A Primer on Employee Benefits

There is gold in those employee benefit packages. In addition to the 401(k), the benefits offered are a source of building wealth that are often overlooked.

Unfortunately, the various components of the benefit packages have generally dwindled over the years, but the average one consists of insurance (typically medical, dental, disability and life), paid vacation and sick leave, 401(k) options, and flexible savings – to name a few. Most employers give you an employee benefit plan when you join the firm. This is the time to study all the perks and benefits they offer. Some companies offer stock options at higher levels or stock purchase plans for all employees.

Keep in mind that not all employers offer all of these options, while some may offer more. But it is important to take your time reading through and digesting all of the information provided. What benefits you decide to take advantage of is completely up to you, but if your employer offers a 401(k) and matches anything whatsoever, you need to match that minimum – otherwise you’re literally leaving money on the table!

If you start early in your 20s and put two to four percent of your paycheck towards your 401(k) and your company matches it, you could potentially have a six-figure nest egg in ten years. Remember, time is on your side! The sooner you begin to save, the more you will have later. For example, if you contribute $6,000 a year and your employer matches $3,000, you would put $9,000 a year away. In this hypothetical scenario, by reinvesting your earnings and earning a rate of 8% for 10 years you would have $130,379.

When it comes to life insurance, the first $50,000 is tax-free on a group term policy – why wouldn’t you take that? However, when you’re younger you are more likely to need disability insurance rather than life insurance, so looking into the disability program is important – especially if you are a woman who is thinking about having children. In some companies, pregnancy leave is part of disability insurance, not health insurance.

What else should you look for?

  • Health Insurance: This is a big one to think about. HMO vs. PPO? Is there a deductible? Are there different plans? Out-of-Pocket Maximum? HMO stands for Health Maintenance Organization, which is generally a lower cost option than a PPO, or Preferred Provider Organization. With an HMO, you must stay “in house” for all your health care needs, whereas with a PPO you have more flexibility to go outside to see non-network doctors. There is almost always lower costs with an HMO vs. a PPO. There are usually little or no deductibles with HMOs, whereas PPOs have co-insurance and deductibles. PPOs offer the most flexibility and you don’t have a gatekeeper for referrals to specialists. If cost is paramount, an HMO would be a better choice for you.

  • Employee Assistance Programs (EAPs): Not every employer offers these. EAPs usually provide free counseling services, childcare, and training programs, to name a few.

  • Tuition Reimbursement: Thinking about getting your MBA? Your employer may help pay for it – up to $5,250 tax free a year.

  • Flexible Savings Account: These accounts allow you to save pre-tax dollars to be used to pay for insurance deductibles and other out-of-pocket expenses.

  • Health Care Saving Accounts (HSAs): These accounts can be used in conjunction with high deductible health insurance plans to set aside pretax dollars which grow tax-free and can be used for qualified medical expenses.

  • Employee Stock Purchase Plan: This is one of my favorites. You can buy your company stock at up to a 15 percent discount. It is great benefit. Even if the stock remains flat, you could make 15 percent when you sell. If you accumulate it over time it can be a great tool for funding your retirement.

Is your head spinning yet? It should, because all of this information is a lot to process. I would recommend talking to someone with tax and benefits expertise. Talk to the HR department at your firm, or talk to a CFP®professional. It helps to have some experience on your side to help you navigate through the confusing, yet equally exciting, world of employee benefits.

Source: A Primer on Employee Benefits

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