October is rolling around again and just like last year you should be receiving notice that your enrollment period is open from your employer. It is time to sign up for additional benefits or remove current benefits through your employer’s group options. Instead of deleting this email, make this the year you dive into what you are signing up for!
What many individuals fail to account for is how they can best utilize their employer’s benefits to help reach their personal goals. While benefits packages differ between each employer, there is often an advantage to using a group benefit. The biggest benefit in most cases is a larger group allows the risk spread among participants often resulting in lower premiums versus signing up for individual policies. Sometimes employers even help pay for some of these costs as they can often write-off these expenses from a tax perspective. Mid to large size companies normally have access to the following benefits listed below:
Often when it comes to health insurance, many companies offer multiple plan types. The three most popular health insurance plans for employers are Health Maintenance Organization (HMO), Preferred Provider Organization (PPO), and High Deductible Health Insurance Plan. Typically, HMO and PPO plans tend to offer better medical coverage when compared to a High Deductible Plan. HMO and PPO do have some distinct differences but it is pretty rare that employers have both an HMO and PPO health insurance option. It is more common to pick a PPO or HMO and then offer a High Deductible Health Insurance option as an alternative to their employees.
High Deductible Health Insurance plans typically offers a lower premium but less comprehensive coverage. One can be very tempted to simply look at the premium cost when comparing these policies. However, one needs to review the total cost including: copays, coinsurance, and deductions. For example, you may only have to pay $30 a month for health insurance but you may need to pay $100 dollars every time you visit a doctor and $500 for a specialist versus an insurance plan at $60 a month but doctors visits cost $50 and specialists cost $250. This means that you may want to consider your individual health situational carefully before deciding on which option will cost you more in the long run. For example, families with young children often have higher medical costs and you may want to look at better health insurance options. One thing that could give you more flexibility in this decision is having a 3-6 month emergency fund. Furthermore, some employers put money into a Health Savings Account for their employees if they select a High Deductible Health Insurance Plan. In our previous blog post, we have expanded further on why you might consider this strategy. Additionally, some employers provide a Health Reimbursement Account (HRA). HRAs are employer sponsed plan where they put funds into an account for their employees for medical expenses. When a medical expense occurs, the employee reports the cost and the employer cover this expense.
Many employers might offer a flat amount of life insurance coverage free to their employers for example: $25,000-50,000 in life insurance. Many also choose to structure it as a multiple of your salary. For example, if your salary is $125,000 and your employer pays 3 times your salary you would have $375,000 of coverage. Also, many companies provide an option during enrollment to purchase additional supplemental coverage. This coverage is paid by you, the employee, however, as it is through a group plan, you will receive a discounted rate, but this does depend on age and health. A major concern is that many of these policies are not portable, meaning that once you leave your employer the coverage will cease. Do your research before purchasing supplemental life insurance coverage through your employer. Research should include the cost, the coverage it provides, as well as the ability to take the benefit should you leave your employer.
Disability Insurance continues to be one of the most underutilized insurance by individuals and yet it should be highest on one’s priority list. Disability Insurance is designed to protect your income by paying you either a percentage of your income or a fixed amount if you get sick or have a major accident where you are unable to work. If you are unable to work, your income often goes away and all the goals you want to accomplish typically go with it. While it is becoming more common for employers to pay for Disability Insurance for their employees, this varies from organization to organization. The major advantage of getting group pricing for Disability Insurance is that is often cheaper than individual policies. However, it does run into the same problem as group Life Insurance in that you may lose the coverage when you move on to a new employer.
There are two major types of disability insurance: Short Term Disability and Long Term Disability. Short Term Disability Insurance through an employer often covers your salary for a short period that can last as long as 2 years, but it is more common to cover your income for 3 to 6 months. With Short Term Disability policies, there is an elimination period which is a period of time from when you get sick or injured before you get the income paid by the policy. It is common to see this period as short as 7 days to 1 month depending on the policy. While Short Term Disability is important, many people mistakenly believe this coverage should be prioritized over Long Term Disability. However, this is not correct, a short term health issue is a temporary situation. While it may impact your financial situation by having to spend down emergency funds and other assets or even require you to take on debt, you are more likely to go back to work and get your finances back on track in a relatively little time. However, the average disability is actually 31 months. If you were to have a Long Term Disability that extends over the average the results could be devastating long term to your finances. While the Social Security Administration is another safety net for disability, it is important to note that it is much more difficult to qualify under (with the disability expected to last for at least 12 months), and it pays out a very modest amount.
Retirement: 401(k) Plans
In today’s workplace environment, retirement planning looks significantly different from previous generations. In a previous blog we explained the changing landscape of employer benefits. Most employers now provide a 401(k) plan to help employees save for retirement. Many mid to large-sized companies also provide a match. This means that if you put money into the 401(k) they will too. For example, if your employer matches 4% of your salary dollar for dollar, and you put in 4%, they will match this amount which helps you save 8% of your salary. It is important to note that some matches have vesting periods where you will need to work a certain amount of years before you can take your employer’s match with you to another company or individual account. For example in a 6 year vesting period, the employer might require you to work 2 years to take 20% of their contribution. If after year 3, you had $20,000 in your own contributions, and $10,000 in employer matching contributions, and decided to leave, you would effectively take $20,000 + $10,000 x 40%, or $24,000 (as well as any gains produced by those funds). Retirement matching is the first step one should look to take advantage of maximizing retirement dollars when planning for retirement saving. That said, for super savers, if you are maxing out your 401(k) early in the year, you need to make sure you are not missing out on the match if an employer does not offer what is called a “true-up” match. We have also written previously on how to avoid this.
In addition to how much to contribute, it is also important to consider the manner in which you contribute. It is becoming more and more common for employers to offer either a traditional pre-tax contribution or a Roth contribution to your 401(k) plan. Pre-tax is where your contributions reduce your taxes today but will be taxed when you take out distributions in retirement. Whereas, Roth Contributions has you paying taxes today but it will not be taxed when you take distributions in retirement. Some 401(k) plan even offer special after-tax contributions to get above the $19,000 contribution limit for 2019 if you age 50 or younger.
Retirement: Deferred Compensation Plans
While 401(k) plans, or 403(b) plan for non-profit organizations, are now the main drivers for saving towards retirement, an additional vehicle that employers can offer is access to a Deferred Compensation Plan. These are more common within larger organizations and provide the ability to withhold a portion of your paycheck to be paid out at a later date. There are two types of Deferred Compensation Plan. It can be either a qualified or non-qualified plan. Qualified Deferred Compensation plans follow the Employee Retirement Income Security Act (ERISA) which requires non discretionary plan rules and is generally considered safer for employees. On the other end of the spectrum are non-qualified plans which are agreements between the company and individual employees to withhold their earned income, invest it, and give it to them at a later point. This plan has more risk as it is tied to the company’s success, and in the event of a company going bankrupt the employee could lose their funds. Despite this risk, it can provide a huge benefit in lowering one’s taxes today and provide an additional retirement vehicle to save. These types of plans are often offered to key executives as they can defer their income and the company invests the funds to pay them at a later point. If your employer is struggling with low participation in a Deferred Compensation Plan here are some talking points to help with engagement.
Retirement: Defined Benefit Pension Plans
Currently, some companies, state, and federal organizations have pension plans to help their employees with retirement. Defined Benefits Plans invest the funds on behalf of the employees and provide a monthly income in retirement. This amount is often calculated by a formula based on an employee’s income, years of employment, age of retirement, and other various factors. These pension plans are often very specific in their accounting and how employees accrue benefits. While these pensions can be a great benefit, many of these pensions are reducing the amounts that are paid out for future participants. The Motley Fool has provided some great research that dives deeper into what participants should be considering when reviewing their pension plan.
Retirement: Employee Stock Purchase Plans (ESPP)
Some companies offer the ability for their employees to purchase shares of the company in a tax-efficient manner. As with many retirement benefits, not all ESPPs are created equal. While ESPPs can be a great tool in helping to build your own personal wealth, when it comes to investing, one must be careful as holding too large of a position in a single company can lead to a lack of diversification in your portfolio, leading to concentrated investment risk. Here is a great article from The Motley Fool that shows what to look for and how to take advantage of these plans when faced with some of these difficult decisions.
Many employers are now looking to offer additional fringe benefits that are designed to attract new employees and enhance help current employees’ daily lives. Currently there is a growing trend to help pay off student loans for employees as well as offering education assistance if you are pursuing a degree or other designation. In addition some employers provide the ability to sign up for legal counsel which can include preparing estate planning documents. These legal services can vary, but often they offer: a Last Will, Living Will, Health Care Power of Attorney, and Trusts services. Lastly, when signing up for medical insurance, you will often be provided the opportunity to sign up for dental and vision services. These services can often added on at great discount compared to buying on the private market, so it’s worth a look. Here is a great white paper that researches what employees are currently looking for in their benefits. Make sure you review these fringe benefits closely as things like discounted gym memberships and other various options can have a positive impact on your life.
In the end, your benefits package can be as unique as the employees it is meant to serve. Start your New Year’s resolution early, and this fall make the time to dive in to understanding your benefits and learn how to turn financial literacy into workplace wealth. While some of the information presented today may not be news to everyone, I hope that this blog helps educate, and inspire those that have not taken action before to make crucial changes to improving their financial fitness. While the hard work of financial fitness falls on the individual, they do not have to go it alone, and if you need any assistance do not hesitate to reach out to My Financial Coach.
Director of Financial Planning