We've all been there. It's the first day of your new job, and someone hands you a stack of forms to fill out. You need to make all kinds of important employee benefit choices right now, so how in the world do you know which ones to make?

Understanding how the most common employee benefits work will help you choose the right options and avoid mistakes.

Key Takeaways:

  • For a 401(k), it is best to contribute as much as you can right away in order to build wealth.
  • For medical insurance, an HMO allows you to go to specific doctors contracted with your insurance company while a PPO gives more flexibility in doctors but may have more out-of-pocket expenses.
  • Consider life insurance if you have a family to support and disability insurance even if you don't.
  • It’s a good idea to revisit your benefit choices when your life circumstances change.

401(k) Plans

Many employers offer their employees a 401(k) plan, which provides a tax-advantaged way to save for retirement. The IRS allows you to contribute up to a set maximum, which changes from year to year. Many experts agree that it is best to contribute as much as you can afford right away instead of going back and trying to catch up later when you are already accustomed to a bigger budget. In the future, you'll be glad that you did.

Mutual funds are the most common investment choice in a 401(k) and you will have to decide how you want your contributions to be invested. You can go back and change this later if you decide on a different strategy. If you really do not understand mutual funds and the choices offered, check to see if there is a fund based on your life stage or age.

One example of this are target-date funds (also known as life-cycle funds). These are mutual funds that adjust risk as you age. If you are younger, you can handle more risk because over time the market will balance out in your favor.

You will probably have the choice of money market funds as well as stock and bond mutual funds. If you don't have a life-stage mutual fund choice, remember that a younger person would probably do well to be in a more risky stock-based fund as compared to a money market or bond mutual fund, which would be better for those nearing retirement.

Many employers match employee contributions up to a certain amount, based on how much you contribute annually. Not taking advantage of an employer match is the equivalent of leaving "free money" on the table.

Health Insurance

You may have to choose between a Health Maintenance Organization (HMO) and a Preferred Provider Option (PPO) for medical insurance. An HMO allows you to go to doctors that are contracted with a specific insurance company. If you have a specific doctor you like to use, ask to see the list of doctors on that plan or go to the HMO website to find a list of its providers. HMOs can cost less, but you may have to be flexible about which doctor you see and hospitals you use.

A PPO is not quite as strictly organized as an HMO. The doctors still have relationships with the insurance company, but you can see a doctor that may not be on the PPO's list and still receive partially covered services. You may have to accept more out-of-pocket expenses to do so, but there are fewer restrictions.

When deciding on whether to accept a dental plan, think about your past history with required dental work. If you rarely have dental issues, it may be more expensive to have the insurance than to just pay for your dental work out of pocket. The same is true with a vision plan. Look at what the services cover and estimate out how much you think you would use them. Some services may be offered through a Multiple Employer Welfare Arrangement (MEWA), where a small business may group with other small businesses to provide benefits to their employees.

Be sure to check how soon your benefits become effective. Health insurance or 401(k) benefits may not start immediately.

Life and Disability Insurance

Employer-provided life insurance is meant to compensate your survivors for your lost wages and income should you die while employed in your new job. If you are single and not supporting anyone else, you may not require life insurance. If you have a family to support, you need to think about how much they would need to survive in the event of your death.

Disability insurance, on the other hand, may be more important for you personally regardless of marital status. If you were to become disabled, you would receive a payout in place of income. It could supply the support your family—or just you—needs while you mend.

Other Employee Benefits

You may be wondering how your company benefits compare to those offered by other companies. Benefits can vary widely from company to company. The most common are listed above. You might also be offered some of the following:

If you are offered a benefit that you do not understand, companies usually have websites set up to explain what they offer. If not, check with human resources or the benefits administrator.

Withholding Taxes

In addition to providing benefits, many companies withhold taxes for you and you'll need to fill out a form for that too. They know how much to take out based on your completed IRS W-4 Form. On this form, you will need to fill in your name, address, Social Security number, and how many allowances you want to claim.

You are considered one allowance. If you are married, then you can add another allowance, and if you have children they count as allowances, etc. The more allowances you list, the less your employer will take out of your check.

Making Changes to Employee Benefits

Many companies allow you to change your choices periodically. Often, your 401(k) contribution amount and investment choices can be changed on a fairly regular basis, but the medical and life insurance choices may be set up so that you can only change them once or year.

Check with your benefits administrator if you think you need to make some changes. Making inappropriate choices can be a costly mistake, especially with your 401(k). Also, revisit your benefit choices on occasion as your life circumstances change.

The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows many employees to stay on their employers' group health plans after leaving a job. It is important that you file right away for coverage as there is a time limit. Also, COBRA is a temporary solution that generally only covers you up to 18 months after you leave.

The Bottom Line

Many people make mistakes and inappropriate choices when filling out their benefits forms. Fortunately, you can still go back and make changes down the road.

Younger employees may not require nearly as many insurance choices as an older employee. Younger employees also have an opportunity to build a substantial retirement nest egg.

Regardless of age, it's always a good idea to reevaluate your benefit choices when your life circumstances change.