Your Plain English Employee Benefits Guidebook

I was 22 when I got my first job on Wall Street. I left the throws of comfortability in Minnesota working with my father for a training program located in the heart of Wall Street – 14 Wall to be exact. I didn’t know what to expect or how I would “make it” in NYC considering my pay started off at $30,000 per year (the equivalent of $15 per hour – or $7.50 when measured in actual hours worked). Let’s be honest, there’s not much apartment that you can get in NYC on $15 per hour.

I’ll never forget thumbing through the employee benefit guidebook on my first day of work. It was a bit complex and confronting to say the least – 30 plus pages of financial and insurance jargon. Fortunately for me, the employee benefits were amazing and worth far more than my starting salary. My benefits included company paid health insurance (as well as dental and vision), a 401(k) with a very generous company match, a fully paid health club membership to Equinox, lunches 100% paid for by the company and an unlimited supply of books to further my personal and professional development.

There wasn’t too much that was left out of my employee benefits package and it allowed me to bridge the gap from that initial training program to my first official job on The Street. That being said, whether you are making $30,000 or $3 million, maximizing your employee benefits is extremely important to your financial health. I don’t just mean maximizing in the sense that you sign up for everything that your company has to offer, but strategically signing up for certain benefits and opting out of others.

Because it is employee benefit season, and over the last 10 years I’ve read hundreds of employee benefit guidebooks, I wanted to give you a plain English guidebook with suggestions on what to enroll in, in order to maximize your benefits for 2015.

Before we jump to it, I have one quick request:

Can you please fill out this very short question questionnaire on your employee benefits (it takes 30 seconds, 3 questions all multiple-choice)? It will help me do a better job delivering advice for you.

Health Insurance

What you need to look for when evaluating your health insurance options is your share of the premium costs, add to the deductible and the total out-of-pocket maximum. Typically, plans fall into two options:

• A Higher Monthly Premium, Lower Deductible and Lower Out-of-Pocket Maximum Plan
• A Lower Monthly Premium, Higher Deductible and Higher Out-of-Pocket Maximum Plan

Higher-deductible plans quiet often scare away a lot of potential enrollees, because they think that they might need to spend a lot of money out-of-pocket on their medical costs. At the same time, the lower deductible plans have pretty significant premium costs which can often cost thousands of dollars more per year in premiums.

So how should you decide?

If your are young, healthy and not anticipating any major healthcare expenditures in the coming year, your should consider the lower premium, higher deductible plan as a starting point. Make sure that your have enough “emergency savings” to handle the deductible and out of pocket maximums in case things don’t go as planned. Also, many employers offering a high-deductible plan have begun to contribute to a medical expense fund known as a Health Savings account which could brunt some of your out of pocket costs should they arise.

For those of you who anticipate major medical costs in the coming year – perhaps due to a potential baby delivery or surgery that your have been putting off – the higher premium plan should be considered first.

There’s been many times when we’ve actually reviewed an employee benefit package and found that the perceived safer, higher premium plan with a lower deductible, could actually end up costing employees significantly more money than the high deductible plan, without even knowing it. So make sure that you select the right plan for you.We’ve seen people enrolled in the wrong plan and waste thousands of dollars per year.

If your company offers discounted premiums by performing certain wellness initiatives, take them up on their offer. Annual savings can range from $600-$800 per year, per family by completing biometric testing, answering a questionnaire and having an annual physical.

Health Savings Account (HSA)

As we discussed above, the HSA is a relatively new feature of many employers high-deductible health insurance plans. Find out whether your company is making a contribution to your HSA in the event your enroll as that may impact your financial evaluation. If so, that is free money that you should welcome with open arms and highly consider. Beyond the initial employer contribution, many employers even offer a company match when it comes to your individual contributions in the HSA.

We are big fans of the HSA as we discussed here as it is triple tax-advantaged and has some flexibility in how you can use it. Your contributions to the HSA provide an upfront tax deduction. A family can contribute $6,650 in 2015 and an individual can contribute $3,350. If a family were to max this account out and is in the 33% tax bracket, tax savings would be in excess of $2,200. That’s no small change.

The money can then be invested and grow tax-deferred, and you can take the money out of the account tax-free for health purposes. There is no other investment account like that. Furthermore, the money in the account is always yours. It never leaves you even if you leave the company.

Retirement Plan

It’s likely that your employer offers a 401(k), 403(b), 457 or SIMPLE IRA that you can contribute to. If they do, find out if your company offers an employer match and what you have to do to receive it. No matter what, make sure that you’re contributing enough to receive your full company match. If you don’t you’re leaving free money on the table and missing out on a guaranteed 100% return on investment.

Beyond that, your company retirement plans offer your the ability to contribute more to tax-advantaged accounts than you could on your own as an employee. In 2015, you can contribute $18,000 to a 401(k) and 403(b) and $12,500 to a SIMPLE IRA. This compares favorably to the $5,500 that your could contribute to a Traditional or Roth IRA on your own.

These retirement plans lower your tax bill in three significant ways so don’t underestimate their value. You receive an upfront tax deduction on your contribution; your money grows tax-deferred which allows for the faster accumulation of your nest since you don’t pay taxes on the interest, dividends and gains every year; and thru tax rate arbitrage where your save money in taxes at your higher “marginal tax bracket and withdraw in the future at your “effective” rate which is typically lower, on average.

Dental Insurance

Many companies of dental plans but do so at a cost to your, the employee. When it comes to fighting financial cavities, we don’t want to waste money on unnecessary expenses. We see companies offering multiple dental plan options and different price points. We find that the benefits of the higher premium plan usually don’t outweigh the benefits…especially for those of you who typically need routine preventive care and cleaning. Even for those of you with young children. If your kids are getting closer to “braces” years, then it may be worthwhile to pay up if the “orthodontic” benefits are substantial.

Vision Plan

Vision is another area in which we want you too see financially clearer. We can cite numerous examples of people enrolled in their group vision plan at a cost of $150-$200 per year when they don’t have any real vision insurance needs. If you prefer to get a vision exam every year, it may be more cost effective to pay out of pocket as there are discounts with AAA amongst others. Not to mention, many health insurance plans offer a once per year vision exam for free as part of your benefits. If your wear contacts and / or your vision is getting progressively worse, then the vision insurance may be worthwhile. If not, save your money and keep your eyes on your wallet.

Disability Insurance

Some employers offer short-term and long-term disability insurance, some employers don’t. Disability insurance is probably the most underutilized area when we review people’s financial lives. If the company provides the insurance for free, take it with open arms. If not and you need to opt-in and pay for it, take the time to understand the group policy.

It may be cheaper to enroll through the company but the benefits may be inferior to the policies that you can get individually, outside of your company plan. Disability insurance will typically cover 40-60% of your salary if you were out of work for a specific amount of time due to illness or injury. In the event your need long-term disability above and beyond your company paid plan, we suggest always exploring the marketplace to ensure the plan is customized to your individual needs, not the needs of your company.

Life Insurance

Many large employers provide a modest level of company paid life insurance benefit for their employees. These same companies, in most cases, give you the option to buy supplemental life insurance for yourself, your spouse and for your children.

Unless insurability is an issue for you, we wouldn’t recommend buying life insurance through your group offering. Why? First, due to the costs. Not only are group life insurance costs, on average, significantly higher, but also because the prices rises as you age.

Take this as an example. For a healthy, 35-year old male, $1 million of 20-year term life insurance would cost anywhere from $500 to $600 per year when purchased outside of the company. The equivalent $1mln of coverage through a company plan would cost around $850 per year ($300 higher). And since prices aren’t locked in, by the time the 35 year old turns 50, this same $1mln in coverage would cost over $2,400 per year.

Over a 20-year period, the costs savings of getting a $1mln policy outside of the employer plan could save you $19,000. If those savings were to be invested and grow at 6% annually, this is a $33,000 decision. Do yourself a favor and take one hour of your life to explore and procure your needed life insurance coverage outside of your group plan.

Beyond that, in many instances your group life insurance is not portable. Meaning that if your leave the company, your life insurance can’t go with your. So in the event your leave the company at age 50 and still have a need for life insurance, it would be significantly costlier to get coverage at that age.

In most cases, we typically recommend that you opt out of life insurance for your children and the optional accidental death & dismemberment policies (AD&D) that may be available to you. They’re redundant, and it’s an unnecessary cost for you.

Life insurance and disability insurance are critical and costly decisions. It’s important to spend some time and learn about your coverage options inside and outside of your employer plans. In many instances, your insurance plan can be more optimally designed for you outside and offer you significant cost savings.

Flexible Spending Account for Healthcare (FSA)

The Flexible Spending Account for Healthcare allows you to set aside money from your paycheck on a tax‐free basis each year into an account. You may then reimburse yourself from your account during the year for eligible healthcare expenses ‐ such as healthcare and dental care deductible and co‐pays, contact lenses, and prescription drugs, etc.  You may contribute a maximum of $2,550 per year to your account.

These accounts can be useful, but on a limited basis. Your must know that if you contribute to an HSA, you may only be able to contribute to your FSA healthcare on a limited basis, if at all. The key to getting the most from your FSA is to maximize your contributions based on the expenses you expect to incur during the benefit year. You don’t want to over-contribute because for many plans it’s use it or lose it (some plans allow you to rollover $500 of unused FSA dollars to the next year).

We advise people to participate in their Flex Spending Account only up to the level of a conservative amount of healthcare related costs throughout the year. If you have a regular monthly prescription of $50, we’d recommend contributing around $600 to your flex spending account. You know you’re not going to lose any of the money, but you also know you’re going to use it and get the pre-tax deduction for it.

Flexible Spending Account for Dependent Care (FSA)

This is a benefit that we have seen overlooked many times by people with young children. It allows you to put up to $5,000 pre-tax to pay for your children’s dependent care expenses. If you have children under 13 years old, this account covers expenses related to the care and supervision of your child while you work full time. Eligible expenses include daycare, nursery school, before and after-school care or your nanny.

All of these can amount to significant costs that are paid directly from your pocket. However, money you set aside in this flexible spending account to pay for these expenses is not only subtracted from your paycheck before income taxes are calculated, but it also avoids the 7.65% Social Security and Medicare tax. So if you’re in the 25% income-tax bracket, you won’t have to pay the 25% federal tax or the 7.65% Social Security tax, which means that you’ll avoid paying a total of 32.65% in taxes on that money. In that case, contributing the maximum $5,000 to your dependent-care flex plan cuts your tax bill by $1,633. The benefits get even better as your tax bracket rises. If you’re in the 33% bracket, for example, you’ll end up saving 40.65% in taxes on the money you contribute to the FSA — and lowering your tax bill by in excess of $2,000. You’ll save even more if your FSA contribution escapes state income taxes (which is nice for those of us in California with income tax rates of 9% or more).

Vacation Time

According to a new study by Oxford Economics, U.S. workers are using only 77 percent of their paid time off. Use it. Take some time for yourself to relax and recharge. You are entitled to it. If you don’t, find out if you can rollover your unused time for the next year or cash out your vacation time as compensation.

Employee Stock Purchase Plan (ESPP)

If you work at a public company, you may be eligible to buy your company stock at a discounted price through a payroll deduction. This means you can buy shares below the current price, usually anywhere from 5% to 15% below market value, which can be a nice margin of safety. That being said you never want too much of your net worth tied to one company.  Buying shares in your company stock is not without risk. The stock price can fluctuate and in many cases there are holding period requirements and specific trading windows that limit when you can sell your stock.  Also make sure to speak with your tax advisor because there are tax implications depending on when you sell the shares.

Employee Stock Options & Restricted Stock Units (RSU)

An increasing number of employers, both large and small, are beginning to offer employee stock options or restricted stock units as part of an incentive program.  In most cases, the stock options and / or RSUs that you have been issued have a vesting schedule. Vesting means that you don’t own the asset until the vesting period passes.  Monitor your vesting schedule and expiration dates so your don’t lose out on thousands of dollars of benefit these stock options and RSUs provide. Like the ESPP, there are tax implications that your need to be aware of based on the type of options you received as well the timing of your buy and sell transactions.

Legal Insurance Plans

Many Fortune 500 employers off this as an optional, employer paid benefit. For a monthly fee of around $20, legal plans provide you access to a network of attorneys for certain legal issues that may arise in your financial life. Once enrolled, many of your legal costs are covered under this insurance so you don’t need to worry about retainers or high hourly fees.

We are reluctant to recommend enrolling in legal plans except on a selective and strategic basis. For example, if you were recently married or had kids and want to do your estate planning, you could enroll in the plan for one to two years. In this instance, your legal premiums may cost $450 over two years but your could have your simple estate planning documents created for free (Wills, Living Trust, Power of Attorney, Living Wills). This could save you $2,000 over two years and then you could opt out of the legal plan during the following enrollment period once it’s completed.

Commuter Spending Account

Do you pay for parking? Do you take the subway, train or bus to work? Your employer might offer commuter benefits, which allows you to pay for your commuting costs through your paychecks using pre-tax dollars. Signing up for this could save you hard earned tax dollars that are already part of your monthly budget.

So there you have it, a plain English version of some of the most common employer provided benefits. Maximizing your employer provided benefits (by knowing what to take advantage of and what NOT to) is a vital component to your financial life health and well-being.

ACTION OF THE DAY: Open up your employer benefit enrollment guide and spend 15 minutes reading it. If you find yourself confused, write down your questions and call your HR or financial advisor for their insight.