When you’re new to the workplace, you might be focusing on the benefits that “sizzle.” You know, the gym membership, commuting reimbursement and, of course, your PTO allocation. But what you really should be concerned about is the “steak.” That is, the benefits that are crucial to your financial picture, both now and in the future.
Here is the scoop on the benefits options that you should care about the most.
Defined Contribution Plans: The 411 on 401(k)s and Roth IRAs
If you are offered a 401(k), don’t even think about passing it up. Here’s why: A traditional 401(k) plan allows an employee to have money taken out of their paycheck on a pretax basis, which reduces the amount of taxes you pay immediately, explained Gary Alton, executive vice president of employer services at The Partners Group in Portland, Oregon.
The money then goes into the 401(k) savings vehicle and grows on a tax-deferred basis. In addition, many companies offer a “match,” which means that your employer will contribute to the account on your behalf up to a certain percentage. While the “match” itself may vary widely, according to the Society for Human Resource Management’s 2018 Employee Benefits report, about three-quarters of companies that offer a 401(k), offer a match. So, even if you are living paycheck-to-paycheck, vow to contribute at least up to the maximum of your employer’s match or you are leaving money on the table.
As with everything, there is a slight downside: When you retire, the money will be taxed when it is distributed, but it is likely to still work out in your favor. “The traditional thought process is that an individual’s tax bracket will be lower in retirement, and as a result, the taxes they pay on the withdrawal from their 401(k) plan will be lower,” Alton said.
Alternatively, your employer may offer a Roth IRA option with the 401(k), which allows an employee to contribute to the account with post-tax dollars out of their paycheck. The downside of this is the opposite – an employee does not get to take advantage of the immediate tax savings, but then at the time of retirement, the distribution out of the 401(k) comes tax-free.
There is never a one-size-fits-all answer to the question of which is better, Alton noted. “As everyone has different needs and goals, it’s hard to say what option is best,” he said, adding that many individuals choose to do both, which gives them more flexibility as they go into retirement. Of course, it’s smart to seek the advice of a licensed professional, and many employers offer some type of financial education to help employees make their decision.
“The key recommendation is for new employees to start saving as much and as soon as possible, which will allow them to take advantage of employer contributions and allow more time for their nest egg to grow,” Alton said.
Life Insurance: A Benefit That’s Easy to Overlook
You typically think of life insurance as something that’s important when you have other people relying on your income, such as a spouse and children. Since many young people don’t have that when they are first starting their careers, they may decide they don’t have a significant need for life insurance, particularly since many companies offer a small employer-paid life insurance policy that provides $10,000 – $50,000 worth of benefits, an ample sum to cover funeral expenses.
However, if your employer offers the option to purchase additional life insurance, Alton suggested considering it for another reason – most of the voluntary options allow an employee to secure additional life coverage without going through any medical underwriting or a health screening.
This “no underwriting” offer is typically a one-time option when you first start, and if you forgo the benefit at that time but choose to buy it after this initial eligibility period, you will likely have to go through an underwriting screen and may not qualify for coverage. “This is an excellent opportunity to secure life insurance if you have health issues,” Alton pointed out.
In addition, most voluntary life insurance for younger employees is extremely affordable. As an example, he recently spoke with an employer who was able to offer $100,000 worth of additional coverage to employees between the ages of 35 and 39 for just $10 a month.
Medical Benefits: What to Consider When Comparing Different Plans
The alphabet soup of medical plans – think PPOs, HSAs and HMOs – can be overwhelming and confusing. Most employers will provide a guide or chart illustrating the key differences between the plans in a side-by-side comparison, but it can still be hard to decipher what exactly the different premiums, deductibles, co-pays and out-of-pocket minimums and maximums mean to you.
That’s why it can be time well spent to sit down with your HR specialist or benefit consultant to discuss your own individual needs, Alton suggested. You’ll want to examine such elements as:
- What do you expect your healthcare needs to be over the next year? (understanding that the unexpected can always happen)
- What providers or specialists do you need to have in-network?
- How much will you pay each month as your premium, and how do the various co-pays and out-of-pocket maximums compare?
“On the surface it can seem simple, but based on your individual circumstances, talking to a professional can really help clarify your decision,” Alton said.
Many newer employees may be relieved to learn that they don’t yet have to make a choice – or incur the costs that typically come with a medical benefits plan. That’s because the Affordable Care Act (ACA) allows parents to keep their young adult children on their plan until they turn 26.
“For some families this can make a lot of sense, but when the coverage under the parent’s plan ends, it’s important for the dependent – the employee losing the coverage – to notify their HR department that this ‘qualifying event’ has occurred,” Alton said. That will allow the employee to join the employer health plan outside of “open enrollment,” the annual time period when employees can add or change their benefits.
The bottom line is that benefits are an important part of your compensation package and understanding them and taking advantage of them can help keep you – and your financial life – healthy.
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