Employee Benefits in Your Total Compensation Package: What You Need to Know
Benefits and incentives offered by an employer can have a significant impact on an employee's overall earnings over time. The right benefits can increase an employee's savings, reduce taxes, create security and build wealth. In a sense, benefits act as financial life preservers by helping employees meet life goals and build a defense against money-sucking problems such as increased or unexpected medical bills. A lack of certain key benefits in a job can create a giant gaping hole in an employee's financial plan. Consider the example of John, a typical job candidate in the final stages of the interview process at two different companies.
John was excited to learn that both companies wanted to offer him a position. John had what appeared to him to be a difficult choice ahead of him. Laying aside considerations about the quality of the job experience and his ability to forward his career in the job, he looked at the total compensation package offered by the company. John was a mid-level employee with a wife and two kids.
The first company was willing to exceed his last salary by $5,000, from $50,000 to $55,000. Increasing his overall monthly take-home pay. But this company was a small business that offered minimal health insurance coverage, and no other incentives. The second company was willing to match his current salary where he had a 401K plan and a high-deductible health insurance plan. A simple choice on purely economic grounds, right? The job with the highest salary wins. Wrong! John decided that the offer from company number two would be a better overall increase for his family's financial picture. Why? The answer is benefits.
The right employee benefits can increase an employee's savings, reduce taxes, increase security, and build wealth.
How the benefits stack up against two job offers, hypothetical example only
Company 1 Offer
Company 2 Offer
Annual Pay of $55,000
Annual Pay of $50,000
Pay for Employee's Health Insurance, but not for his family
Employee health insurance plan including family-coverage
$2500 moving allowance
Moving package including shipping employee's car, professional movers
No Retirement Benefits
401K Package includes company match up to 10% of employee salary
No Stock Purchase Options
Participation in stock purchase plan
10 days paid vacation
Employee-sponsored Health Savings Account includes company contributions
3 weeks paid vacation
Which Benefits Are Best?
The answer to this question may depend on personal circumstances, but most people need health insurance, even healthy people in their 20s. Given that the cost of health care is more expensive per procedure for the uninsured than for insured individuals, health insurance is not only a good idea, it is essential. Employers who pay 100% of employee health premiums are highly desirable, as are employees who extend this coverage to an employee's immediate family members.
Health insurance is possibly the costliest and riskiest employee job benefit to do without, since we cannot predict accidents, health conditions, or pregnancies. An employer who can offer great health coverage to its employees and their families could possibly save an individual thousands of dollars over the life of their employment tenure.
Supplemental Health Insurance
Some employers may pay for secondary or supplemental health insurance plans, such as AFLAC, which help an employee meet the cost of health care premiums for hospital bills and high-cost procedures. These plans reduce the overall amount an employee has to pay out of pocket for their health care expenses.
Health Savings Accounts and Flexible Spending Accounts
Health Savings Accountsoffer tax savings for employees on their federal income taxes while helping employees set money aside for present and future health care expenses. Health Savings Accounts are a good supplement to a high-deductible health care plan, which are increasingly common as corporations find ways to reduce the cost of providing health care coverage to large groups of employees. The funds in a health savings account can be invested similarly to retirement funds, and the money in the accounts can be used to pay for many health care expenses such as deductible payments, medicines, and other costs not covered by insurance. Some employers offer a Health Savings Account option in their benefits package and allow employees to withdraw pre-tax contributions from their paychecks which then are added directly to the HSA. Some employers will even match an employee's contributions to an HSA, or deposit a lump sum into the employee's health savings account each year.
Flexible spending accounts may also offer a tax advantage to employees in high-deductible health plans, but unlike their cousin, the health savings account, the flexible spending account is usually offered through the employer, with a pre-determined amount set aside for health costs during a certain calendar year. Any funds withdrawn but not used by a certain date are not reimbursed to the employee, but are considered "use it or lose it." Flexible spending accounts offer a tax advantage to participants, though, so in certain situations, they can be a bonus.
Other Desirable Employee Benefits
"Only two things in life are certain: death and taxes." This quote attributed to Benjamin Franklin is repeated so often that it has become a cliché, but that makes it no less true. Great companies often offer life insurance to their employees at a significant discount to market prices. This can be an attractive benefit for middle-aged and pre-retirement aged employees, though it is nice to have the security of an employer-sponsored life insurance policy at any age. Some employers offer term life insurance policies with the option to upgrade to a higher level of benefit. Usually this benefit is offered at reduced cost to an employee.
Short Term and Long-Term Disability Insurance
Disability insurance is another desirable employee benefit that acts as a buffer against unexpected hard times, workplace accidents, or extended health problems. Short term and long term disability insurance helps an employee to continue to receive a paycheck (though usually at a reduction to the regular salary) during periods in an employee's life when they would otherwise be unable to work. Short-term disability is not meant to be permanent, but is offered to employees who are expected to return back to work at some future date. Long-term disability insurance is offered to employees who lose the ability to perform their job permanently. Regardless, each of these employer benefits help to shore up an employee against catastrophic life events that can wreak havoc on an employee or even bankrupt him or her.
Retirement benefits are another area that can add to an employee's wealth by reducing taxes from an employee's take-home pay. Retirement benefits are usually structured differently depending on the size of the employer and the type of business they are in. Anyone who is employed or who owns their own business can open an Individual Retirement Account. Nevertheless, retirement benefits are highly desirable, and companies that fail to offer this key benefit are probably doomed to lose their best employees, since saving for retirement is a challenge, especially without the help of an employer-based retirement option. Some employer retirement benefits to look for are:
401K Plans or 403b Plans
401K plans are savings and investment accounts that can hold a variety of investments, usually including mutual funds, equity funds (holding stocks in corporations), and bond funds. Other investments are also usually available. 401K plans are usually tax-deferred, and employees are required to begin taking distributions from these accounts after a certain age after retirement, when these funds will be taxed, usually when the employee is making less money and in a smaller tax bracket. The best 401K plans include a company match. A company that matches the amount of money you contribute to a retirement plan is offering you free money to save for retirement. Make sure to save the maximum amount you can if at all possible, because not doing so is like throwing away free money. A company that matches up to 10% of your pretax income at $50,000 is giving you $5,000 in addition to your salary! Some companies will contribute to your 401k even if you don't, but most of them require you to contribute something yourself before they pony up.
403b plans are similar to 401K plans, but they are often offered to government employees, teachers, university employees, and sometimes, to employees of nonprofit organizations.
Stock Options and Stock Purchase Plans
Employers sometimes offer their employees benefits in the form of stock shares. Stocks, also called equities, are shares in the company. Depending on the company, stock awards can be an extremely lucrative financial bonus by allowing employees to tap into the company's financial growth. Stock awards give employees access to stock priced below the price that the stock is trading on the market. Stock options can be especially lucrative during periods of company growth and expansion, when the price of a company's stock is on an upward trend. Two popular stock benefits are stock options and stock purchase plans. Each of these types of benefits have complicated tax implications and an employee considering participating in these plans should consult with their tax advisor to better understand how participation will affect their tax situation.
Stock options and stock purchased through stock purchase plans can sometimes depreciate in value, making this benefit an investment just like any other. Still, if your employer offers this benefit, after you have tapped into all of the free money available through 401k matching, this is an excellent benefit to be offered, and an attractive piece of an employee's total compensation package.
For the vast majority of corporate jobseekers, a pension is a benefit from a quaint, bygone era when employee retention and longevity on the job was seen as the norm. Now it seems that pensions are only offered in a few specialized career fields, unionized jobs, and government positions. However, a pension continues to a highly desirable job benefit for an employee who can reasonably expect to stay at a position until retirement.
Defined Benefit Plans are popular types of pensions. In this type of pension plan, the employer promises to pay an employee a set amount of money based on a set formula, usually based on the number of years the employee worked at the company, the employee's age at retirement, and other factors, such as the employee's pay grade. Nowadays pensions are considered a supplemental retirement benefit and many experts encourage employees to seek out additional ways to supplement their retirement plan beyond a pension.
Quality of Life Benefits
Some employers offer quality of life benefits that help keep their employees healthy, happy, and sane. These benefits offer employees a better quality of life or assistance with common life challenges. These types of benefits underline an employer's stake in investing in its employee workbase. An employer who offers these types of benefits may expect a high degree of commitment and performance from its workforce, but these types of benefits help improve quality of life and are highly desirable.
Some common quality of life benefits include moving allowances and relocation expenses, gym memberships, paid time off, work sharing and flex-time.
Relocation Benefits and Moving Expenses
Anyone who has relocated to start a new job understands the value of a relocation benefit, whether it is a bonus in the form of a lump sum payment, moving assistance through a full-service moving company, or reimbursement for expenses incurred during an employee's move. Relocation benefits can represent thousands of dollars to an employee.
When all things are relatively equal, vacation benefits become another area of the total compensation package to explore. Some companies offer a base amount of vacation time with the opportunity to increase paid time off after a discrete period of time on the job. Some corporate or University jobs also will offer a sabbatical, which is a kind of extended vacation offered to employees who have served after a set number of years of service with the same employer. Sabbaticals are seen at high-stress work environments or companies that are seeking to build employee loyalty and longevity. This type of incentive is hard to quantify in financial terms, but if you have a family or simply desire to keep a better work-life balance, this benefit is highly desirable for as an employee and can be beneficial to employers, too.