The most common mistakes people make with their employee benefits
The College Basketball Tournament is here! Not only is it one of the most exhilarating sporting events in the world, but if we look hard enough, it can also serve as a superb teaching platform for Wealth Management (OK so maybe it’s a bit of a stretch but humor me here)!! When watching the games, whether it’s a #1 seed or a lowly #16 seed, notice how each team plays defense. Do they design the defense to lock down the opponent’s best scorer, regardless of the outcome? If so, they’d all but assure themselves of a 50-point loss (and possibly destroy your brackets in the process). However, if they focus on ALL of the players on the other team, and design their defense accordingly, there’s a much higher chance of victory. Although it may appear to be a bit of a stretch, the same broad thinking is needed to help stack the deck in your favor to achieve real financial independence.
Many individuals spend countless hours with various important aspects of their financial planning, then spend all of about 6 minutes of deep thought related to their Employee Benefits at work. Let’s see if we can shed a bit of light on some common errors/omissions when reviewing one’s Employee Benefits in an attempt to “Stop the Madness”.
without further ado...
This seems crazy, as almost every single working American has been told from day one to “Contribute to the 401(k)”, “Take advantage of the company match”, “Defer some taxes”, and so on. Don’t get us wrong, we want every working human in America to save until it hurts. HOWEVER, let’s be smart about how we do this. If your income is in moderate tax brackets, let’s say 24% or less, contributing to a Traditional 401(k) certainly provides a tax deduction. However, unless your tax bracket today is significantly less than what you anticipate your retirement tax bracket will be, you may want to forgo the tax deduction and instead use your company’s Roth 401(k) to let your retirement dollars grow Tax-Free (be sure to read #2 below for the best way to do this)!
Everyone with a family should have enough life insurance to sufficiently cover the value of their income in the event of an untimely death. However, along with sounding horribly gruesome, AD&D insurance only covers work related injuries and/or death. This is why the insurance costs on this are about 200 times cheaper than “real or traditional” life insurance, and it’s also why these policies are rarely collected upon. Most untimely deaths are a result of everything but AD&D injuries – to properly safeguard your family, don’t confuse AD&D for traditional Term life insurance. Realize that you should have life insurance to protect your family against untimely death in addition to Long-Term Disability insurance (see #1) to protect your family against all types of non-fatal injuries.
This is a very general and bold statement, but we pretty much stand by it until proven otherwise. Non-qualified deferred compensation plans allow employees to defer a huge portion of their salary, and sometimes their entire salary, in a “Non-Qualified” manner. The main reason employees participate in these plans is to defer taxation, usually in high income years. However, all of the assets in these plans are considered general assets of the company and can be entirely lost to creditors if the company performs poorly. Additionally, although taxes are deferred if placed in this plan, taxes are still owed, and oftentimes the payout of these plans triggers more taxation than was originally owed. There may be some plans that have merit, but tread very very cautiously when considering (almost like picking an eleven seed to win the tournament)!
As mentioned in #9, all employees should have enough life insurance to sufficiently cover the value of their income in the event of an untimely death. Quite often, employers provide a great benefit to their employees through group life insurance plans that are available at very attractive prices. However, using this group life insurance as the only source of insurance can be a HUGE (yes, HUGE) mistake. If an employee changes jobs, federal law requires the portability of this group life insurance. However, it DOES NOT guarantee the same pricing. The concept of Adverse Selection typically occurs when sick people request insurance continuation, and healthy people do not. Therefore, the insurance companies DRAMATICALLY INCREASE the premiums on these policies making it almost impossible for employees to continue this coverage if their employment ends.
With the excitement of starting a new job, we are bombarded with a slew of paperwork to “get things started”, many of which are written in such a way that only the Supreme Court can truly understand. Although it’s no fun to digest “legal-ease”, it’s imperative that you have direct knowledge and can articulate non-compete criteria, severance agreement and amounts, vacation policies, maternity policies, etc. Also, it’s imperative that you KEEP YOUR SIGNED COPY. Invariably when you really want to take a look at this, you’re probably not too excited about asking your boss for a copy of it………
Many companies offer stock purchase plans and to incent employee purchases often offer significant discounts on the average stock price. While it is important to understand all of the holding requirements and tax ramifications involved, there are often significant discounts (up to 25%) and limited to no holding requirements in many stock plans. Therefore, make sure you know all of your options and take advantage where it makes sense.
The IRS defines a High Deductible Health Plan (HDHP) as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family. If you have a High Deductible Health Plan at work and you’re NOT contributing into a Health Savings Account (H.S.A.), you’re missing out on the ONLY THING IN THE WORLD where you get BOTH a tax deduction as well as TAX-FREE growth on the invested funds. Let me say that again – H.S.A.’s are the only thing in the world that provides both a deduction and tax-free growth. If you don’t like that, you probably also don’t like free money!
If you are contributing to a Health Savings Account (H.S.A), you might become enamored with the convenience of the H.S.A. debit card that you can use to pay for co-pays and prescriptions and such. Do yourself a favor...get some sharp scissors and CUT UP THAT CARD!! Your H.S.A. grows TAX FREE as long as you are alive. Don’t spend money that grows tax free, spend money from your checking account that DOES NOT grow tax free and invest your H.S.A. funds until you retire!
Don’t get us wrong, we love Roth 401(k)’s as much, if not more, than anyone. However, by contributing directly to a Roth 401(k), an employee must first pay ALL Federal, State, and Local taxes before funds can then be placed into the Roth 401(k). On the other hand, many states (INCLUDING ILLINOIS), do not apply state tax to Traditional 401(k) contributions that are then converted into Roth 401(k)’s. Therefore, rather than contributing directly to a Roth 401(k), contribute to your employer’s Traditional 401(k) and then do an in-plan conversion to the Roth 401(k). This can save over $1,000 annually if done properly! If your company’s plan does not offer an in-plan Roth conversion option, please share this article with them!
Statistically, we are almost five times as likely to suffer a debilitating injury that prohibits us from working, but does not result in our death. Additionally, not only is there a loss of income, but also a significant increase in the cost of care resulting from the injury. Thus, Long-Term Care insurance steps in and provides a continuation of income usually at a lesser percentage – typically between 50% and 60%. However, many employees don’t realize that if they pay for these premiums with pre-tax dollars, every penny of the insurance proceeds are then deemed taxable income. Most employers offer the chance to pay these premiums, which average less than fifty dollars per month, on a post-tax basis, but this is often overlooked resulting in hundreds of thousands of dollars lost in taxation.
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Raymond James Financial Services, Inc. and its advisor do not provide advice on tax or legal issues, these matters should be discussed with the appropriate professional. Opinions expressed in the attached articles are those of the authors and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice.