Great employee benefit packages can entice employees to remain at their employers or encourage new hires to come aboard. The problem is, these benefits are oftentimes overlooked during the enrollment period every year. Large benefits such as ESPP (employee stock purchase plans), life and disability insurance or access to an HSA (health savings account) may be available, yet their complexity makes it hard for the average employee with little financial planning experience to maximize their potential. “Smaller” benefits such as pre-tax commuter funds, employee discounts, wellness benefits, or even tuition assistance for furthering education related to your field of work can also make a major difference when it comes to managing your finances. This article will explore money moves to make during employee benefits enrollment to ensure you maximize your decisions!
Equity Compensation Benefits
In the tech industry, it’s common to receive additional compensation outside your baseline salary. This can be done in a variety of forms. In most cases, it’s important to ensure you’re taking full advantage of this additional compensation or benefit.
Restricted Stock Units (RSU’s)
RSU’s are an increasingly popular way companies compensate their employees. Employees receive X amount of shares in the company over a particular vesting schedule. Over time, as these shares vest, the employee can determine whether to hold onto or sell the company shares. What’s important to understand with RSU’s, is that once the shares vest, they’re counted as ordinary income for tax purposes.
For example, if you receive 100 shares of XYZ stock at $2,000 a share, the current market value on the date of vesting counts as your “compensation” and ordinary income. Meaning for tax purposes your income has increased by $200,000 this year.
RSU’s are typically determined during the hiring period, however, if you’re up for a promotion, or negotiating your compensation, benefits enrollment can be a great time to review your current RSU schedule and potentially vie for more.
Similar to RSU’s, stock options are an additional form of compensation above and beyond what you might earn on a salary basis. They typically have a vesting schedule associated with them as well. Once vested, employees have the option to “exercise” the right to buy the underlying stock at a predetermined price. Because stock options allow the employee to purchase the stock at the pre-determined price, they can be extremely lucrative for employees working at quickly growing companies.
Again, the caveat with planning around stock options is the tax consequence upon exercising. There are two types of stock options, incentive stock options (ISO’s) and non-qualified stock options (NSO’s). Each is treated differently when it comes to taxes. The bottom line with stock options is to review your current and future vested options and determine whether you can make a case for vying for more during your benefits enrollment period.
Employee Stock Purchase Plan (ESPP)
The ESPP is considered a traditional benefit on top of compensation, compared to RSU’s or stock options, which technically are added compensation, not an added “benefit”.
The ESPP allows employees to set aside cash each paycheck to purchase company stock at the end of the predetermined period. At the purchase date, the company stock is bought at either a 15% discount from the current market price OR the market price at the beginning of the purchase period (when you started setting aside cash), whichever is lesser. Because the employee is able to purchase the stock at the lower price, they’re immediately able to recognize a gain of a minimum of 15%. A 15% gain over the course of 6 months (a common time period for ESPP’s) isn’t too shabby!
If your company offers an ESPP and you have extra cash flow you’re looking to put to work, ensure you take advantage.
Health Care Plans
When it comes to choosing the best health care plan, there are a variety of things to consider. However, if you’re in a stable financial situation, and looking to make smart money moves to reduce taxes and set aside additional retirement funds, keep an eye out for the ability to contribute to a health savings account (HSA) through your employer’s high deductible health insurance plan.
The HSA is the premier investment vehicle available today. It’s the only “triple” tax-advantaged account available. When you contribute to an HSA, you’re making pre-tax contributions, thereby reducing your taxable income. The contributions can be invested in the HSA, and grow-tax free. When you need to pay for medical expenses, the funds can be withdrawn tax-free. Not to mention, the HSA essentially morphs into an IRA when you turn 65 and can be used for ANY withdrawal, not just medical expenses, without incurring a penalty.
The less flexible cousin of the HSA is the “flexible savings account” or FSA (ironically, it’s relatively not flexible). The FSA allows employees to contribute pre-tax dollars and use them tax-free for medical expenses, similar to an HSA. However, the key difference is if you don’t use all the funds in the FSA within the year, they’re lost. The use-it-or-lose-it designation of FSA’s make them less attractive than an HSA, however, they are typically associated with the lower deductible plans. If you do choose a lower deductible plan and have access to an FSA, ensure you’re only contributing up to what you expect to spend on medical expenses, so you’re not leaving cash behind at the end of the year.
I encourage anyone who might have access to an HSA or FSA to explore during their employee benefits enrollment period whether it fits into their current financial situation.
Life and Disability Insurance
Many large employers will offer free access to group life and disability insurance. This may require the employee to “opt-in”, in which case you want to be sure you do so!
Life insurance, while a boring and morbid topic, is an essential part of any strong financial plan. If you have dependents or a family that relies on your income for their current lifestyle and future expenses, life insurance is a necessity. Losing a loved one is hard enough, losing a loved one and being financially in ruin, makes it even worse.
Group life insurance policies offered through employers typically cover a stated percentage of your compensation. For example, if you earn $200,000 a year, your employer might cover 2.5x your compensation up to $500,000. Meaning, you’d have $500,000 in life insurance coverage through your employer for free!
Some employers even allow you to purchase additional insurance at low rates above what they offer for free. The downside to purchasing additional insurance through your employer is if you leave employment at a later date, you may be required to provide “evidence of insurability” which would increase your premiums since you’re older and in the eyes of the insurance company, a greater risk. The alternative is looking for additional insurance through the private marketplace and “locking-in” premiums for the stated term of the insurance policy (up to 30 years!).
Secondly, disability insurance may be provided by your employer for free as an added benefit. Surprisingly, 1 in 4 millennials can expect to be disabled at some point in their career. Being disabled negates your ability to earn an income and make progress towards financial goals, let alone pay for everyday living expenses. Taking advantage of the free coverage through an employe is a great starting point. However, is it enough?
If you’re in need of additional disability insurance outside what your employer might provide, consider browsing the private marketplace to receive tax-free benefits and ensure you’re financial situation isn’t dramatically impacted if you’re disabled.
Adjustments can be made throughout the year regarding your 401(k), but while you’re reviewing your benefits package, you might as well review your 401(k) as well.
A few questions to ask yourself. Did I get a pay raise this year? If so, how much should I increase my contributions to my 401(k)? Do I have access to a Roth 401(k), if so, should I be contributing to that? Am I correctly allocated with my investments?
Each year as your compensation increases, it’s important to increase your savings/investments/ or debt paydown. If you don’t, you’re likely going to spend that additional compensation. And spending more without increasing your savings is a losing strategy long-term.
Secondly, if you’re in a relatively lower tax bracket (anything at or lower than 24%) you should consider contributing to a Roth 401(k). The idea of contributing to the after-tax account is that you’d rather pay taxes today at a lower rate than you would at retirement when you’re making distributions from the retirement accounts. It’s a guessing game, but what we know is that we’re in a relatively low tax environment right now and for younger individuals, we haven’t hit our peak earning years.
Lastly, reviewing your 401(k) investments is always a good idea. Over time, if you don’t “rebalance” particular asset classes will become a larger or lesser part of the overall portfolio. For example, if you have a U.S small-cap fund that historically over long periods of time has greater returns than a bond fund, the small-cap fund will overtake the bond fund for a larger percentage of the portfolio because its returns have been greater. By “rebalancing” back to the original asset allocation or newly determined allocation, you can systematically sell higher performing assets at a gain and purchase lesser performing assets at a lower price point. Not to mention, maintaining your original risk parameters.
Employers oftentimes have intangible benefits they’ll provide to entice new hires or keep employees around. However, from a personal finance standpoint, they can be quite significant. It could range from offering pre-tax commuter funds, free parking passes, employee discounts, or even wellness benefits such as gym memberships. Whatever these might be, utilizing these free benefits can save you money!
The Bottom Line
Reviewing your benefits package on an annual basis in its entirety is a good habit to ensure you’re not missing anything valuable! The strategies surrounding each decision can be variable depending on each person’s unique situation. Helping you solve the puzzle and maximize your choices is where Millennial Wealth comes in!
If you dread reading through the nuances of the benefits package or are unsure how to maximize your decisions as they pertain to your individual financial situation, schedule a free consultation to see how we can help.
Levi Sanchez is a CERTIFIED FINANCIAL PLANNER™, BEHAVIORAL FINANCIAL ADVISOR™ and Founder of Millennial Wealth, a fee-only financial planning firm for young professionals and tech industry employees. Levi’s been quoted in the New York Times, Business Insider, Forbes, and is a frequent contributor to Investopedia. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!