Portable Benefits

What Are Portable Benefits?

Portable benefits are those that have been paid into or accrued in an employer-sponsored plan. Portable benefits can transfer to a new employer's plan or to an individual who is leaving the workforce. Portable benefits apply to benefits from health plans, retirement plans, and most other defined-contribution (DC) plans. For example, most 401(k) plans are portable as are most 403(b) plans, and health savings accounts (HSAs). However, certain pension plans are not portable.

How Portable Benefits Work

Over the years, significant progress has occurred in making employee benefits more portable. Portable benefits mean that the benefits are attached to the individual employee, instead of the employer. The portability allows individuals to take these benefits with them when they change jobs or move from one employer to another. The result is that there are no financial losses or interruption of services from the benefits as a result of moving them to another job.

These portable benefits include the funds within a retirement plan that can be transferred into a new retirement plan. Other portable benefits can include health insurance and money saved within health savings accounts. However, there are various rules and procedures as to how these benefits should be transferred when changing employers.

Retirement Accounts

It’s possible to transfer the funds from a retirement plan, such as a 401(k) and 403(b) plan, into a new retirement plan when changing employers. These plans are tax-deferred accounts that allow employees to contribute from their paycheck a percentage of their salary. The employers typically match a percentage of the employee's salary as well. These benefits are portable in the sense that the funds can be moved to another 401(k) at the new employer, or the money can be transferred into an individual retirement account (IRA). The process of transferring the funds is called an IRA rollover.

When doing a rollover, the funds are not capped, meaning the employee can take all of the vested money within the account. Vested refers to the funds contributed by the employer that must remain in the account for a specific time period before the employee owns that money. For example, an employee might be vested after three years of employment at the company. However, all of the funds that an employee has contributed are 100% vested and can be rolled over when leaving the job.

Direct Rollover

There are guidelines issued by the Internal Revenue Service (IRS) as to the best way to rollover IRA funds. A direct rollover means that the employee receives a check made to the new retirement account for the amount in the 401(k). The employee must deposit those funds into the newly established IRA or the new employer's 401(k).

Trustee-to-Trustee Transfer

The funds can also be transferred by trustee-to-trustee transfer in which the financial institution managing the existing 401(k) transfers the money directly to the institution holding the new IRA. This method is the safest way to roll over funds since the employee doesn't receive the money. Instead, the banks take care of the transfer once all of the forms have been completed and signed by the employee.

Indirect Rollover

An employee has the option to have the check made out to them–called an indirect rollover–so that the employee must deposit the check into the new retirement account. However, the employee has 60 days in which to make the deposit. If it's deposited after 60 days, the IRS considers it a taxable distribution. If the employee is under the age of 59½, there would be a 10% penalty assessed as well as the income taxes that would be due on the IRA funds.

Also, 20% of the funds are withheld from the check. Those funds are returned to the employee at the tax-filing time and when the IRS knows that the check was deposited into a new IRA. However, the employee must come up with the 20% withheld by the IRS and deposit the full amount that was in the retirement account by the 60-day time frame. Otherwise, taxes and penalties will apply to the distribution amount that was not redeposited. The indirect rollover is the least favorable option since employees are at risk of being taxed and penalized for not completing the process properly.

Health Insurance

The Health Insurance Portability and Accountability Act (HIPAA) has played a key role in the development of employee benefits. The U.S. Congress created this act in 1996 to amend both the Employee Retirement Income Security Act (ERISA) and the Public Health Service Act (PHSA). The original intent of HIPAA was to protect individuals covered by health insurance.

Today, HIPAA ensures that pre-existing medical conditions don't exclude a worker when moving from one group health plan to another, meaning that health-care plans are accessible, portable, and renewable. It also sets standards and the methods for how medical data is shared across the U.S. health system and helps prevent fraud.

Health Savings Accounts

A Health Savings Account (HSA) is a tax-advantaged account created for individuals who are covered under high-deductible health plans (HDHPs) to save for qualified medical expenses that are over and above an HDHP's coverage limits and exclusions. Contributions are made into the account by the individual or the individual's employer and are limited to a maximum amount each year. The contributions are invested over time and can be used to pay for qualified medical expenses, which include most medical care such as dental, vision, and over-the-counter drugs.

A deductible is the portion of an insurance claim that the insured pays out-of-pocket. In order to open and contribute to an HSA for themselves or their family, an individual needs to have an HSA-eligible high-deductible health plan (HDHP). An HDHP is an insurance plan that has a higher annual deductible than typical health plans.

Special Considerations

Non-Portable Benefits

The two main types of plans that don't have portable benefits, one of which are defined-benefit plans (such as pension plans). A defined benefit or DB plan is one in which employee benefits are computed using a formula that considers factors like length of employment and salary history. In contrast, a defined contribution (DC) plan, such as a 401(k) does have portable benefits.

Company-sponsored flexible spending accounts (FSAs) are also non-portable. FSAs are a type of cafeteria plan that allows an employer to expand benefit choices on a tax-advantaged basis to employees with minimal extra out-of-pocket costs. Employees select cash and specified benefits by means of a payroll deduction that they elect each year.