The Main Categories of Employee Benefits
For most companies, they offer someone the chance to change some or all of their employee benefits in October and November, and they usually fall into three categories:
- Health
- Financial
- Protection
Each company is different in what benefits they provide, and here is a general guideline on how to think about them. Then you can decide if you need to change something or keep rolling with what you have.
Health-Related Benefits
Since health insurance is often tied to an employer, employees need to decide what they want to do about their medical, dental, and vision insurance.
Medical Insurance
Not all medical insurance is created equally, but typically the higher the premiums you pay for your medical coverage, the lower your out-of-pocket expenses will be with co-insurance and deductible. The current federal cap for maximum out-of-pocket costs is $8,550 for individual plans and $17,100 for marketplace plans but could be lower with your employer sponsored plan.
Remember that the out-of-pocket limit doesn’t include:
- Your monthly premiums
- Anything you spent for services your plan doesn’t cover
- out-of-network care and services
- The cost above the allowed amount for a service that a provider may charge
Plans To Choose From
For most plans, they typically offer three types of plans, but there can be more options:
- Health Medical Organizations (HMOs): low cost but typically less flexibility in who you can see in-network
- Preferred Provider Organizations (PPO): higher costs but typically more flexibility in who you can see in-network
- High Deductible Health Plan (HDHP): lowest premiums but the highest out-of-pocket costs typically. These out-of-pocket costs can be offset with a health savings account.
Dental
Things you want to think about dental care and the amount of coverage you choose:
- Preventive – usually covers cleanings and x-rays
- Basic – filling in cavities
- Major/Restorative – root canals
- Orthodontic – braces
If you feel you will need more major/restoratives dental work, your company might offer a plus plan covering more co-insurance than the standard plan. For example, the basic plan might cover $300 for the year, while the plus plan will cover $1500. You still need to look at co-insurance to see if additional savings need to be put aside to cover certain restorative and orthodontic procedures.
Vision
Things you want to think about vision care the
- Exam
- Prescription glasses (could include eye contacts)
- LASIK coverage
A Plus plan will allow higher allowances for glasses, contacts, or sun care, as well as an increased allowance for LASIK. Same as with medical or dental insurance, if you know you’re going to be needing more coverage this upcoming year, then the Plus plan will probably make more sense to enroll in.
Financial-Related Benefits
Financial benefits can either lower your financial costs or help you increase your financial assets. They can also be benchmarks that need to be met before you get a financial benefit.
Employee Matching
If an employee puts money into their employer-sponsored retirement plan, they can get a matching contribution from the employer. Usually, this is a dollar-for-dollar match up to a certain point. If a company matches your 5% contribution and your monthly income is $5000/mo, and you put 5% in your employer-sponsored retirement plan, you will put $250 into the account, and your employer will match the $250. If you decide to put more into the account, the employee match will only do the $250.
- It’s important to know that if you’re going to max out your account before the end of the year, your company might not have the system in place to give you all your matches. If you max out your 401k in October, then you might miss out on Nov and Dec matching. So make sure this is covered.
Vesting
If your employer is offering a match on your employer-sponsored retirement plan (401k, 403b, TSP, etc.), they probably have a vesting schedule. This means for whatever company money is put into this plan. They can take a portion or all of it away if you decide to leave your company or get fired before satisfying the vesting period.
- Cliff Vesting
- This means you get to keep 100% of the money after the vesting period has been met. This can be immediate, one year or three years typically, but be as long as six years.
- Graded Vesting
- This means that you keep a portion of your employer match or profit-sharing every year of employment. A six-year graded vesting period means that at year 2, you get to keep 20%, then in year 3, you get to keep 40% of what was match, and in year six, you can keep 100% of what was matched.
- Cliff Vesting
It’s essential to understand your vesting schedule if you don’t plan to stay at your job for that long so that you can stay long enough to get all of your employee matching contributions. If you decide to leave early, make sure that the value for leaving exceeds the lost employee matching.
Employee Stock Purchase Plan
Usually can purchase company stock at a 15% discount. If timed correctly, you can guarantee a 17.65% return on the money you put into this program.
You can decide to hold the stock longer, but to get the long-term capital gain rate of 15%, the company stock needs to be held for two years after acquiring the stock. The stock price of the company can go up or down during this period. It’s also wise to ensure that not more than 5% of your portfolio is in company stock for financial risk purposes.
There is a limit on how much you can contribute to an ESPP, but this is a benefit that employees should take advantage of most of the time.
Health Savings Account
An HSA can only use with an HDHP.
For those that are anticipated to use none or very little health care for the coverage period. This can allow someone to save in an HSA and build this account up to help lower future health care costs and pay the lowest in health care premiums. When a health care expense does happen, you will be expected to pay a larger portion of the health care expenses.
The significant benefit of an HSA is the triple tax benefit of contributing:
- Contributions are tax-deductible, so it lowers your taxable income for the year
- Funds can grow tax-free, so you don’t have to worry about tax consequences for rebalancing or dividends
- Withdrawals are tax-free if they are used on medical-related expenses
The max you can contribute is $3,650 for 2022 as an individual or $7,300 as a family. Withdrawals are taxable if HSA funds are not used on medical-related expenses, including a 10% penalty. This 10% penalty is waived if someone is 65 years old or older.
Healthcare Flexible Spending Account
Those expected to use a lot of health and are on an HMO or PPO health care plan want to pay for the co-insurance and deductibles with pre-tax money. This can save someone over 40% in taxes because the money is not taxed when used on health-related expenses from a Flexible Savings Account.
Usually, this account is use-or-lose-it, and only $500 can be rolled over into the following year. The max you can contribute is $3,650 as an individual and $7,300 as a family.
Dependent Care Flexible Spending Account
This account is used for preschool, before and after school programs, child or eldercare expenses.
This account allows someone to fund the account with pre-tax dollars that won’t be taxed if used on eligible expenses. The max for a family is $10,500, but there is a use it or lose it component, but with the Taxpayer Certainty and Disaster Tax Relief Act of 2020, an employer can allow people to roll over more than $550 than in a normal year but usually have a 2.5 month grace period to spend the money.
The contribution limit is set to go back to $5,000 in 2022 if Congress doesn’t extend the $10,500 limit past 2021.
Commuter Expense Reimbursement Account (CERA)
These are pre-tax benefits, and someone can receive a maximum benefit of $270/mo. They can cover:
- Bus Pass
- Subway Pass
- Vanpool expenses
- Train Pass
- Ferry Pass
- Parking Expenses
Ineligible expenses are:
- Toll Roads
- Parking passes not near your regular place of employment
- Taxis
You still pay for these transportation expenses but receive a tax benefit for participating in a CERA program.
Tuition Assistance
To help with your career development, your employer might offer tuition assistance to pay for undergrad or graduate coursework, a certificate program, placement tests, or courses. Depending on the company, they want the tuition assistance to be somehow related to the employee’s job.
$5,250/yr is what is tax-free. If your employer gives you more than this amount, then this would be taxable to you. If you’re to use student loans for this cost, there might be a way to do it.
Protection-Related Benefits
These benefits are used to reduce the impact of a catastrophic event that could cause a substantial financial impact on someone’s life and their family’s life.
Group Life Insurance
This is usually term life insurance that only sticks around while you’re an employee and usually lasts for 31 days after you leave.
One of the benefits of group life insurance is that insurability is not usually required. Someone with a medical condition that would prevent them from getting life insurance would get coverage.
These policies are cheaper than individual policies as well. If you have a policy, make sure the death benefit is going to the person you want it to. Some policies can be kept after employment, but it’s up to the employee to pay for the premiums and probably convert it to a new policy. Please look at your employee benefits handbook to see what’s possible.
- Group life insurance is usually 1-2 times your salary
- Supplemental life insurance is extra coverage that you can purchase, and the coverage amount is based on your salary usually.
Dependent life insurance is usually less in coverage but can be very economical, and the dependent might not have to do a physical to get coverage. Also, please look into what’s available.
To get additional coverage, you have to see if your employer is allowing it. Some companies or organizations only have open enrollment every couple of years, and people have to wait until this happens to change their coverage.
Life insurance premiums for policies on the first $50k are tax-free. For policies that exceed $50k in coverage, a portion of the premiums is taxable. More information can be found here.
Accidental Death and Dismemberment
AD&D will provide benefits only when your loss, death, or dismemberment results, directly and independently from all other causes, from an accidental bodily injury that was unintended, unexpected, and unforeseen. The exact terms are different from company to company, so review your employee benefits handbook to see what is covered.
This benefit is usually two times your salary, and someone might be able to get additional coverage. AD&D coverage is generally very economical but ensure that this is the amount of coverage for you. The policy also usually lasts 31 days after your leave your employers.
Short Term Disability
Suppose your ability to work is limited for a period of time due to physical disease, injury, pregnancy, illness, or mental disorder that is not work-related. In that case, a short-term disability plan provides income.
- Usually covers 26 weeks after a seven-day waiting period.
- The cost of the insurance is usually covered by the employer, which then makes the benefits taxable. The ST disability benefit is usually 100% of your income.
Long Term Disability
This benefit usually kicks in after 180 days after being disabled and unable to perform your duties at work.
- Usually covers 60% of your salary up to a certain amount (for example, $25,000/mo), and these benefits are taxable.
- If an employee pays a portion of the premiums, the premiums are pre-tax and make the benefits taxable.
- A supplemental private policy can be obtained to fill in any gaps if necessary.
- Benefits can last anywhere from five years to age 65 (need to look at the policy certificate to see actual timeline)
Since employer long-term disability benefits are taxable, the person with only an employer benefit will see about 43% of their salary after taxes. Employer benefits usually have less flexible vocational rehab or home modifications than a private plan would have. Just know the deal that is required for you and your situation.
Final Takeaways
Your employer has many benefits that you can take advantage of, and there are probably more benefits to think about than what’s available on this list. It’s free money in a sense, and if you don’t use it, you lose it.
Suppose you need help understanding how your employee benefits fit into your financial plan or need help with developing a financial plan that involves your company benefits. In that case, you can schedule a complimentary phone call with me here.
*Before you make any changes with your financial plan or situation, please do further research or consult a professional like me to ensure you make the best decision for yourself*
