tax. Again, it’s use it or lose it, so plan the amount wisely. Many years ago I had a conversation with someone who said they didn’t bother with this because they just deducted it when they filed their income taxes. This is not optimal, as if you do that you lose the 8% PERA savings and, depending on your itemized deductions, you may not get to claim the entire $5000. (2017 Contribution Limits: $5000).

So, let’s put some example numbers with this. How much savings you realize varies tremendously, not only based on your tax bracket, but based on the size of your family and what expenses you have, but I’ll try to pick a “typical” educator family (even though there is no such thing). For this example, I’m going to have the educator be married with two children, one of whom is in day care. The educator will cover themselves and their children (but not their spouse) for health and dental, and be employee-only for vision. They will choose the Kaiser High-Deductible Plan and the Low Cigna Dental Plan. They will max out the Dependent Care Flexible Spending Account with $5000, contribute $100 a month to their HSA (plus the district contribution), and pay for all insurance premiums pre-tax. (Their spouse would probably realize additional savings by utilizing some of these at their employer for their coverage.)

  1. Kaiser HDHP Employee Premium: $391.29/month
  2. Cigna Low Option Dental Employee Premium: $34.76/month
  3. VSP Employee Only Employee Premium: $11.29/month
  4. Dependent Care Flexible Spending Account: $416.66/month
  5. HSA Contribution: $100 month (district adds $85/month)
  6. No Limited Purpose contributions

That totals $954 a month, or $11,448 a year (not including the $1020 the district contributes toward the HSA). Assuming the family is the 25% federal tax bracket, that equates to a savings of $4308 in a year in taxes and PERA contributions. Keep in mind that you also have $2220 in your HSA to either spend or preferably rollover from year to year, for a total “savings” of $6528. Again, it could be a lot less than that if you’re doing employee only coverage (although still worth it), or a whole lot more if you’re doing family coverage, using Cigna for health care, and/or contributing more to your HSA and the Limited Purpose FSA.

As with everything financial, the specifics of your situation matters, so if you choose to work with me, we’ll work through all the permutations. In a future post, I’ll talk more about retirement accounts (401k/403b/457 plans) and how, when you combine them with Section 125 plans, you can dramatically lower your taxes.

*Very Important: If you are within 3 to 5 years of PERA retirement, you want to opt-out of all Section 125 deductions because it will lower your retirement benefit (lowers your HAS). I think there is probably at least a 40% chance that this rule will change in the 2018 Colorado Legislative session, in which case you would no longer opt-out when near retirement, but you also would “lose” the 8% PERA savings each year prior to that. Still very much worth doing because of the federal and state income tax savings.

Photo credit: reynermedia via Foter.com / CC BY

Focus On: DCSD Health Insurance

dcsdbenefitsschreenshot

I recently posted about the health insurance offered by Littleton Public Schools, this post will focus on Douglas County Public Schools. The first part of this post will be very repetitive from the LPS post, as some of the background information is essentially the same (hooray for copy and paste). So, if you’ve read that other post, you might just want to skip down to the comparison part of this post.

Healthcare and health insurance are complicated. Each person/family has unique needs, and many families have two employer plans to choose from. Therefore it’s really important to look at each person/family individually, so this blog post is going to be a general overview of the health insurance options currently offered by Douglas County Public Schools, but your needs may require additional considerations that this post won’t cover.

As a long-time public school employee, I’m very familiar with the benefits that school districts offer. I’m also very familiar with the fact that many people don’t like to think much about benefits and aren’t really aware of the different options and what they might mean to them. Again, while each person/family has specific needs, let’s take a look at some general observations about the health insurance options that DCSD currently offers.

DCSD still offers a choice of two different insurance carriers (which is increasingly rare), CIGNA/Allegiance and Kaiser, and then two plans from each provider (a more traditional, low-deductible plan, as well as a high-deductible plan). So the first decision most people have to make is whether to go with CIGNA or Kaiser. This discussion often ends up being similar to the Apple vs. PC discussions that happened a while back, with folks having very strong opinions on both “sides,” but let me try to share what I know.

The main consideration for most folks is how important it is for them to be able to choose their own doctor. If you have an existing relationship with a doctor (not at Kaiser), and you have perhaps some on-going, chronic conditions that doctor is helping you with, that could be a strong argument for CIGNA. But I’d suggest you really give some thought to both of those conditions to see that they both apply. If either does not, then you have some more thinking to do.

One of the frustrations over the years when I’ve discussed health insurance with folks is the assumptions they make. Many (not all) assume that CIGNA must be better than Kaiser, both because it’s more expensive and because it is not “managed care.” That assumption is not correct. CIGNA is not bad, but Kaiser consistently ranks very high in both quality of care and customer satisfaction (and typically higher than CIGNA). That doesn’t mean that Kaiser is perfect, some folks have had bad experiences with them, but the structure of Kaiser is why their quality of care is so good.

Managed care has a bad reputation, but all health insurers – including CIGNA – are practicing managed care. The difference is that at Kaiser there is a dedicated team to identify best practices based on the research evidence, and that is then disseminated to the doctors, nurses and other staff members to follow. Under plans like CIGNA, doctors have more freedom (which many people like), but the quality of care is more variable from doctor to doctor. An interesting result of all of this is that when folks have a bad experience with a doctor at Kaiser, they typically blame Kaiser, but when they have a bad experience with a doctor with CIGNA (or other carriers), they typically blame the doctor. I am not trying to convince you to change to Kaiser, just to examine your assumptions and make sure you are basing your decision on your needs and the actual evidence.

Once you’ve made the decision between CIGNA and Kaiser, you then have to decide between the two plans they each offer, a more traditional low-deductible, copay/co-insurance type of plan, and the newer (and increasingly more popular among employers) high deductible plans. It is beyond the scope of this blog post to discuss all the pros and cons and the nuances of high deductible plans, but we can look a bit more carefully at the actual out-of-pocket costs under each plan and many folks will find the result surprising.

Before we do that, just a little background. It’s important to look a little bit at how much DCSD contributes toward your premiums. Unlike LPS, there does not seem to be a particular formula DCSD uses (at least it’s not apparent if there is one). DCSD appears to have made the strategic decision to keep premiums lower but have deductibles and max out of pocket be higher. They definitely do contribute some toward dependent coverage, but I’ve been unable to discern a consistent percentage amount.

Whether that is personally good for you depends, of course, on whether you are covering dependents :-). In effect, employees who choose employee only coverage end up helping subsidize those who choose any of the dependent coverage options. (And, by the way, employees who choose Kaiser end up subsidizing those who choose CIGNA.)

A second piece of background is to understand the purpose of insurance, and particularly group insurance. Folks who grew up in my generation tend to have the view that the purpose of insurance is to “pay for our healthcare costs.” While that would be nice, it’s unfortunately not sustainable. The purpose of insurance (from an individual’s perspective), is to cover outliers. If something bad happens to you (or your family), it prevents catastrophic healthcare costs that you might be unable to pay. (Prior to the Affordable Care Act, medical bills were the leading cause of personal bankruptcies, it will be interesting to see what happens going forward.)

By pooling your risks with those of a group, it becomes affordable for the group as a whole to pay those really high healthcare costs for the (hopefully) few individuals who need it. In effect, those folks who don’t end up with high costs subsidize those that do. When insurance rates go up, it’s not just because the insurance companies are greedy (Kaiser, in fact, is non-profit), it’s because the cost experience of the group (in this case, DCSD employees who’ve chosen each particular plan) has been more than the premiums that are paid in. It just takes one or two very expensive cases (a premature baby with complications, brain cancer, etc.) to require higher premiums. To be clear, this is not a bad thing, this is the reason for group health insurance. If you never get sick, the best option would be not to buy health insurance at all. This is the reason for the controversial “individual mandate” in the ACA, for health insurance to work you have to have healthy people involved in order to pay for the sick people.

So now let’s look at the premiums. When folks look at the rate sheet put out by DCSD each year, they often skip down to the employee portion of the premium, think about the deductible amount and perhaps maximum out of pocket, and then make a quick decision. For many folks, the idea of a “high-deductible” and paying costs out-of-pocket up front is scary, but if you stop to do the math, the story turns out a bit different. This table shows the total out-of-pocket costs for each plan choice under a couple of sample scenarios. Obviously, your experience will most likely not match the sample scenario, but I tried to pick scenarios that people typically worry about (which is costs that come in right at the deductible amount for the high-deductible plans).

dcsdratesscreenshot

It turns out that under the CIGNA plans, the high-deductible plan is cheaper for almost everyone under almost every scenario. (I think it is actually everyone and every scenario, not just “almost”, but I can’t check every possible scenario so I didn’t want to overstate it.) Check out this google doc for a bit more detail but, basically, with the amount you save in premiums under the high-deductible plan, plus the amount that DCSD contributes to your HSA (I’ll write a post soon talking more about HSAs, they are a very attractive option), you come out ahead over the OAP plan even when you have large medical bills. Even better, if you have years where you don’t have large medical bills, you not only come out ahead, but the amount in your HSA (DCSD contribution plus whatever you might choose to contribute) rolls over. So not only do you pay less that year, you have “money in the bank” for future healthcare costs.

The math is not quite as straightforward on the Kaiser side, because under the DHMO you have both copays and coinsurance after you meet the deductible, and what those might end up being varies greatly depending on exactly what kind of care you end up needing (plus, ironically, since the premiums are lower than CIGNA, the difference between the two Kaiser plans is not as stark). But, in general, the story is fairly similar to CIGNA, for any of the dependent coverage plans, the high-deductible plan is better – for employee only, the DHMO might be better. When you have “good” healthcare years with low costs, you will definitely come out ahead with the high-deductible plan and can carry over any money in your HSA. When you have “bad” years with higher costs, you may still come out ahead with the high-deductible plan, but there are certainly scenarios where the DHMO would end up being cheaper. (And, of course, when you compare to the CIGNA plans, Kaiser is less expensive under all scenarios.)

So, which carrier and which plan should you choose? It depends. You also have to look at the benefits offered by any spouse’s plan, your existing health and any conditions you might have. as well as your personal preferences. That’s certainly part of what we’d do if you decide to work with me.

Additional Resources (2017-18)
DCSD 2017-18 Rate Sheet
CIGNA/Allegiant Plan Summary
Kaiser Plan Summary (appears to be HDHP only, didn’t find one for DHMO)
DCSD Benefits Summary
Medical Plan Comparison Chart

Focus On: LPS Health Insurance

lpsbenefits

Healthcare and health insurance are complicated. Each person/family has unique needs, and many families have two employer plans to choose from. Therefore it’s really important to look at each person/family individually, so this blog post is going to be a general overview of the health insurance options currently offered by Littleton Public Schools, but your needs may require additional considerations that this post won’t cover.

As a long-time employee of Littleton Public Schools, I’m very familiar with the benefits that LPS offers. I’m also very familiar with the fact that many people don’t like to think much about benefits and aren’t really aware of the different options and what they might mean to them. Again, while each person/family has specific needs, let’s take a look at some general observations about the health insurance options that LPS currently offers.

LPS still offers a choice of two different insurance carriers (which is increasingly rare), CIGNA and Kaiser, and then two plans from each provider (a more traditional, low-deductible plan, as well as a high-deductible plan). So the first decision most people have to make is whether to go with CIGNA or Kaiser. This discussion often ends up being similar to the Apple vs. PC discussions that happened a while back, with folks having very strong opinions on both “sides,” but let me try to share what I know.

The main consideration for most folks is how important it is for them to be able to choose their own doctor. If you have an existing relationship with a doctor (not at Kaiser), and you have perhaps some on-going, chronic conditions that doctor is helping you with, that could be a strong argument for CIGNA. But I’d suggest you really give some thought to both of those conditions to see that they both apply. If either does not, then you have some more thinking to do.

One of the frustrations over the years when I’ve discussed health insurance with folks is the assumptions they make. Many (not all) assume that CIGNA must be better than Kaiser, both because it’s more expensive and because it is not “managed care.” That assumption is not correct. CIGNA is not bad, but Kaiser consistently ranks very high in both quality of care and customer satisfaction (and typically higher than CIGNA). That doesn’t mean that Kaiser is perfect, some folks have had bad experiences with them, but the structure of Kaiser is why their quality of care is so good.

Managed care has a bad reputation, but all health insurers – including CIGNA – are practicing managed care. The difference is that at Kaiser there is a dedicated team to identify best practices based on the research evidence, and that is then disseminated to the doctors, nurses and other staff members to follow. Under plans like CIGNA, doctors have more freedom (which many people like), but the quality of care is more variable from doctor to doctor. An interesting result of all of this is that when folks have a bad experience with a doctor at Kaiser, they typically blame Kaiser, but when they have a bad experience with a doctor with CIGNA (or other carriers), they typically blame the doctor. I am not trying to convince you to change to Kaiser, just to examine your assumptions and make sure you are basing your decision on your needs and the actual evidence.

Once you’ve made the decision between CIGNA and Kaiser, you then have to decide between the two plans they each offer, a more traditional low-deductible, copay/co-insurance type of plan, and the newer (and increasingly more popular among employers) high deductible plans. It is beyond the scope of this blog post to discuss all the pros and cons and the nuances of high deductible plans, but we can look a bit more carefully at the actual out-of-pocket costs under each plan and many folks will find the result surprising.

Before we do that, just a little background. It’s important to understand how LPS decides the district contribution toward your healthcare premiums. Currently (and for many years now), LPS covers 92% of the employee only premium and 54% of any of the dependent options (Employee & Spouse, Employee and Child(ren), Family). That’s notably different than many other school districts in that LPS contributes money toward dependent coverage, not just employee coverage.

Whether that is personally good for you depends, of course, on whether you are covering dependents :-). In effect, employees who choose employee only coverage end up helping subsidize those who choose any of the dependent coverage options. (And a side effect of this percentage method, by the way, is that LPS employees who choose Kaiser end up subsidizing those who choose CIGNA.)

A second piece of background is to understand the purpose of insurance, and particularly group insurance. Folks who grew up in my generation tend to have the view that the purpose of insurance is to “pay for our healthcare costs.” While that would be nice, it’s unfortunately not sustainable. The purpose of insurance (from an individual’s perspective), is to cover outliers. If something bad happens to you (or your family), it prevents catastrophic healthcare costs that you might be unable to pay. (Prior to the Affordable Care Act, medical bills were the leading cause of personal bankruptcies, it will be interesting to see what happens going forward.)

By pooling your risks with those of a group, it becomes affordable for the group as a whole to pay those really high healthcare costs for the (hopefully) few individuals who need it. In effect, those folks who don’t end up with high costs subsidize those that do. When insurance rates go up, it’s not just because the insurance companies are greedy (Kaiser, in fact, is non-profit), it’s because the cost experience of the group (in this case, LPS employees who’ve chosen each particular plan) has been more than the premiums that are paid in. It just takes one or two very expensive cases (a premature baby with complications, brain cancer, etc.) to require higher premiums. To be clear, this is not a bad thing, this is the reason for group health insurance. If you never get sick, the best option would be not to buy health insurance at all. This is the reason for the controversial “individual mandate” in the ACA, for health insurance to work you have to have healthy people involved in order to pay for the sick people.

So now let’s look at the premiums. When folks look at the rate sheet put out by LPS each year, they often skip down to the employee portion of the premium, think about the deductible amount and perhaps maximum out of pocket, and then make a quick decision. For many folks, the idea of a “high-deductible” and paying costs out-of-pocket up front is scary, but if you stop to do the math, the story turns out a bit different. This table shows the total out-of-pocket costs for each plan choice under a couple of sample scenarios. Obviously, your experience will most likely not match the sample scenario, but I tried to pick scenarios that people typically worry about (which is costs that come in right at the deductible amount for the high-deductible plans).

lpsrates

It turns out that under the CIGNA plans, the high-deductible plan is cheaper for almost everyone under almost every scenario. (I think it is actually everyone and every scenario, not just “almost”, but I can’t check every possible scenario so I didn’t want to overstate it.) Check out this google doc for a bit more detail but, basically, with the amount you save in premiums under the high-deductible plan, plus the amount that LPS contributes to your HSA (I’ll write a post soon talking more about HSAs, they are a very attractive option), you come out ahead over the OAP plan even when you have large medical bills. Even better, if you have years where you don’t have large medical bills, you not only come out ahead, but the amount in your HSA (LPS contribution plus whatever you might choose to contribute) rolls over. So not only do you pay less that year, you have “money in the bank” for future healthcare costs.

The math is not quite as straightforward on the Kaiser side, because under the DHMO you have both copays and coinsurance after you meet the deductible, and what those might end up being varies greatly depending on exactly what kind of care you end up needing (plus, ironically, since the premiums are lower than CIGNA, the difference between the two Kaiser plans is not as stark). But, in general, the story is fairly similar to CIGNA. When you have “good” healthcare years with low costs, you will definitely come out ahead with the high-deductible plan and can carry over any money in your HSA. When you have “bad” years with higher costs, you may still come out ahead with the high-deductible plan, but there are certainly scenarios where the DHMO would end up being cheaper. (And, of course, when you compare to the CIGNA plans, Kaiser is less expensive under all scenarios.)

So, which carrier and which plan should you choose? It depends. You also have to look at the benefits offered by any spouse’s plan, your existing health and any conditions you might have. as well as your personal preferences. That’s certainly part of what we’d do if you decide to work with me.

Additional Resources (2017-18)
LPS Benefits Book
CIGNA OAP
CIGNA CDHP with HSA
Kaiser DHMO
Kaiser HDHP with HSA