What is Open Enrollment and How to Prep Your Employees

What is open enrollment? Open enrollment season is a critical time for both employees and employers, as decisions made during this period directly affect health coverage, benefits, and financial planning for the upcoming year. Understanding the tax and accounting implications of these choices is essential to avoid surprises and ensure compliance. 

This blog explains what open enrollment is and provides practical steps to help employers prepare their teams, with a focus on managing payroll adjustments, tax-advantaged accounts, and regulatory requirements. HR professionals, accounting teams, and business owners will find this guide valuable in streamlining the process, optimizing tax savings, and setting their organization up for a smooth benefits transition.

Table of Contents

• What is Open Enrollment
• Open Enrollment Dates to Consider
• Tax and Accounting Considerations for Open Enrollment
• Steps to Prepare Your Employees for Open Enrollment
• Best Practices for Employers from a Tax and Accounting Perspective
• Conclusion

What is Open Enrollment?

Open enrollment is a designated period when employees can enroll in or make changes to their health insurance and benefit plans for the upcoming year. Typically occurring in the fall, between November and December, any selections made during this window take effect at the start of the following year. 

This process is essential because employees' choices—such as selecting new coverage or adjusting contributions to tax-advantaged accounts—directly impact payroll deductions, tax obligations, and the company’s benefit compliance. Properly navigating open enrollment ensures smooth financial operations and helps employees maximize their benefits.

Open Enrollment Dates to Consider

Here are some key open enrollment dates and deadlines that are crucial from a tax and accounting perspective:

1. Open Enrollment Period for Health Insurance (Marketplace & Employers)

• Marketplace (ACA):
  • Typically runs from November 1 to December 15 each year, with coverage starting on January 1 of the following year.
  • Important for individuals claiming premium tax credits—any changes to income or coverage during enrollment affect year-end tax filings.
• Employer-Sponsored Plans:
  • Varies by employer, but most align with the fall months (October–December) to match the calendar year.
  • Payroll systems must reflect changes by January 1 to ensure accurate deductions for the new year.

2. HSA and FSA Contribution Deadlines

• Health Savings Accounts (HSAs):
  • HSA contributions for the current tax year can be made up until the federal tax filing deadline (usually April 15 of the following year).
  • Ensure payroll systems accurately track contributions to avoid exceeding annual limits ($4,150 individual / $8,300 family for 2024).
• Flexible Spending Accounts (FSAs):
  • FSA elections typically end during open enrollment and must be finalized by December 31.
  • Some employers offer a grace period or carryover option into the new year—important to monitor for proper accounting.

3. ACA Reporting Deadlines

• Form 1095-C and 1094-C (for employers with 50+ full-time employees):
  • Distribution to Employees: January 31
  • Submission to IRS: March 31 (if filing electronically) or February 28 (if filing by paper)
  • Accurate reporting is essential to avoid IRS penalties and ensure compliance.

4. COBRA Administration

• Employees leaving the company must receive COBRA election notices within 44 days of separation.
  • Employers must manage premium payments for continued coverage accurately, as these are not tax-deductible for the individual unless itemized.

5. Year-End Payroll Adjustments

• All benefit elections must be finalized before December 31 to ensure pre-tax deductions are applied correctly to employees' first paycheck in January.
• Review payroll withholding adjustments in advance to ensure compliance with new elections, HSAs, or FSAs.

These dates ensure your business remains compliant with tax laws, avoids penalties, and provides employees with a smooth benefits experience.

Tax and Accounting Considerations of Open Enrollment

Open enrollment has significant tax and accounting implications, requiring careful management of health insurance premiums, savings accounts, and compliance reporting. For employers, the premiums paid toward employee health insurance are deductible as business expenses, reducing the company’s taxable income. 

Employees benefit too, as contributions to health premiums can be made pre-tax through a Section 125 Cafeteria Plan, lowering both the employee’s taxable income and the employer’s payroll tax burden. This makes proper tracking of these deductions essential to ensuring accurate payroll processing.

Companies offering Health Savings Accounts (HSAs) should note that these accounts are only available alongside high-deductible health plans (HDHPs). Both employer and employee HSA contributions are pre-tax, providing tax advantages, but they must be recorded correctly in payroll systems. In 2024, the IRS limits for HSA contributions are $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution for those 55 or older. 

Similarly, Flexible Spending Accounts (FSAs) also offer pre-tax savings but require employers to monitor forfeited balances since unused funds often revert back to the company at year-end. 

In addition to managing deductions, employers with 50 or more full-time employees must remain compliant with the Affordable Care Act (ACA) by submitting Forms 1095-C and 1094-C to the IRS and reporting the total value of health benefits on employee W-2s (Box 12). By staying on top of these accounting tasks, businesses can avoid compliance risks while helping employees optimize their tax benefits.

Read More: Ways A CPA Can Help Grow Your Business

Steps to Prepare Your Employees for Open Enrollment

A successful open enrollment process requires proactive communication, personalized support, and seamless integration with payroll and accounting systems. Here are key steps to guide your preparation:

1. Communicate Early and Clearly

• Provide key dates and deadlines to ensure employees are aware of when they need to enroll or make changes.
• Offer plan comparison tools to help employees understand their options and select the most suitable coverage.
• Highlight tax benefits associated with HSAs, FSAs, and pre-tax premiums, so employees can make decisions that maximize their savings.

2. Host Informational Sessions

• Invite your accounting team or benefits provider to walk employees through the tax and payroll implications of their choices.
• Use Q&A sessions to answer employee questions on HSAs, FSAs, and changes to payroll withholding, ensuring everyone is on the same page.
  
  

3. Offer One-on-One Consultations

• Provide employees with access to HR or payroll staff for personalized assistance with specific concerns.
• Help employees project paycheck changes and ensure their tax withholdings are properly adjusted based on new benefits.

4. Update Payroll and Accounting Systems

• Ensure payroll systems reflect new benefit selections and pre-tax deductions correctly, starting with the first paycheck of the new year.
• Coordinate with the accounting team to ensure ACA reporting (Forms 1095-C and 1094-C) is accurate and submitted on time, avoiding compliance issues.

By following these steps, you can make the open enrollment process smoother for employees while minimizing administrative burdens and ensuring tax compliance.

Read More: Employee vs Contractor - Tax Implications for Business

Best Practices for Employers from a Tax and Accounting Perspective

To ensure a smooth open enrollment process and avoid financial and compliance pitfalls, employers should implement several best practices. One key area is managing Flexible Spending Accounts (FSAs). Since FSA funds are typically "use-it-or-lose-it," it’s important to educate employees on spending deadlines to prevent forfeitures. Providing reminders or resources on eligible expenses can help employees make the most of their contributions.

Additionally, employers should:

• Adjust payroll withholdings early: Ensure that payroll systems reflect employees’ updated benefits and deductions starting with the first paycheck in January, avoiding paycheck surprises.
• Audit benefits packages: Regularly review health plans to confirm they meet Affordable Care Act (ACA) requirements and that necessary compliance forms (1095-C, 1094-C) are ready to avoid penalties.
• Track COBRA enrollees: Maintain proper administration for employees who opt for COBRA continuation coverage, ensuring premium payments are accounted for accurately and coverage remains uninterrupted.

By following these best practices, employers can minimize administrative errors, stay compliant with regulatory requirements, and ensure employees fully benefit from their health and savings plans.

Conclusion

Open enrollment plays a crucial role in both employees' financial planning and your business's accounting processes. The decisions made during this period affect payroll, taxes, and regulatory compliance, making clear communication and thorough preparation essential for a smooth transition. 

By starting early, consulting with tax professionals, and ensuring employees are well-informed about their options, businesses can optimize benefits, avoid costly mistakes, and prevent tax surprises. A proactive approach will not only streamline operations but also empower employees to make decisions that maximize their financial well-being.

Read More: Tax Smart Business Investments