If you’re employed by a firm its important to understand your employer benefits package to ensure you are leveraging those benefits tot he best of your ability.
This guide to typical employer benefits applies to everyone. It doesn’t matter if you are newly minted professionals starting a first job, in between jobs or have been with your employer for years. It’s always a good idea to review benefits and make changes as your life changes.
Retirement Plan
Often the first employer benefit that comes to mind. Depending on the type of firm and its industry, employees will either have access to a 401(k) or 403(b) retirement plan. These are essentially the same type of account, 401(k)s are deigned for profit companies and 403(b) are found in the non-profit sector, think schools and hospitals.
This type of account that is set-up in the employees name where they have the option to defer dollars from their paycheck directly into the account. The objective of this account is to build a nest egg that the employee can use in their retirement to create a “retirement paycheck”.
I will dedicate a future post to all the details of a retirement plan but for today’s conversation it’s important to know that employer’s provide these investment vehicles to employees. I should also emphasis that it’s very important that employees contribute to this account, at the very least up to the employer match.
Employer Match
A.K.A free money. That’s right you heard me, free money! Most employers will offer to match up to a percentage of the dollars an employee contributes to their 401(k). To be clear, the percentage is a percentage of income. It’s common to see employer’s matching between 3-4% of the contributions put into the plan by the employee.
As an example, if an employee makes $50,000 at their company and the employer offers a 4% match, as long as the employee contribute 4% of their income ($2,000), the employer will contribute the same $2,000 for total annual 401(k) contributions of $4,000. If the employer if offering a match, it would be silly to not contribute up to their match!
Investment Options
The ability to invest the funds in a employer retirement plan an important feature and should be leveraged. For some employees, the investment decision process can be overwhelming and lead them to keeping their contributions in cash. Not investing a 401(k) will likely put an employee at a major disadvantage at retirement due to a lack of growth and compounding interest over their working career.
Most plans offer “target date” or “target retirement” fund investment option. This is a great way for an employee to begin investing their retirement plan contributions. These funds are set-up to be heavily weighted in equities (most aggressive) and slowly shift to being more conservative as time progresses. At the target retirement date, chosen by the employee, the underlying investments will have a focus on fixed income (most conservative) investments that will hold their value while the, now retired, employee begins using those funds to support their retirement lifestyle.
Group Insurance
Employers will offer a variety of insurance policies to their employees. Based on the employer, these benefits could be fully paid by the employer or partially subsidized by the employer. Be sure to ask!
Life Insurance
It’s common for an employer to offer a basic life insurance policy to their employees in an amount equal to one times their salary. In some cases, this amount could be more or less.
As an employee, its important to evaluate how much life insurance is needed based on your personal and financial situation. For a single employee without debt obligations (i.e. student debt and/or mortgage), the basic life insurance offered through work might be sufficient. For employees with a spouse and children, they may run the risk of being under insured. A rule of thumb to consider if you have a family is 10 times salary + any debt obligations.
Some employers offer supplemental insurance that can be purchased at a discount on the life of the employee or employee’s spouse. Its important to keep in mind that any supplemental insurance purchased through an employer is not portable and will be lost if the employee switches jobs.
Disability Insurance
There are two types of disability insurance; short-term and long-term. If an employer offers access to either a short-term or long-term disability policy, its beneficial to participate at any age or stage of life.
A professionals greatest source of capital is themselves which is why its so important to protect against a scenario where they might be out of work. Another rule of thumb to keep in mind is having a long-term disability policy with a benefit equal to at least 60% on income.
Health Insurance
Health insurance is a very confusing and expansive space with lots of options. An employer may offer one of the following common plans:
- HMOs
- PPOs
- EPOs
- HDHPs
High Deductible Health Plans (HDHPs) have become more popular over the years and are often part of an employer’s benefit package. Like life insurance, the employer may cover all or a portion of the plan’s premiums. A unique feature of the HDHP is the option to open an Health Savings Plan (HSA) and defer, before tax, a portion of each paycheck towards this account to cover future medical expenses. For an employee its a great way to decrease their taxable income and pre-fund future medical expenses.
Qualified Transportation Fringe Benefit
Transportation benefits are a lesser known fringe benefit that can be very impactful for employees that work in urban areas and rely on public transportation to get to and from work. Similar to an HSA for health insurance, an employee can defer, before tax, dollars from their paycheck that will be used for Metra or Ventra and even Divy passes. The benefit to the employee is that it lower’s their taxable income come tax time.
Thanks for reading!
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