Back to Basics: Employee Benefits

Back to Basics: Employee Benefits

8.0 MIN READ

 

From health insurance to disability coverage and retirement savings, your employee benefits can help you stay on track with your life at work and at home. But did you know that those same work perks can also add stability to your financial plan?

Employers offer benefits to attract skilled workers (like you) and retain their valued employees (also you!). Many workers also stick with their employers to obtain and maintain those benefits. You might be familiar with using insurance to help with the cost of health care or adding to your employer’s 401(k) to earn matching contributions.

 

But your benefits could be even more beneficial than you know. Not only can they reduce the burden of health care costs and help you save for retirement but they could even provide income or help support your family in the event of a disabling injury or premature death.

The most-often offered employee benefits tend to fall into three main categories: Health, retirement, as well as life and disability benefits. Choosing the options to best benefit yourself and your loved ones begins with a basic understanding of each category and how each type of coverage can come in handy. 

If you don’t care to read through the 25-page PDF your employer sent this year, securely forward it to us for review and analysis! We’ll follow up with recommendations, and we can even join you to go through your employee benefits portal. We’ll help you enroll in the right options at the coverage levels that are right for you.

Health Benefits

As health care costs continue to rise in the U.S., employer-provided or -sponsored health insurance plans can offer savings safeguards. Look at it this way: In 1960, health care spending was approximately $146 per person in the U.S. per year. That amount has risen annually, and the average health care cost per person in 2018 was a whopping $11,172. And, to top it off, “Health care costs have risen faster than the median annual income.”

More and more, health care expenses are cutting into Americans’ take-home money. Enrolling in a health insurance plan, then, is one way to reduce out-of-pocket spending on health care. While you could pay for your own individual plan, many employers present employees with the option to enroll in reduced-cost care through their group health insurance offerings. And they also tend to pay at least part of the cost of employees’ premiums. That means those employees can enroll in care at reduced rates. Plus, with insurance in place, employees are not paying the full cost of care when they receive it. This leaves more of their take-home pay for them to actually take home in the event of a health emergency.

Imagine going in for surgery without insurance. Paying what could easily be a six-figure bill out of pocket could seriously postpone your ability to reach other financial goals! Or it could take those goals out of the equation entirely. Having health insurance could greatly limit the impact of such a bill.

Employees also often have options when it comes to the health care plan they’ll enroll in. Paying a higher upfront premium can often mean paying less for care, so choosing the best health plan can be a trade-off between paying now and paying later, should you need care. On the opposite end of that spectrum is the high-deductible health plan (HDHP). Premiums may be lower, but — as the name implies — deductibles tend to be higher. But don’t let the name fool you: HDHPs can also have lower out-of-pocket maximums than non-HDHP plan options. And, in addition to paying a lower premium, an upside of an HDHP is health savings account (HSA) eligibility. With an HSA-eligible plan, you can save pretax dollars in your HSA and use those dollars for health-care-specific purchases.

Retirement Benefits

Another often-offered employee benefit is based around saving for retirement. Of course, the defined-benefit pension system of the past is changing.

That puts the retirement-saving onus on employees. Fewer employers are offering pensions today, instead allowing their employees to opt into plans that employees themselves contribute to. While many different types of plans are available, these are some of the most popular among employers today:

401(K)

Many employers give their workers the option of enrolling in a profit-sharing 401(k) plan. In addition, employers may make a matching contribution to their employees’ 401(k) plans, adding to the plans’ future value. In fact, it’s like receiving “free” money — just for contributing. So it’s a win-win for many: Employees save for their future, and their employers amplify the amount they’re saving. 

Even if employers don’t offer matching contributions, employees can make 401(k) contributions with pretax dollars. Plus, employees can opt to have those contributions taken right out of their paychecks, which is one way to “trick” yourself into saving for retirement. In 2021, employees can contribute up to $19,500, and those over 50 can add an additional $6,000 in “catch-up” contributions.

403(B) and 457

The 403(b) plan is similar to the 401(k) but for those in some tax-exempt organizations, including many public service employers. The 457 plan, also similar, is available to many state and local government employees and those who work for some nonprofit organizations.

Like 401(k) plans, both the 403(b) and 457 allow both employee and employer to contribute. Both also allow pretax contributions, lowering the amount of employees’ taxable income. Another similarity: Contribution limits are the same as those imposed on 401(k) contributions with a $19,500 maximum and $6,000 catch-up contribution opportunity for those 50 or better.

With so many similarities, what makes these plans different? The 403(b) plan alone allows those enrolled and with at least 15 years of service to the employer to make an extra contribution of $3,000 per year for five years, for a total of $15,000. And those enrolled in 457 plans can also participate in other types of retirement plans with the contribution cap being $19,500 on each plan for those under age 50. 

Life and Disability Benefits

In addition to health care and retirement benefits, many employers also offer life and disability benefits, adding to the ways in which they offer protections to employees. Whether short- or long-term disability benefits or life insurance, these can also come in handy for the employee and, in many cases, the employee’s family.

Consider this: What if you were permanently disabled due to an off-the-job accident? Worker’s Compensation wouldn’t be an option, and you could be both unable to work and liable to pay health care costs due to the injury. With a new financial outflow and less money coming in, this could be a sticky situation for many. It can be especially difficult for those who financially support family members or loved ones.

However, employer life insurance and disability benefits can ease such a tough situation. While short-term disability insurance can help boost income for temporarily disabled employees, long-term disability insurance can do the same over a more lengthy timespan. And, in the event of death, life insurance benefits can help support an employee’s family members, allowing them to continue their quality of life and achieve major goals, like paying off the mortgage or sending the kids to college.

Choosing the Right Benefits For You

Whether you choose to enroll in employee benefits for today, your future, your family — or your own reasons — the protections they offer can help you keep more money in your pocket. And, as they safeguard against unexpected expenses, they’re key pieces in the foundation of any financial plan. After all, health is important for a long life, and a long life makes for a long retirement!

With so many options, though, choosing the right benefits for you and your financial plan can be confusing but is nonetheless important. If you’re beginning a new job or your employer’s open enrollment period is coming up as they tend to in the autumn, it might be best to speak with your spouse or significant other, company human resources department — and your FPFoCo team — to select the options that best meet your needs.

Key Benefits For Employees

Want to limit the time you dedicate to choosing your benefits? Or did you wait until the last day of your open enrollment window and you’re pressed for time? Here’s where you can start and which benefits you might want to focus on first:

1. Health

Most employers offer one to three health care plan options. If you’re relatively healthy, visit the doctor only once or twice a year, and aren’t expecting significant medical expenses in the next benefit year, a high-deductible health plan might be a strong option. No HDHP offering? The most basic plan offered could be your best bet. 

If you require more frequent medical care, visit the doc more often, or see health specialists, it might be a good idea to compare options. Look closely at the premiums you’d pay, your deductible and coinsurance, as well as your maximum out-of-pocket costs. It can also be helpful to create “best-case” and “worst-case” scenarios to better understand how much financial risk you’re willing to retain should you need more extensive care.

And don’t forget about dental and vision insurance, especially if you think you’ll need something more than a routine exam this year. 

2. Disability

If your emergency/opportunity fund is in place, you probably don’t need to purchase short-term disability coverage and can self-insure instead. Long-term disability, however, is a different story. That’s because it can provide income for the long term if you were to become disabled. While it tends to cover only 60% to 67% of your income, it’s far better than going without, so it’s usually best to enroll.

3. Retirement

If you’ve got to make a quick choice on this one, find out if your employer offers a match on your contributions. Then, if you can, opt to contribute enough to receive the full amount of that “free” money your employer offers. The more the merrier in your retirement accounts, so contribute additional dollars if you can. Another way to “trick” yourself into saving for retirement? Increase your retirement contributions by 1% per year. With annual cost of living increases and the occasional raise, you probably won’t miss it, and you can benefit your future self.

4. Life

Employers often provide at least one time employees’ annual salary up to $50,000 in basic group term life insurance at no cost because it gives them a tax break. While employees pay taxes on amounts above this, it tends to be a relatively small amount. However, employees don’t pay for the first $50,000, so why not accept this free work perk? 

Of course, if your employer pays for any or all of your other benefits, it’s usually a good idea to enroll. 

Not eligible to receive employee benefits — or your employer only offers some? You may be able to purchase added protections via individual plans. While individual plans can cost more than employer-sponsored offerings, the cost is generally less than the bill for the unexpected could be, making individual benefits a strong option for many. We can help with these, too, so let us know how we can help! 

Jason SpecinerAbout the Author
Jason Speciner is a CERTIFIED FINANCIAL PLANNER™ professional, an Enrolled Agent, and the founder of fee-only firm Financial Planning Fort Collins. He is also a member of the National Association of Personal Financial Advisors (NAPFA) and XY Planning Network. Since 2004, he has served clients of all ages and backgrounds with unique experience working with members of generations X and Y.

Did you know XYPN advisors provide virtual services? They can work with clients in any state! View Jason's Find an Advisor profile.

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