How to Maximize Your Employer Benefits
Any young professional that has started a new job knows how unexciting it can be to wade through pages and pages of information surrounding the endless benefits their new employer offers. The list can include retirement plan benefits, insurance coverages and other perks and is almost certain to be exhaustive and overwhelming.
So where does a young professional start? Which benefits are truly a benefit and how do you go about maximizing each one? Below is a breakdown of three of the most common employer benefits and how to take advantage of them, as well as a few common bells and whistles to pay close attention to.
Save for Your Future – The Retirement Plan
One of the most common employer benefits is the employer sponsored retirement plan. These oftentimes come in the form of a 401(k), but can vary widely from Employer Stock Purchase Plans (ESPPs) to the increasingly less common defined benefit plans, often referred to as a pension. Each type of retirement plan comes with different contribution limits, different tax consequences, investment options, and benefit options so be sure to fully understand each of the various options.
Assuming your retirement plan is a 401(k) plan, it should be looked at as a great vehicle to begin—or continue—saving for retirement in an easy and efficient manner. The best thing about 401(k) plans is that contributions can be automated through a payroll deduction, which is ultimately the key to consistent, long-term savings.
In addition, be sure to inquire about a company match, which is fairly common benefit in which an employer will provide added incentive for employees to participate by offering to “match” contributions up to a certain percentage. For example, an employer might match 50% of every dollar up to 6% of your pay. If you have this option you should contribute up to the match no matter what your financial situation looks like. Find a way to contribute up to the full match—it is literally free money!
The best thing about a 401(k) plans is that contributions can be automated.
If you don’t know how to invest your money once it is in the 401(k) plan there a number of options for you. The simplest is to look for Target Date Funds (TDFs) in your plan that invest your money across a variety of different asset classes such as bonds, domestic stocks, and international stocks based on your age and adjust that allocation to become more conservative as you near retirement—be sure to pay attention to costs when it comes to TDFs as one of their drawbacks is they are oftentimes expensive.
Check out the Young Professionals Guide to Investing to learn more on how to get started investing.
If you want more customization or your plan doesn’t offer TDFs, but you’d still like to breakdown your assets in an appropriate manner, check out Blooom, an awesome new company looking to simplify the process of investing in your 401(k) (disclosure: we are not affiliated with Blooom in any way, other than being big fans)!
Protect Your Life – Group Life Insurance
According to a 2013 study by the Bureau of Labor Statistics, nearly 60% of companies offer some form of life insurance to employees as a company benefit. Having life insurance offered through your company can be a great perk for two primary reasons.
First, for those with pre-existing health conditions, group life insurance does not require proof of insurability, which means regardless of any existing conditions you can qualify to receive life insurance. On the contrary, this is not the case if you try purchasing individual life insurance, where a pre-existing condition will likely disqualify you from receiving coverage.
The second perk when it comes to group life is that it can oftentimes be less expensive than purchasing policies individually because the group is buying in bulk from the insurance company which helps to drive the cost down. Think of it as buying life insurance at Costco or Sam’s Club.
Group life can be a great perk, however, it is important to keep in mind the two potential downsides. First, group life coverage is typically limited to some multiple of your salary (i.e. 2-4) meaning you likely will not be able to fully insure your life with employer-sponsored coverage.
Second, the coverage is contingent upon your employment at the company and the company’s continued willingness to offer the group benefit. If either of those change you may stand to lose coverage or the very least be forced to pay for the coverage entirely on your own.
Note: The IRS provides an exclusion for the first $50,000 in group life insurance coverage. This means individuals do not need to pay taxes on the company paid premiums for this type of policy, however, any premiums paid by an employer for coverage above $50,000 must be included in income and taxed.
Protect Your Income – Group Disability Insurance
It’s estimated that nearly 1 in 4 young professionals will become disabled in some capacity prior to retirement, making it absolutely critical that young professionals insure their most valuable asset: their future earning capacity. Thankfully nearly 30-40% of employers offer some form of group disability insurance.
When it comes to group disability it’s important to understand exactly what you’re getting. Unlike group life which is fairly straightforward in that policies are essentially a basic term life insurance policy, group disability can vary widely on the benefit amounts, eligibility, taxation, etc.
Check out the Young Professionals Guide to Disability Insurance to learn more.
Similar to group life insurance, one of the biggest advantages of group disability is that no proof of eligibility is required. A.k.a. you don’t need to pass a medical exam, which can be a major perk if an individual has a pre-existing medical condition. Oftentimes individual policies will be far too expensive or unavailable all together if an individual has a pre-existing condition.
Other advantages of group disability policies include the cost savings that come with buying in a bulk, as well as the convenience of being able to get coverage with no medical examination and the ability to pay for it by simply having the cost deducted out of your paycheck.
A couple important things to keep in mind when it comes to group disability. First, have a good understanding of whether or not you or your employer will be paying the premiums, as this directly impacts the ultimate taxation of your benefits. If an employer pays the premiums for your policy or if you do with pre-tax dollars, then when benefits are paid out they will be taxable. The taxation of benefits can quickly erode the purchasing power of those dollars. If, however, you pay the premiums on the policy, but with after-tax dollars, then any benefits you receive will be tax-free.
Lastly, be sure to have a clear understanding of how the group disability policy defines being disabled. There are two primary definitions of disability: any and own. “Any” simply means you are disabled only if you cannot perform any other form of employment, while “own” means you are considered disabled—and ultimately eligible to receive a disability benefit—if you cannot perform your own job occupation. This is an important distinction, especially for those with a very specific set of skills that afford them a high salary.
Note: Be sure to pay close attention to exclusions, which are simply certain disabilities that a policy will not cover; also be sure to pay close attention to details on the elimination period (i.e. how long you’ll have to be disabled before receiving a benefit).
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