How to Get the Most Out of Your Work Benefits
Congrats -- landing a new gig during a recession is no easy task. But before you get too comfy, there's one more thing you need to check off your to-do list: read your work welcome packet. Sure, that stack of papers may be even more boring than taking in the “M" section of the phone book, but navigating the company health plans, setting up a pension program, reviewing stock options and taking advantage of insurance are key to setting you up for the sweet life down the road. Here's how to amp up the value of your paycheck by making the most of the benefits your new company might offer.
Look Over Offered Health Insurance Plans
Before you even crack open your health packet, Carolyn McClanahan, MD, CFP and founder of Life Planning Partners Inc. wants to get one thing established. “Young couples need to pick a plan that fits their budget now, not one that will give them the biggest break at tax time," she says. Here's how to choose between the three major types of group health plans offered by most insurance companies.
Preferred Provider Organization (PPO)
What It Is With this traditional health plan, you share part of the cost of the insurance premium with your company, and you also pick up the tab on a copay (usually around $35) when you see a doctor, therapist or dentist. The same goes for all prescriptions.
Who Should Choose It If your company pays the lion's share of the premium, there's no reason not to go with this plan. For one, you get a wide choice of doctors—and you'll get partial coverage if you go with an MD not covered by your plan (you'll only pay about 30-50 percent of the bill). And here's another perk: You don't need referrals to see specialists, so you're free to make appointments on your own for whatever care you need.
Tip Set up a Flexible Spending Account (FSA) with your insurance company so you can use pretax dollars for copays. “It's a use-it-or-lose-it arrangement," says McClanahan. “So if you decide to use it, make sure you have a back-up plan about how to spend the money by the end of the year, like getting new glasses or having dental work done."
Consumer Directed Health Plan (CDHP)
What It Is This plan is known for having deep discounts on premiums (usually about 10-20 percent less than traditional PPO plans), which means you'll get less taken out of your paycheck. The catch? It also has a steep deductible (at least $1,200 per person and about $2,400 for families), so you'll have to meet that before you start reaping any real benefits.
Who Should Choose It Preventive care such as your annual physicals, gyno visits (including mammograms) and also immunizations are usually covered at no cost (meaning, the deductible doesn't apply to these). Translation: This plan can be a great deal if you don't think you'll need much medical attention.
Tip Open a health savings account (HSA)—a tax-free bank account used for paying everything from medical, dental and vision appointments to plain old pharmacy expenses (you can deposit up to $6,150 for a family in 2010). And don't worry—you won't have to go on a shopping spree at CVS come December; any money left in the account rolls over to the next year. So what does this mean exactly? If your company will help fund your CDHP by contributing to your HSA, this plan can be a great deal.
Health Maintenance Organization (HMO)
What It Is With low premiums and small deductibles, this plan seems like the best of both options—but you won't have a ton of control (type-As need not apply). How it works: You'll dish out a copay for doctor visits (usually $10 to $25) and also hospital stays (which tend to be higher), but preventive care (like annual exams and gyno visits) is often free.
Who Should Choose It An HMO plan only really works if you're comfortable seeing an assigned primary physician (probably an employee of the insurance company) and letting that doctor refer you to specialists when needed. It's also more likely to limit the types of tests your insurance will pay for.
Tip You can still take advantage of an FSA with an HMO. “If you consistently spend at least $600 a year on copays and prescriptions, put $50 a month in the account," says McClanahan. It's pretaxed money, so you'll save in the end.
Stockpiling money you're not going to need for another 30 or 40 years while juggling your current monthly bills can seem daunting, but it will pay off. “Young couples that start saving for retirement now will reap the benefits of compounding interest," says Sharon Smith, Hr manager and panelist of the Society for Human resource Management. Translation: Save now, and you'll be able to contribute less later. So take advantage of a company-sponsored pension plan that deducts funds from your paycheck and even matches them.
What It Is This long-term savings plan lets you contribute a portion of each paycheck to your retirement, and in many cases, your company will match your contributions. (The match limit is up to 6 percent of your annual income.)
Who Should Choose It Anyone (and that means anyone) with an employer match program. Not contributing to a 401(k)— and having some extra help from your company—is basically turning down free money. Not only that, but your 401(k) contributions are pretaxed, meaning that if you deduct $100 from each paycheck to go toward this type of savings, you're only taxed on what you make after the deduction (so if you make $1,000 a week, you're actually only taxed on $900). Fair warning: Once you put money in the account, leave it there. With a traditional 401(k), while you'll eventually be taxed when you withdraw funds at the age of 591⁄2, taking your money out before then means an additional 10 percent penalty. (Educational institutions and nonprofits offer a 403(b), which works just like a traditional 401(k).)
Tip If you have a combined income upwards of six figures, you'll get a substantial tax break if you max out your contribution (you can stash up to $16,500 in 2010).
What It Is With the economy still not doing so hot, many companies have stopped matching contributions, which has made IRAs (both traditional and Roth) a better place to keep money. While an IRA is an independent account and there's no employer match, it allows you more freedom to move funds around than you would have with a 401(k). This means you get to control how much risk you want to take with your savings. With a 401(k), your employer decides where your money goes—which often means you end up owning a lot of company stock (great if business is good, bad if it's not). With an IRA, you're not tied down, allowing you to “trade" as you wish within your own savings. So what's the limit? You can stash away up to $5,000 this year (it varies annually), and you may get a tax deduction come next tax season.
Who Should Choose It If your company doesn't have a 401(k) match program, if you're self-employed or if you've already maxed out your 401(k) and want to save more dough, it might be a good time to look into opening a personal IRA account.
Tip Have an old 401(k) from a previous job? Roll money out of your old plan by opening an IRA at a brokerage firm, such as Fidelity, TD Ameritrade or Schwab. This will cut down on the number of accounts you have to keep track of—and it may be cheaper to manage one IRA than two or three 401(k) plans.
What It Is This hybrid between a 401(k) and Roth IRA lets you contribute funds from your paycheck (which can be matched by your employer), but you pay taxes on that money now. This means that when it's time to withdraw (again, you have to be 591⁄2 years old or pay a penalty to take out funds), you'll end up with a lot more money when you need it.
Who Should Choose It If you make over $177K a year combined, contributing to a Roth IRA isn't an option. Luckily, you're still eligible for a Roth 401(k), which allows the same tax benefits as a Roth IRA. Plus, you may get the advantage of an employer match program. For 2010, you can stash up to $16,500 in a Roth 401(k)—the same as a regular 401(k).
Tip You can roll over a Roth 401(k) the same way you would a traditional 401(k). So if you switch jobs, you'll have the option to move your money into another Roth 401(k) or a Roth IRA depending on your income at the time.
Enroll in a Stock Option Plan
Accepting a job means investing your time, energy and money in a company. With stock options, your employer returns the favor by investing in you—so the two of you can grow together.
Restricted vs. Incentive Shares
What It Is Most companies hand out two types of stock options, Restricted Stock Units (RSUs) and Incentive Stock Options (ISOs). RSUs are given to you by your employer for free, but you can't touch them until you've met your company's vesting requirement. RSUs aren't taxed until you vest. To take advantage of them, “make sure the schedule meets your needs and don't change jobs before you vest," advises Eric Brotman, CFP and author of Debt Free for Life. ISOs are sold at a discount to employees (usually upper management) and can be generally resold whenever you please. They're not taxed until you sell them, but when you do, you'll pay based on what the shares are actually worth.
Who Should Choose It The rule of thumb is that if stocks are offered, take 'em.
Tip If a company offers stock options as part of your total salary offer, be careful; make sure you research the company's financials before deciding to accept.
Decide On Life and Disability Insurance Plans
It's important to plan for how you'll provide for your family should the unthinkable happen. “We spend so much time insuring the fruit from the money tree," says Brotman. “But you have to insure the tree itself." Although you shouldn't rely on your company to provide all of your insurance, there are two key plans you should take advantage of.
What It Is Your company may provide term life insurance to temporarily cover your expenses in case you die. Sounds reasonable, right? Sure. But you should still, on your own, buy something called supplemental life insurance (it's usually cheaper to get from a private company). And yes, the word “supplemental" implies just what you think: This plan covers your family after your term insurance expires, setting them up for the long haul.
Who Should Choose It Good news: Term life insurance is often offered by your employer at no cost, so take advantage.
Tip “It may be possible to convert your supplemental coverage to permanent insurance if you have a medical condition that makes you uninsurable to private companies,“ Brotman says.
What It Is You get a portion of your pay (usually about 50 percent) in the event that you're no longer able to work (short- term or long-term) due to pregnancy, illness or a debilitating ailment.
Who Should Choose It You can get a great deal on short-term disability insurance when you buy it through your company. That's why Brotman advises purchasing as much as you can afford from your company (especially if your career is physically demanding or you plan to become pregnant). In many cases, it will cost less than $100 a month and could replace up to two-thirds of your paycheck if you're out of work.
Tip Don't pay for short-term disability with FSA funds or other pretax dollars. That way, your payout will be tax free.
Make even more money with these office perks and tax programs hiding in the fine print of your employee packet.
- Since healthy people are less likely to call in sick, many companies are now reimbursing a percentage (sometimes even half!) of employee gym memberships, yoga classes or even weight loss programs like Weight Watchers.
- While they likely won't pay for the cost of an MBA program, some companies will foot part of the bill when you sign up for continuing education classes, as long they are related to your job.
- If you pay to take some form of public transportation to work (or even pay to park while in the office), ask if your company takes part in a Qualified Transportation Plan (QTP). This plan allows you to take up to $230 pretax dollars a month out of your paycheck to pay for transit costs.
- Planning to have kids but not sure if you can afford a nanny or day- care? There's a pretax program for that too. The Dependant Care Assistance Program will let you allocate up to $5,000 a year for childcare expenses.