What Are the Best Employee Benefits?
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 insurance and benefit choices right now, so how in the world do you know which choices to make?
Here we look at some of the most common benefit options and provide you with the background information you need to make immediate decisions regarding your employment benefits—and how to change them down the road.
- For a 401(k), it is best to contribute as much as you can right away in order to build wealth.
- If you are unsure of how to invest your funds, see if there is a recommended fund based on your life stage or age. Consider changes to your investments as you age.
- 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.
Understanding Employee Benefits
The IRS allows you to contribute up to a set maximum, which changes from year to year, to your 401(k). 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. Try to sign up for the highest percentage contribution option you are allowed. In the future, you'll be glad that you did.
Typically, you will have to decide how you want the funds to be invested. Remember, 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 is target-date funds (also known as life-cycle funds). These are mutual funds that adjust risk as you age and require little on your part in terms of adjustments. 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.
Taxes on New Employee Benefits
Many companies withhold taxes for you. 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 yourself are considered one allowance. If you are married, then you can add another allowance; if you have children, they count as allowances, etc. The more allowances you list, the less your employer will take out of your check.
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.
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.
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 needs while you mend.
Pretax Medical and Childcare
By paying medical care or childcare through pretax dollars, you can reduce how much money can be withheld in terms of income taxes and Social Security. If you know that you are going to use a certain amount of money each year for medical care or childcare, this can be a great way to lessen your tax bill.
Benefits and More 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 ones are listed above. You might also have:
- Elder care benefits
- Employee discounts
- Wellness benefits
- Counseling programs
- Pension plans
- Flexible time benefits
If you are offered a benefit that you do not understand, companies usually have websites set up to explain what they offer. Be sure to check how soon your benefits become effective. Something like medical insurance or 401(k) benefits may not start immediately.
Remember that if you quit your job, you will need to look into continuing health coverage. A Consolidated Omnibus Budget Reconciliation Act (COBRA) health plan allows you to continue health insurance after leaving your 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.
Making Changes to Employee Benefits
Remember that many companies allow you to change your choices periodically. Often, your 401(k) may 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. Remember that 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.
Special Considerations for Employee Benefits
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 have an opportunity to build a substantial retirement nest egg. An employee in their mid-20s who puts away between $3,000 and $4,000 a year could have more than $1 million upon retirement. The key is to start young, take out as much as you can before you notice it is missing, and keep an eye on your investment choices to be sure you are adjusting them as your conditions change.