Maximizing Your Employee Benefits (Because You’re Worth It) - Adviser Investments

Maximizing Your Employee Benefits (Because You’re Worth It)

January 28, 2020

Episode Description

Employee benefits are one of the most powerful parts of your overall financial plan, but also one of the most commonly overlooked. Statistics show that effectively managing your benefits can boost them up to 30% of your compensation each year. That’s a fantastic return on the time invested.

In this lively conversation, Senior Financial Planner Andrew Busa and Senior Account Manager Alden Witman go over numerous ways to take full advantage of what’s available to you and your loved ones.

Among the key topics of discussion:

  • Maximizing retirement investing vehicles like 401(k)s
  • What benefits are portable when you switch jobs (and which ones aren’t)
  • How to minimize risk when making benefits decisions
  • Making savvy insurance and health care choices

Employee benefits can maximize your earnings, protect your family and put you on the right track to a comfortable retirement. Don’t leave all that on the table!

Episode Transcript

Andrew Busa:
No matter where you are in your working career, your employee benefits are one of the most important and powerful parts of your financial plan. Listen to this podcast to find out why.

Andrew Busa:
Hello, this is Andrew Busa and I’m a financial planner here at Adviser Investments. We’re here with another The Adviser You Can Talk To Podcast. Today I’m joined by my colleague Alden Whitman. He’s a CERTIFIED FINANCIAL PLANNER™ and a senior account manager here at Adviser Investments. So Alden, talk a little bit more about how you help clients here.

Alden Witman:
Hi Andrew. Thanks for the introduction. Yeah, so my role as a CERTIFIED FINANCIAL PLANNER™ and senior account manager here at Adviser Investments is to work with clients to help them achieve their financial goals. Part of this is aligning them to appropriate investment strategies and the other part of it is financial planning, which includes all aspects of someone’s financial life, including what we are going to talk about here today, which is employee benefits.

Andrew Busa:
Yeah. And we’re excited to do that because employee benefits, it’s really one of the most powerful parts of your financial plan. And I think often one of the more overlooked parts of your financial plan because there are these employee benefits that are always sort of there, they’re off to the side, you might take them for granted, not really know what you have. That’s why we say a lot of times at the beginning or end of the year, it’s a good opportunity to just sit down and review your employee benefits, just to make sure that you’re taking advantage of everything you should be.

Andrew Busa:
You know, I’ve seen some statistics that say that your total employee benefits can add up to be as much as 30% of your total compensation each year. You know, when you think about your 401(k) benefits, your health care benefits, if there are any insurance benefits that are given to you or stock options, these are all things that add up to be very powerful and we’re going to review all of this today to help give you a framework to review your employee benefits package. So, Alden, any thoughts before we dive into the good stuff?

Alden Witman:
Yeah, absolutely. I mean I think there are some key takeaways that we’re going to focus on. You know, many people don’t actually take the time to understand what their benefits are and we want to make sure that you’re taking full advantage of all the benefits that are available to you. Also, we want to make sure that you aren’t exposed to any undue risk in your financial plan.

Andrew Busa:
Right. That’s, that’s a good point because there are some decisions that you might make with your employee benefits that you’ll see have sometimes tax implications. So we’ll, we’ll talk through that. So making sure that you’re, that you’re not exposing yourself to any undue risk there. So starting things off, as you’re assessing your employee benefits package, let’s start with some of the more common benefits that I think most people are familiar with. Talking about 401(k) plans, potentially health savings accounts or HSAs, flex spending accounts (FSAs) these are all investment related options that are available to many employees. In some cases they’re designed to save for your retirement. So let’s start talking about those. Start off with 401(k)s.

Alden Witman:
Yeah, so I think 401(k)s are a great place to start and basically if we’re going to define what a 401(k) plan is, a 401(k) is an investment account used to save for retirement. Contributions are made from your gross salary and are actually excluded from your income so you’re not taxed on what you put into the plan. Once the money is in the account, you get to participate in tax-deferred growth through the plan’s various investment options. When you retire, you are then responsible to pay income taxes on the distributions when you are presumably in a lower tax bracket. The thing I want to point out here is, as soon as you’re eligible to participate in the 401(k) plan, it’s really important to enroll. You know, we talk about tax-deferred growth and over time compounding growth is very powerful and starting as early as possible really is going to make all the difference in the world.

Alden Witman:
Also, you want to make sure to contribute at least what the company matches. You don’t want to give away free money. So I have an example of this using individual that we recently spoke with. Their company offered a 10% match and, again, really all this means is that if this person contributed 10% of their gross income, their company would be required to match 100% of the contributions up to that 10% level. Since this person was only contributing 6%, they were essentially giving up the 4% of additional company money.

Andrew Busa:
So even just taking the time to understand what your match is, is a good place to start to make sure that you’re fully taking advantage of that because as a lot of financial experts like to say that’s free money on the table to take advantage of. But in terms of contributing to your 401(k), how do you talk to clients about balancing those contributions with their other short-term goals, like paying down debt, building up an emergency fund? How do you balance that?

Alden Witman:
Yeah, that’s a great question. I mean I think about the term “pay yourself first,” and basically what that means is contribute to your retirement plan and kind of forget about that money. And then use what’s left over to pay for your living expenses, which I think makes a lot of sense, but I think it’s important to understand that as you talk about retirement, it’s important to save, but don’t lose sight of what your current cash flow needs are. You know, you need to create a budget and understand how much you need to pay your bills and cover your existing expenses before you can start maxing out a 401(k) or any other type of retirement plan.

Andrew Busa:
Yeah, so I think kind of following up on that point there, a lot of it is first understanding what your spending needs are to really make sure that you’re not stretching yourself too thin. If you’re over-contributing to your 401(k), you know, we certainly recommend building up your retirement accounts as much as you can, but not losing sight of the fact that you need to pay your bills at the end of the month.

Alden Witman:
Exactly.

Andrew Busa:
And this is also one of these benefits, a 401(k) that is portable, so it travels with you from company to company. We’ll see as we go through this podcast that not all employee benefits are, they don’t all travel with you, but talk about the portability options that come along with a 401(k).

Alden Witman:
Yeah, absolutely. I mean, there’s a lot of different things that that folks can do after they leave a company. The first thing, and this is probably one that we would not recommend, is to just take a lump sum distribution. If you do that, the entire value of the account then becomes taxable. And if you’re under 59½, you’re going to end up paying a 10% early-withdrawal penalty. So that certainly is not something we would recommend doing unless you absolutely had to. The other thing that you can do is do a rollover and you can move money into another 401(k) plan if you’re enrolled in the 401(k) plan of another company, or you can move the balance over into an individual retirement account or an IRA.

Andrew Busa:
Okay. So, a follow-up there, do you recommend one over the other, either rolling over to your next 401(k) or rolling over to an IRA?

Alden Witman:
Yeah, I mean I think there’s no right answer or wrong answer to that question. Both are non-taxable events, but there can be reasons to choose one over the other. One thing that comes to mind in 401(k) plans is that you have limited investment options. So if you’re looking for more investment flexibility then the IRA might be the right choice for you. Also, to compare the fees is another big thing. So 401(k) you know you have management fees and with the IRA you want to take into consideration any management fees associated with that account or the internal expense expenses inside the funds themselves.

Andrew Busa:
Yeah, that’s, that’s good to know. So definitely be aware of those fees and talk to your adviser about this one right? We can help you think through this decision if you’re leaving a job, kind of what to do with your 401(k). So moving aside from 401(k), as we mentioned, health savings accounts and flex spending accounts and we actually did a previous podcast on HSAs so be sure to check that out. But just giving a brief overview to the listeners here. Talk a little bit about these employee benefits.

Alden Witman:
The health savings accounts and flexible spending accounts are really great ways to save for health care costs. A health savings account is an account provided in conjunction with a high deductible health plan. Basically the money that you contribute is tax-deductible and you actually get tax-free growth as long as the funds are used for qualified medical expenses. Oftentimes, employers make contributions as well. So you definitely want to make sure you take advantage of that if it’s available.

Andrew Busa:
Right. So this is one of the best tax deals around really, HSA is, right?

Alden Witman:
Absolutely. Another good thing about these accounts is that they’re actually portable. So if you decide to leave the company, you can enroll into a new HSA account.

Andrew Busa:
Right, and we’ve had clients ask, “Is the HSA plan right for me?” So you need to enroll a lot of times in a particular health plan that your company offers in order to be eligible for that HSA. And a lot of times the answer comes down to what kind of health care user you are. You know, if you’re not a frequent health care user, you don’t think you’re going to hit that high deductible every year, a lot of times it can make sense to go ahead and opt for the HSA to get that extra retirement savings in there because this is one of those accounts where it’s a triple tax-free, right? It’s tax-deductible on the way in, the funds are invested inside of the HSA and it grows tax-free, and then when you take the money out for health care expenses, there are no taxes on that as well. So these are powerful accounts. Often comes down to, again, the type of health care user you are, right?

Alden Witman:
Yeah, exactly. And another point I want to make about health savings accounts, and this is a strategy that some folks have been using more recently, is that inside the HSA you’re able to actually defer and save above and beyond the IRA and 401(k) limits.

Andrew Busa:
That’s a good point.

Alden Witman:
So if used for nonmedical expenses prior to age 65, there is that 20% penalty. But once you attain age 65 you’re just paying taxes and there’s no penalty. So it’s just, it’s very similar to investing in an IRA. And so for folks who want to sort of defer taxes and get a little bit money, a little bit more into tax-deferred accounts, if they contribute to the HSA with no intent of using those funds until retirement or after they turn 65.

Andrew Busa:
That’s great. So you know, we’ve talked through your 401(k), HSA, potentially FSA. These are again investment or retirement related benefits. So this is just one part of your employee benefits package. It’s quite frequently one of the more commonly understood. Let’s move ahead to look at more insurance-related benefits that come along with employee benefits packages. The first one that we want to touch on is group life insurance. What do we need to know here?

Alden Witman:
Yeah, so life insurance in general can be really important. I mean, it’s important to work with your adviser to determine how much life insurance you might actually need. The most obvious reasons are income replacement or maybe even covering outstanding debts or future financial goals. And sometimes folks without those needs still need coverage to pay for estate taxes.

Andrew Busa:
And group life insurance versus individual or private coverage. What differences are there to be aware of?

Alden Witman:
Yeah, that’s a great point. The big thing I think about here is that sometimes people are uninsurable due to medical conditions or health issues and the beauty of the group policy is that you don’t have to go through all the medical underwriting to qualify. You’re basically being evaluated based on the risk of the entire group, not yourself, and you might not otherwise be eligible for coverage.

Andrew Busa:
Right. So group life insurance going to be less strict from an underwriter perspective, individual, you’re going to have to hit some hurdles to be able to qualify for that.

Alden Witman:
Exactly and add to that, that if you were actually were to leave your company, you do have the option to convert to an individual life insurance policy within 31 days.

Andrew Busa:
That’s a good point. I think that gets lost a lot actually, is that you do have that option.

Alden Witman:
It does. I mean the premiums may increase, but at least you’re guaranteed coverage continuation where you might not be insurable if you try to get an individual policy on your own.

Andrew Busa:
Right with all these options, there’s always taxes to take into consideration. Any tax implications here to be aware of?

Alden Witman:
Yeah. There’s an interesting caveat with group life insurance: Up to the first $50,000 in coverage is not taxable to the employee, so if you decide to increase your coverage, keep in mind that you might be increasing your future tax liability as well.

Andrew Busa:
Definitely a good thing to be aware of. So shifting gears, staying within the insurance realm, but moving to health insurance, this is a huge benefit. Again, most people take advantage of this at the company that they’re working at, but not always, but when you’re evaluating your health insurance options, let’s give you some points to be aware of as you’re looking at this. We’re talking about things like HMOs or health maintenance organizations, or PPOs, preferred provider organization, help us out to understand this maze.

Alden Witman:
Yeah. Typically, what we see in terms of group health insurance options are, like you just said, the preferred provider organizations and the health maintenance organizations and the differences are pretty straightforward. PPOs you can go out and network and you don’t necessarily need referrals, so there’s a bit more flexibility there. With the HMO, typically they’re less expensive but you have to stay in a network and if you see a lot of doctors, you know you’re going to need referrals to go see those doctors and those specialists. So I would say it’s important when making that decision to understand and really know what your health care needs are. If you see a lot of specialists and you have more specific health care needs, maybe it makes sense to pay a little bit more and go with the PPO.

Andrew Busa:
That’s a good point. This is again one of those decisions that is very individual based so it will depend on the kind of health care user you are. So definitely think through the implications of that decision before you opt into the health options that are available to you. We talk about also COBRA being available when you’re leaving a job or transitioning from one job to another. What is there to know about here?

Alden Witman:
Yeah, so if you’re leaving a company, you’re protected through HIPAA, which stands for Health Insurance Portability and Accountability Act. And basically what this is saying is that a new employer plan can’t exclude coverage based on preexisting conditions. Andrew, you just touched on COBRA. You know if you are leaving your company and you’re not covered by another employer plan, you kind of really have two offerings. COBRA is one and then the health care exchange is the other.

Alden Witman:
COBRA allows individuals, spouses, independents, to continue coverage through their previous employer’s plan. Important to note here is that COBRA is available in companies with 20 or more employees. So if you work for a small business, it may not be available for you. It’s usually seen as somewhat of a last resort also because it really can tend to be pretty expensive. Costs can be up to 102% of the premium you paid at your former employer’s plan. So keep in mind it’s only available also up to 18 to 36 months, depending of your specific situation. So really it’s meant to be more of a…

Andrew Busa:
It’s a stop gap, right?

Alden Witman:
Yeah, it’s meant to bridge the gap between coverage. And again, I think it’s important to balance this option with what you can purchase on the health insurance exchange based on your specific plan. Yeah, COBRA might be better, but oftentimes the exchange will allow you the flexibility to find a plan tailored to your specific needs at a more reasonable cost.

Andrew Busa:
Right, I mean, this is really powerful stuff, right? Because when we think about how expensive health care is, if you have the opportunity to contribute to one of these health savings accounts to really take advantage of the tax-free growth and tax-free withdrawals, like you said, if they’re used for qualified medical expenses, that’s powerful stuff right there to take advantage of.

Alden Witman:
Yeah. It’s really powerful stuff. And another point I want to make is that HSAs also offer the ability to defer and save above and beyond IRA and 401(k) limits.

Andrew Busa:
That’s a great point.

Alden Witman:
Yeah. So if used for nonmedical expenses prior to age 65, there’s actually a 20% penalty associated here. But after age 65 you just pay taxes and there’s no penalty. So it’s really similar and just like investing in an IRA. Some people use this strategy and don’t ever tap into the account until after retirement.

Andrew Busa:
And then another employee benefit that we are seeing sometimes, it’s not all too frequent, but this is long-term care insurance that’s available for folks. And, and again, long-term care, this involves a variety of services, right? It’s designed to meet personal health or personal care needs for short or most of the time, long periods of time. It ends up being very costly. You know, insurance can be useful here. You know, let’s talk about this one a little bit more.

Alden Witman:
Yeah, absolutely. I mean this helps cover the cost of care if you need to go into a nursing home or if you need home care. It’s pretty basic. You know, typically what we see is that folks start looking at long-term care policies or coverage in their 50s maybe even early 60s, but the bottom line here is that you never know when you might need care. Health concerns can come out of nowhere and we’ve seen some really tough situations with clients. You know, if it happens, if you do need to go into a nursing home or if you do need home care, it can really, really quickly deplete your assets. I saw a statistic somewhere that the average cost of a private room in a nursing home can be upwards of $7,000 to $8,000 per month.

Andrew Busa:
Staggering.

Alden Witman:
Yeah, I mean, you do the math, right? It can really, really drain someone’s portfolio. So why not consider getting coverage through your company if they offer it and maybe even help pay for it?

Andrew Busa:
Sure. And it’s the same thinking that we talked about with disability and life insurance. If it’s offered through a group, there’s going to be less strict underwriting requirements. So that’s definitely one to explore. And we are doing another podcast about long-term care specifically, so definitely be on the lookout for that. We’ll dive a little bit more deeply into that topic.

Andrew Busa:
So we’ve talked through again 401(k)s, insurance, let’s briefly hit on another employee benefit that is becoming a lot more common. We’re seeing it frequently and that’s stock options. You know, I think this is when you talk about your employee benefits being a large part of your total compensation, stock options is a major one that we’re seeing more and more of. So this can be complicated. So how do we understand what to look for, sometimes what decisions not to make when it comes to these? Talk to us about this a little bit.

Alden Witman:
Yeah, I mean equity compensation can be really complicated. There are various types of plans and if you know the wrong decisions are made, there can be some serious tax consequences. So I thought we’d just discuss a few of the more common types of plans that we’re seeing with clients now and then sort of what some things are to think about there. The first one that kind of jumps out at me is employee stock purchase plans; these are pretty simple, these types of plans. Basically where the company offers you the option to buy stock at a discount. It’s good for people who really believe in their company and believe that the stock price is going to go up. There’s really not too much complexity there.

Andrew Busa:
This one. Yeah. It’s kind of easy to understand, right? All you’re getting is just the opportunity to buy your company’s stock at a discount. Good deal if you’re able to do it right?

Alden Witman:
Exactly, exactly.

Andrew Busa:
But then restricted stock options, RSUs, a little bit more complicated, but not too complex yet right?

Alden Witman:
Yeah. Not too complex and I actually think that restricted stock units are, is probably the most powerful type of equity compensation that you can get from a company. Here the company essentially just pays you in shares of stock that vest over time. The way it works is as they vest they’re considered taxable income to you. A cost basis is then established at vesting. So if you sell right after the vesting, there can be really minimal additional capital gains.

Andrew Busa:
Right. And that can also be a good way to avoid picking up these large concentrated positions over the course of your working career if you are able to sell those RSUs when they vest. You know, it doesn’t always make sense to do that, but it is something to keep in mind where if you’re having this one company stock take up a large part of your portfolio, it’s just something to be aware of right?

Alden Witman:
Yeah, absolutely. Absolutely. And I think part of the power in these plans here comes to the fact that if the stock price actually goes down, you’re still receiving that stock, right? Then the shares don’t expire worthless. Where, we’ll talk about non-qualified stock options, it’s a little bit different with non-qualified stock options, you’re granted shares with the option of purchasing the stock at a specific price in the future. Incentive options actually work very similar, but there’s some different tax ramifications there. But the downside here and unlike restricted stock units is that if the stock value drops below the strike price, the options can actually expire worthless you know, it really does you no good.

Andrew Busa:
Okay. So there’s a little bit more risk with incentive stock options. Is that safe to say?

Alden Witman:
Yep, absolutely. Absolutely.

Andrew Busa:
So big takeaway here, we’ve talked through employee stock purchase plans, restricted stock units, non-qualified and incentive stock options. You know, I think just be aware of your vesting schedule, right? Making sure that you’re not leaving money on the table. I think you’ve seen that before.

Alden Witman:
Yeah, I mean let’s again go back to the restricted stock as an example. You know, if the restricted stock isn’t vested, you usually lose it if you decide to leave the company. If you have grants for non-qualified plans, you know, different plans have different plan rules, but typically you only have three months to exercise those shares after termination or else you’ll lose those as well. So it’s important to kind of understand vesting and understand where you stand with all of these plans. You don’t want to make the wrong decision and you know, leave your company and leave a lot of money on the table.

Andrew Busa:
Right. We talked a little bit about through this episode, what benefits are portable, what do you need to replace? These are benefits that they are portable, you know, potentially, but you need to understand all of the implications before you decide to leave your company or also if you decide to sell one of these stock options that can have some serious tax implications that you don’t even realize are going on.

Alden Witman:
Yeah and you made a good point earlier in the conversation about highly concentrated stock positions. You know, sometimes we see older folks at retirement with highly concentrated stock positions from these types of stock option plans. And this creates a really great opportunity to work with your adviser and or accountant to come up with a strategy to diversify away from some of that single company risk in a tax efficient manner.

Andrew Busa:
Great point. So we’ve talked through a lot of common employee benefits that we see for clients. Hopefully this has been helpful. I think a key takeaway for me here is that no matter where you are in your working career, whether you’re at the beginning and you’re assessing the different jobs that are available to you or if you’re in the middle of your career, you’re considering transitioning from one job to the other, or if you’re retiring, no matter where you are, all of this material is relevant to you in one way or the other. Whether you have to think about benefits being portable, whether you need to replace them with stock options if you’re considering selling positions, that’s a takeaway for me. How about you?

Alden Witman:
Yeah, for me, I mean I think it kind of comes back to revisiting your financial plan. You know, if you’re moving from one company to another and your benefits are changing, it has real life implications to your financial plan. So let’s go back to the drawing board, let’s update the financial plan and just kind of see where your risks are and, and you know how you might want to move forward.

Andrew Busa:
And when we create financial plans for clients, we make a point of understanding what employee benefits they have, because like we said at the beginning, this can be overlooked, but it’s a really powerful portion of your financial plan that we want to make sure that you’re taking full advantage of.

Alden Witman:
Yeah, maybe your company doesn’t offer certain benefits and that places some risk into your financial plan that we need to look to supplement from a private policy or something like that. So it just opens a lot of doors and it lets us, you know, lets us evaluate where you are.

Andrew Busa:
Well, great stuff. This has been Andrew Busa and Alden Whitman from Adviser Investments thanking you for listening to The Adviser You Can Talk To Podcast. If you enjoyed this conversation, please subscribe and review our show. You can also check us out at www.adviserinvestments.com/podcasts. Your feedback is always welcome and if you have any questions or topics that you’d like us to explore, please email us at info@adviserinvestments.com.

Andrew Busa:
Thanks again.

Podcast released on January 28, 2020. This podcast is for informational purposes only. It is not intended as financial, legal, tax or insurance advice even though these topics may be discussed. Information and events addressed in this podcast, as well as the job titles, job functions and employment of the podcast’s participants with respect to Adviser Investments, LLC may have changed since this podcast was released. For more information on each individual featured in this podcast, see the Our People section of our website.

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Your total employee benefits can add up to 30% of your compensation [each year].


Andrew Busa, CFP®

Senior Financial Planner

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