Maximizing Benefits During Open Enrollment
September 28, 2016
The season of change is upon us. Autumn is a beautiful time of the year. Temperatures are cooling and the fall foliage is changing. This is an important time to review, update, or make changes to your employer plans. Open enrollment for company benefits typically takes place in October or November each year.
How do you know if you are maximizing your company benefits? Do you know if the company benefit programs are the most efficient and cost effective for you and your family? Let’s review common workplace benefit plans and some questions to consider.
How Can I Maximize My Employee Benefits?
Many people forget that employer sponsored benefits are a significant component of their total compensation. Employee status with W-2 wages provides additional forms of payment. For instance, if you are an employee with W-2 wages, your employer pays a matching amount of your Social Security (6.2%) and Medicare (1.45%) taxes. They may also partially subsidize many insurances, and offer other benefit programs to you.
Examples of these benefits include:
- 401k company match
- Company stock ownership (ESPP, RSUs, stock options)
- Medical, dental, and vision insurances
- Life and disability coverage
- Paid leave policy
- Miscellaneous employer benefits
“How do you know if you are maximizing your company benefits?”
Your employer may offer retirement plan options such as 401k, 403b, 457b, Simple IRA or SEP IRA to name a few. If your employer also offers a matching contribution, it is vital that you capture the entire match. This effectively secures a 100% return on your matching contribution!
Questions to ask:
- What is my retirement plan’s matching contribution policy?
- What do I need to do to capture the entire match?
- What if I maxed out my contribution too early?
- When and how is my company match paid?
Matching contributions often come with specific limitations. For example, a company may fully match up to 5% of your contribution. Or, the matching may be tiered, for instance 100% match on first 3%, then 50% match on the next 3%. So you would need to contribute 6% to enjoy the full benefit. Effectively this is equivalent to the company offering 100% match on the first 4.5%. This is useful information to know if you are comparing job offers.
To capture the entire company match, begin with knowing what percentage you need to contribute. Your employer cannot match what you don’t contribute. Next, plan the timing and amount of your contributions so that you do not reach your maximum contribution allowed by law before you receive your full company match.
For instance, say you earn $10,000 per month, and contribute 20% of your earnings with your employer fully matching up to 5%. After nine months, you’ve reached your $18,000 annual limit1 having received $4,500 in matching funds. But if you contribute 15% over 12-monhs, you will maximize your $18,000 limit, receive the full $6,000 in matching funds, and not leave $1,500 on the table. Some retirement plans provide for a “true-up” provision to mitigate this issue.
Your employer’s matching contributions may not vest immediately but over time. For example, you may not be entitled to the matching contribution until after the second year of employment. Or you may vest 20% after the second year, 40% after the third year, … until 100% vested after the sixth year.
The timing of matching contributions can have a significant impact on retirement portfolios. Some companies pay matches simultaneously with each payroll contribution you make. Others match your contributions once a year, and only if you are employed on that date. Timing can have an impact on portfolio performance, but more importantly on risk and return related to overall allocation and rebalancing.
Company Stock Ownership
If you work for a publicly traded company, you may be offered the opportunity to buy company stock at a discount with an Employee Stock Purchase Plan (ESPP). Or you may receive compensation rewards with Restricted Stock Units (RSUs) or stock options. If your company offers these plans, there can be significant financial benefits to you, if you manage them appropriately.
Questions to ask:
- Does our company offer an ESPP?
- What are the details of the RSU and stock option plans?
An ESPP offers you the opportunity to purchase your company’s shares through payroll deduction typically during a 12 or 18 month offering period. In general, the company will buy shares at six-month purchase periods. For instance, the plan may offer you the ability to buy company stock at 85% of its closing price on the lower of the first day of the offering period or the last day of each purchase period. The 15% discount is a compelling benefit you should take advantage of if you can.
RSUs are a form of employer compensation where you receive shares of company stock over a vesting period and distribution schedule. When the RSUs are vested, the shares are assigned a fair market value and are considered as taxable income. Usually a portion of the shares are withheld to pay the income tax liability. You are entitled to the remaining shares and can sell them at any time. Over time, valued employees may build up significant overlapping RSU grants which presents a planning and investment diversification opportunity.
Medical insurance is a desirable benefit for both employers and employees. The company receives tax benefits from their subsidy of employee insurance and also benefits from having a healthy and productive work force. Other coverages may include dental and vision, life and disability insurances. These may be offered for you, your spouse, and dependent children.
Questions to ask:
- What type of plans do my medical insurances offer?
- How much is the cost for my employer provided life insurance?
- Would my disability benefit be taxable to me?
Health insurance providers may be HMO, PPO, or POS organization. The insurance company may have a “gatekeeper” necessitating a referral before procedures will be covered. It is also important to understand your deductibles and copays, and the difference between coverage for in-network versus out-of-network providers. For example, your doctor may be in-network, but the hospital or lab facility may be out-of-network.
Your company may cover the cost of basic levels of life insurance for you. Typical coverage amounts are $50,000 or one to two times your salary. Additionally, you may be offered supplemental life insurance for yourself, your spouse and dependent children. If you are interested in additional insurance, you should ask what is the cost per $1000 coverage at your age. Healthy employees typically pay a higher cost with employer plans versus what they can get through a personal policy.
Disability claim benefits from employer provided plans are usually taxable. If your premiums are paid by your employer or paid with pre-tax dollars, the benefit will be taxable. Employer provided disability coverage will not cover 100% of your income if you have a claim, and there may be a time limitation on how long the benefit lasts.
Providing work life balance is becoming more of an important consideration in today’s work environment. Paid leave may be classified into vacation, sick, personal, and flex days. Or paid leave can be combined into a catch-all category of paid time off (PTO). Do you ever feel like you are doing the work of 1.7 people?
Questions to ask:
- How do my paid leave days accrue?
- Will my vacation and/or sick days carry over into next year?
Paid leave typically accrues over a calendar year. If you are entitled to three weeks of paid leave, you are not likely be able to take all three weeks starting January 1st. For example, you may accrue 8 or 12 hours per month. If you have PTO, there becomes a juggling act using the time whether for illness, providing for family needs or taking a vacation to recharge and rejuvenate.
Vacation and sick days are often a “use it or lose it” proposition. If you don’t use the days during a certain time period, typically a calendar year, this benefit will not roll into the next year. Some employers may allow you to roll forward a certain amount of paid leave, or to “cash in” unused vacation and/or sick days. Upon termination of employment, the employer typically will pay you for unused eligible paid time off that has accrued.
Miscellaneous Employer Benefits
There are many other ancillary workplace benefit programs. Review the list below to see if there are any you can take advantage of.
- Flexible Spending Accounts (FSA)
- Health Savings Accounts (HSA)
- Prepaid legal plan
- Employee Assistance Programs (EAP)
- Health and wellness rewards
- Gym membership or other vendor discounts
- Commuter or Parking Benefits
“Do you ever feel like you are doing the work of 1.7 people?”
During open enrollment, it is important for you to review your work place benefits, the main considerations for each, and the questions you should be asking. At Coherent Financial Advisers, providing guidance on employer benefits is an integral part of helping our clients maximize their financial potential. Contact us if you have questions during open enrollment.
Tom Pietrack, CFP
September 28, 2016
You are welcome to comment!
- Not including $6,000 catch-up contribution. 2017 IRS annual limit of $18,000 plus $6,000 catch-up if over age 50.
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