When it comes to employee compensation, salary earns most of the attention. But what many people don’t realize is the role that benefits play in their total compensation. The Bureau of Labor Statistics found that the average benefits package comprised 32% of an employee’s annual compensation. When leveraged correctly, your benefits are a great way to further your financial goals.
Each fall, you typically have the option to review and adjust your benefits during an open enrollment period. This is the time to check-in and make any necessary changes to your health or life insurance coverage, beneficiary designations, and even retirement contributions.
How can you make the most of your benefits package? Let’s find out.
Max out your retirement contributions
One of the most important benefits of working for an employer is the opportunity to save for retirement. There are many retirement plans available depending on your industry and company, but the most popular is a 401k. A 401k enables you to contribute pre-tax income into the account. That is, you will not be taxed on any money you invest in a 401(k) account when you invest it or while it remains in the account, meaning all dividends and capital gains are also untaxed. You cannot withdraw the money until you are at least 59 and a half years old. But only when you begin to withdraw the money will you be taxed on it. It is a good deal!
If you are not currently enrolled, we urge you to consider starting with even a small monthly contribution. With regular payroll contributions, you lower your taxable income and take advantage of compound interest in each pay cycle.
Here’s an example of the power of compound interest. Suppose you opt to invest $200 per month in a 401(k) plan. In just five years, assuming a 6% annual interest, you’ll have over $13,000 in your account and in 20 years, your account would be worth over $92,000.
If you want to invest the most money possible each year, ask your employer if they offer a Roth 401(k). A Roth 401(k) works a bit differently than a traditional one. You contribute to a Roth 401(k) with after-tax dollars instead of pre-tax. You can withdraw whatever you have deposited tax free any time, and if you wait until age 59 and a half, you will not have to pay any tax on any withdrawals, including dividends and capital gains that have built up over the years. It is also a good deal!
For 2020, employees may contribute up to $19,500 of pre-tax income, with an extra $6,500 in catch-up contributions for those over 50.
If you’re already enrolled in a retirement plan, evaluate your current contributions, and ask yourself if you could make intentional increases.
Some companies, to encourage their employees to save, will even match what you save up to some amount.. Make sure you are taking advantage of this as much as possible. It is another good deal!
If you received a raise this year, did you increase your contributions accordingly?
Did you allocate a portion of your bonus to your retirement plan?
Worried you may not be at your company much longer? Any company-sponsored 401(k) or IRA can be rolled into a personal IRA if you change employers, retire, or become self-employed, so there’s no risk in opening an account.
Keep in mind, though, that while you have access to your contributions, any employer contributions made through a match could be subject to a vesting schedule. If you are planning to leave, check out that provision to ensure you know what you can and can’t take with you.
Increasing your contributions is a great way to receive tax benefits now while saving for your future.
Understand your health coverage
Reading through health care plans can be tedious and confusing, so it’s important that you feel confident asking questions to ensure you get the answers you need.
The best choice for medical, dental, and vision plans will depend on your family’s coverage needs, your current health status and history, pre-existing conditions, and more. Below are a few points to consider:
Your desired coverage level (single or family)
The type of health plan that’s best for your health conditions (Health Maintenance Organization, Preferred Provider Organization, etc.)
Cost-sharing requirements (co-pays, deductibles, premiums, and out of pocket maximums)
One of the most critical decisions involves choosing a low- vs. high-deductible plan. The main differences between the two are:
It’s important to note that most employers will pick up a significant portion of your premium (average of 70-80% depending on your coverage level). Keep this in mind as you read the examples below.
The low deductible option means your monthly premiums are higher but your deductible is lower. For example, you may have a $1000 deductible, but a $700 monthly premium. This choice can be better for families with young children or if you require frequent doctor’s visits because more of your services will be covered at a lower rate. This limits your annual out-of-pocket expenses.
On the flip side, a high deductible (and therefore, lower premium) plan is often best for young professionals and those in good health who don’t spend a lot on medical costs each year. For example, you may have a $6,500 deductible, but a $400 monthly premium.
High deductible plans also offer a health savings account (HSA) option. If your employer doesn’t offer one, you can enroll in a separate HSA. This is an excellent long-term investment tool and offers three distinct tax benefits,
Tax-free withdrawals (qualified medical expenses)
With an HSA, all unused funds roll over into the next calendar year, making it a great opportunity to compound your savings.
Finally, consider a flexible spending account (FSA) if it’s available to you. FSAs are a tax-efficient way to save for health costs like prescriptions, contacts/glasses, dental work, and specialist appointments. With this program, unused funds expire each year, which makes proper planning crucial.
Purchase adequate insurance
When it comes to disability insurance, it’s important not to underestimate the chances that you may need short- or long-term disability due to an accident or health emergency. From carpal tunnel syndrome to Covid-19, unforeseen illnesses can prevent you from working for many weeks or months.
We highly recommend enrolling in whatever disability plans are offered. Many of these plans can’t be purchased on the open market, and the costs are not unreasonable for what you receive. Short-term disability insurance, for example, can pay up to 60% of your salary for a limited amount of time, and long-term disability can kick in after that if needed.
Life insurance is, of course, in place for the worst-case scenario and provides compensation to loved ones who depend on your income. People with significant debt (mortgage, auto loan, personal loan) must plan ahead to take care of these expenses should an unexpected death occur.
Life insurance is often offered at no cost (i.e. no premium payment is required) to pay out the equivalent of one year’s annual salary to your designated beneficiary, and additional coverage may be purchased on top of that amount.
Enjoy your work/life balance benefits
When considering an employment decision, many people look at the additional perks companies offer. These can swing the balance in favor of an employer who offers the most creative and flexible benefits to its employees.
Examples include a hiring bonus, flexible work or commute hours, help with student loan repayment, maternity/paternity leave, continuing education, gym memberships, extra paid time off, and time for volunteer work.
Not surprisingly, some of the happiest employees take all their vacation time, even if it’s in the form of a staycation. Take advantage of all of these fringe benefits to maximize your workplace performance, and come home happier to your family!
Don’t underestimate the direct and indirect benefits of your employee benefits package. When you get the annual “open enrollment” email from your human resources or benefits department, plan ahead and show up to the meeting to make the right elections for you. Evaluating your changing needs annually is well worth your time investment.
If you would like to discover more ways to maximize the impact of your benefits package, give us a call today.