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Once you start working full-time, it’s common for employers to offer benefits to employees in addition to a salary.
In general, there are four types of employee benefit programs: health insurance, retirement plans, tax-advantaged savings, and supplemental benefits such as life and vision care insurance.
The generosity of employee benefit plans varies depending on your employer, so a good understanding of all of the options is very important. There can be a big difference between your salary and your total compensation when all benefits are included, so you’ll want to use your knowledge of employee benefits when evaluating job offers. Further, if your employer doesn’t offer the benefits you need, you’ll need to know how to fill any gaps you may find.
Health Insurance
Health insurance is perhaps the most important benefit offered to employees. An employer-sponsored plan typically means that your insurance costs will be lower – enabling you to get better coverage for less money than you may have spent on a bare-bones plan as an individual.
Employers typically offer several health insurance choices at different prices. When making plan decisions, you’ll need to consider your healthcare needs, whether you have dependents, whether your preferred provider is approved, and other factors unique to you. For example, if you anticipate frequent doctor visits or take expensive medications, a plan with a higher monthly payment may cost less overall when healthcare expenses are totaled over time. On the other hand, a single person in excellent health may choose a plan with a lower premium and less generous benefits – applying the savings to other financial priorities.
Retirement Savings
Tax-advantaged retirement savings plans are another common employee benefit, especially among larger employers. Options include 401k plans, Roth 401k plans, and similar plans for small businesses and non-profits. Each plan offers tax advantages, meaning that money can be either deposited or withdrawn without a tax bill (but not both). Contributions to a traditional 401k plan are tax deductible, meaning you are not taxed on contributions and they can grow tax-free, but taxes are charged on withdrawals during retirement. Roth 401k plans are not tax deducible, so they don’t lower your tax bill now, but they do grow tax-free and withdrawals during retirement are tax-free.
In some cases, employers may also “match” your contributions up to a certain point, meaning they contribute to your savings plan independently of your salary. For example, if an employer matches contributions by 50% and you deposit $200 into your retirement savings plan each month, the matching amount would be $100. That’s like getting a pay raise of $1,200 per year, but it’s available only if you contribute to the plan. Over a 40-year career, that $1,200 annual contribution of free money alone would be worth over $300,000 at an 8% annual return.
If your employer doesn’t offer a retirement plan, consider opening an Individual Retirement Account (IRA). If your income permits, you can also open an IRA in addition to a 401k and contribute to both – a great strategy for minimizing taxes and saving for the future.
All retirement plans have contribution limits and include penalties for early withdrawals – typically ten percent plus any taxes owed. Most retirement plans do, however, offer penalty-free withdrawal for higher education expenses, medical expenses, a first-time home purchase, and in cases of personal disability.
Tax-Advantaged Savings
In addition to tax-advantaged retirement accounts, some employers offer other savings programs that can also reduce your tax bill.
Your strategy for making the most of these types of accounts will vary depending on your anticipated spending. For example, if you know you’ll need to pay doctor visit and prescription copays because of an existing medical condition, paying for them through a tax-advantaged account is like getting a discount that’s equal to your tax bracket. So if you’re in the 28% tax bracket and spend $1,000 per year on qualified expenses, your true cost would be just $780. For an ongoing medical condition, it would make sense to contribute each year.
On the other hand, even an individual with no medical conditions can benefit from a health savings account. In the event of a major medical expense, most health insurance plans have deductibles – the amount you would be required to pay before the insurance company would pay. Average annual deductibles could be thousands of dollars per year for many plans, so a serious accident or other condition could be a major financial burden.
Medical savings accounts are a great way to supplement health insurance accounts that have high deductibles or copays. Once you save an amount equal to one year’s maximum deductible, you could consider stopping your contribution and doing something else with the money.
Unlike flexible spending accounts, medical savings accounts can grow year after year and never expire.
Supplemental Benefits
Health care and tax-advantage savings are major employee benefits, but your employer may offer additional perks as well, including:
Regardless of the types of benefits offered by your employer, keep in mind that changes are typically limited to one period of time per year. Known as an “open enrollment” period, the specific dates will vary by employer.
Like any kind of financial plan, you’ll likely need to make changes to your benefit choices as your earnings increase and your family grows. If you have access to an online calendaring program at work or through your email account, setting up an annual reminder to review your benefit decisions is a good strategy.
