Clients Ask These 3 Benefit Questions

Employer benefits are a key part of our financial planning process when we meet with new clients and at least annually with our existing clients. That’s why it’s important for you to locate the materials your HR department puts together and send them our way. We dive into the documents and read about the various options and associated costs, so we are ready to answer your burning questions during new job onboarding or open enrollment. After all, the benefits your employer offers are a meaningful component of your overall compensation and add up to potentially thousands of dollars a year. We’ve noticed several questions clients tend to ask, so I’m going to discuss the top three. Stay tuned to the end of the article for the one question you should be asking but aren’t.

There are so many choices. What should I select?

Understanding the available options and pricing can be overwhelming. Benefits come in two general flavors: those deducted from your paycheck before you pay taxes and others after taxes have been deducted. You’ll hear the term Cafeteria Plan, which is the formal name given to the array of options offered by your employer that are deducted from your pay pre-tax. Like a cafeteria, you choose from among the many options that fit your plate by taking what you want and leaving the rest behind. The options include group term life insurance, disability, medical and dental coverage, flexible spending accounts, health savings accounts, and adoption assistance. That’s not all, though. Your company could provide additional benefits, such as commuter benefits, gym memberships, tuition assistance, and ID theft protection.

A simple question to ask is, “Do I need it, and is it worth the cost?” For example, your company might offer life insurance at group rates. You’ll want to check comparable coverage offered through an independent insurance agent to make sure you’re getting the best deal for your age and coverage level. Plus, if you buy life insurance outside of work, it’s totally portable from job to job. Another factor to consider is the benefits available to your family through your spouse’s job. Maybe your spouse has better options at a lower cost.

Some benefits should be avoided altogether. For example, insurance for accidental death and dismemberment (AD&D), special cases like cancer, and life insurance for your children are almost always unnecessary add-ons. The health insurance coverage you receive through work already covers cancer, and you don’t need life insurance for your children because they don’t have income to replace.

Most employers only let you make changes to your benefit selections once a year, typically in November or December. The great thing about starting a new job is that you have the full array of employer benefits to choose from, and usually, you have 30 days or so to make any changes before it’s locked in until the next open enrollment period. Special life events such as marriage, your spouse losing their job, retirement, and the birth of a child qualify you to make mid-year plan changes.

What health plan should I choose?

Health care, and medical insurance specifically, is the #1 benefit clients want to talk about. Start by grabbing the summary of medical plan options from HR. They will usually have a packet of materials that gives a side-by-side comparison of the available choices, including the deductibles, co-pays, co-insurance, and out-of-pocket maximums. Every plan covers routine annual preventative check-ups because of the Affordable Care Act. The moment you have something other than that is when the deductibles, co-pays, and co-insurance kick in. A co-pay is the amount you pay for each covered visit. Your deductible is the amount you have to pay before the insurance company shares any cost. Once you’ve paid your deductible for the year, co-insurance kicks in. This is where you and the insurance company share the costs (Commonly, they pay 80%, and you pay 20%). Once you’ve reached your out-of-pocket maximum for the year, the insurance company pays all additional costs. It’s an art to be able to weigh each of these factors in selecting the best plan.

You’ll see two high-level flavors of plans: HMOs and PPOs. HMO stands for Health Maintenance Organization, which is characterized by a limited network of providers and requires referrals and approvals from a primary care provider. However, these plans cost less than PPOs or Preferred Provider Networks. PPOs tend to have more doctors to choose from and fewer hoops to jump through to visit specialists, but that comes with increased costs.

Star of the Show

In my estimation, the star of the options list, especially for the young or healthy, is any high-deductible health plan (HDHP) with a Health Savings Account (HSA). These plans come in both HMO and PPO flavors. While they have higher deductibles and out-of-pocket maximums, they allow employees to contribute enough money each year to cover those higher levels of responsibility AND receive a big tax benefit because the contribution is deducted when calculating federal, state, and Social Security/Medicare taxes! The HSA belongs to you, and the money can be stashed until you need it for medical expenses. Once you have over a minimum amount in cash, you can invest the rest. Any time you pay for qualified medical expenses, you pay NO TAX! A triple tax advantage. They are convenient, too, because most HSA accounts come with a debit card. And if that weren’t enough, many employers contribute to your HSA. Do you know why? These plans cost significantly less for your employer and for you. If you pick an HDHP, though, it’s imperative that you contribute enough to cover at least one year of your out-of-pocket max.

If you decide against an HDHP and opt for a plan that has lower deductible and out-of-pocket responsibility, check whether or not your employer offers a Flexible Spending Arrangement (FSA). An FSA doesn’t require an HDHP and still has the same tax advantages as an HSA. The downside is you can’t contribute as much, and if you don’t use all the funds, you could lose them after the plan year ends. The FSA just isn’t as flexible (How Ironic).

What happens to my health insurance if I leave?

An ancillary concern is about what to do if you’re wrestling with a job change. This is a big deal for folks. Health insurance frequently has clients’ attention when they are contemplating a career change, a spouse leaving the workforce, a reduction to part-time work, retirement, a job that doesn’t offer health insurance, or the desire to launch their own business. It can be a real roadblock to pulling the trigger.

The good news is that you have time to figure out a replacement plan. That’s because employers with 20 or more employees have to offer COBRA coverage, which allows continuing coverage for 18 months. You keep the exact same plan. The big drawback is the increased cost. Usually, employers pick up a portion of your premium, and you pick up the remainder. But with CORBA, you bear the full cost. However, if you’ve done your work to position yourself for financial success (eliminating debt, having emergency savings, investing), you can weather the increased cost for a time of transition.

With time in your pocket, you can explore available options. Are you getting close to Medicare eligibility? We’ll teach you how Medicare works and connect you with professionals in our network we trust who can find a plan that fits. You, of course, have the healthcare.gov marketplace as well, which gives you access to a variety of plans and coverages with the possibility of subsidies depending on your income. A final option is a health care sharing group. My wife and I have been a part of one since 2007 and have found it fits our values and is cost-efficient. The point of saying this is that I don’t want you to get locked into work that drains your life simply to keep your health insurance. You have options!

Should I invest in my company’s retirement plan?

The last weighty question we encounter is whether or not to invest in your company’s 401k plan. Here are some questions to answer to help get you thinking about the important factors.

• When can I start investing? Many employers have a waiting period for enrollment. Get the details from HR to understand the timing.

• What are the investment options? Regulations require plans to have enough options so you can diversify, but some plans have mediocre or appalling options that underperform their peers or have higher-than-average fees. Other plans have stellar choices.

• How Much Should I Contribute? The maximum amount of salary you can defer into your company’s plan in 2024 is $23,000, with an additional $7,500 allowed if you are 50 and older, which will allow you to make up for slim contributions in your earlier years.

• Does my employer offer a match? Many employers offer a Safe Harbor provision, which means they match 100% of your first 3% of contributions and 50% of the next 2%. More simply, if you put in 5%, you get a 4% match. This provision exists to simplify your employer’s retirement plan compliance rules that even the playing field between low and high-salary employees. Not all employers match, though.

• Does it all belong to me? Your salary deferrals are always 100% yours. With Safe Harbor matching, the employer contributions belong to you immediately, too. Other employer contributions may have a vesting schedule, which means their contributions will become yours over time. This varies depending on plan rules, anywhere from 2 to 6 years. They do this to encourage employee loyalty.

• Is there a Roth option? How do I pick Roth or pre-tax? The nerdy answer depends on your current vs. future tax bracket, which we consider, among other factors such as estate planning, in detail when you’re our client. Roth contributions mean you pay tax on the money you are contributing now, so you have tax-free withdrawals on the entire account later, including growth, and no required distributions. If you choose pre-tax contributions, you get to deduct that from your income in the year it was earned and defer paying taxes on the money, including growth, until you use it later.

What’s the best choice for me?

A decision ultimately rests on your current financial and personal picture as well as your goals, so it’s challenging to give blanket direction without spending time going through the financial planning process with you. Having said that, here are some general paths I tend to favor.

• Contribute up to the match, especially if you are out of debt. You can think of your employer’s contribution as an immediate return on your investment.

• Save 15% of your household income into tax-advantaged retirement accounts (if you are debt-free). That will set you up for a strong income stream when you take the foot off your income-earning gas pedal.

• If the investment options are good, you can do all of your investing in your 401k plan. This keeps the mechanics of investing and building wealth simple. If the options aren’t good, contribute up to the match and use a Roth or traditional IRA instead.

• If you’re a long way off from needing the funds, be in the market. You don’t need any cash, bonds, or Target Date funds if you have many years before you need the money. Being in the stock market has historically beaten the pants off those other investments.

• Skew towards Roth contributions if you’re in any but the highest couple of tax brackets. Your employer contributions are tax-deferred always, so having Roth and pre-tax contributions gives you a diversity of income and tax planning options.

One bonus question you NEED to be asking

Twenty-five percent of today’s 20-year-olds can expect a disability before they retire. That’s double the chance that a 20-year-old will use life insurance. What would happen if you couldn’t work for several months or even years? How would you replace that income? This is why understanding your employer’s disability insurance benefits is critical. What, if any, options do they provide for employees?

Disability benefits come in two varieties - short-term and long-term. Short-term covers you up to a certain number of weeks with a weekly benefit to keep you floating until long-term disability kicks in around 90 days after the event that caused the disability. Coverage for both types replaces 50-60% of your income. The benefit covers less than your full salary because disability benefits are typically tax-free because premiums get paid with money that has already been taxed.

Many employers offer group disability policies, which tend to be less expensive than a policy you can get on your own. However, if your employer doesn’t offer disability coverage or you can get a better plan elsewhere, you want to ensure you are covered.

Benefit From Our Expertise

We have read through countless employer benefit document packages, so our advisors are well-versed in the lingo and can explain the options to clients if they’re having trouble understanding them. We give you the information you need to choose what’s best for you and your family from the array of options. It’s one of the core services we offer as part of our comprehensive financial planning and wealth management service. And it’s getting close to open enrollment season, which is a perfect time to connect with us for a conversation about your benefits.