Evaluating Your Employee Benefits
Employer-provided benefits are a significant part of any compensation package and can have a profound effect on your finances. Employers often provide a wide range of benefits, including the following:
Retirement plans, such as the 401(k)
Section 125 cafeteria plans
Group health, life, dental, and disability insurance plans
Flexible-spending accounts Stock option plans
Vacation, holiday, and sick-leave benefits
All of these benefits, as well as others not mentioned, have a monetary value that you should consider when evaluating your salary or comparing job offers.
Some benefits, such as 401(k) and cafeteria plans (which have nothing to do with food — read on!), also have tax benefits that can save you additional money by reducing your taxes.
Most people with health insurance are covered under a group plan offered by their employer or their spouse's employer. Although employers are charging employees more as prices continue to increase dramatically each year, employer-provided health insurance is still a bargain.
If you aren't offered coverage through your employer you can purchase an individual policy, but these can be expensive — especially as you get older, or if you have a family. Whether you're married or single, you need health insurance to protect yourself against financial disaster in the event of a serious illness or accident.
If you're fortunate enough to have employer-provided coverage, calculate its monetary value by first finding out what the company pays for your medical, dental, life, and long- and short-term disability on a monthly or yearly basis. If you contribute to the cost, subtract your contribution from the total.
If your contribution is pretax (as in a cafeteria, or section 125, plan), factor in your tax savings by adding your social security tax rate of 7.65 percent (up to $84,900 in earnings, after which it's only 1.45 percent), your federal tax rate, and your state tax rate. Multiply the total percentage times the amount you pay toward your insurance coverage to calculate your tax savings.
For example, if you're in the 28 percent federal tax bracket and a 7 percent state tax bracket, add these two percentages plus the 7.65 percent social security tax. Your total tax rate is 42.65 percent. If you contribute $100.00 per month toward your insurance, your real cost is $57.35 ($100.00 × 42.65 percent = $42.65 in savings; $100.00 – $42.65 = $57.35).
Being young is no guarantee of health. If you don't have full insurance coverage, purchase a high-deductible policy to protect yourself against major medical expenses. The higher the deductible, the less expensive the policy, so consider one with a $1,000 to $5,000 deductible until you find a job with insurance.
Flexible-Spending Accounts (FSAs)
FSAs, or reimbursement accounts, are an employer-provided benefit that allows you to set aside pretax contributions to pay for eligible medical expenses that aren't covered by your health insurance, including premiums (unless they're paid with pretax money), deductibles, copays, and any other health cost considered an allowable medical expense by the IRS.
For a complete list of allowable medical deductions, see Publication 502, Medical and Dental Expenses, in the Forms and Publications section of the IRS website, or request a printed copy of this publication from the IRS by calling 1-800-829-3676.
You benefit from an FSA because your contributions are deducted before taxes are calculated, thus reducing your taxes. Using the same tax brackets as the health insurance example, if your total tax percentage (federal, state, and social security) is 42.65 percent, every dollar you put into an FSA will cost you only 57 cents. Don't contribute more than you think you'll use, because under IRS regulations, you forfeit any unused funds at the end of the year.
If you have significant medical expenses you can save a lot of money, so don't overlook this great benefit. If you get stuck at the end of the year with an unused balance, visit your local drugstore and stock up on bandages, aspirin, cough syrup, and any other goods you think you'll use in the coming year.
401(k) and Other Retirement Plans
If your employer provides a 401(k) plan, you'd do well to participate — remember, your contributions are usually tax-deferred (except for social security taxes). If your employer matches a percentage of your contribution, add this to your compensation total when calculating the value of your benefits.
Most employers match between 50 cents and $1 for every dollar you contribute, for up to 3 to 6 percent of your salary. If you earn $40,000 a year and contribute $200 a month and your employer match is 75 percent for up to 6 percent of your salary, your employer will kick in another $150 a month up to a maximum of $2,400 a year. Under this example, your employer is actually paying you an additional $1,800 a year ($150 × 12 = $1,800).