Are You Getting the Most from Your Company's Benefits?
By Ric Edelman
From Inside Personal Finance, Updated 09.26.03
Most workers dont realize that their employers spend 20% to 40% of
their income on benefits. In other words, if you work full-time and earn
$50,000, your employer provides you with benefits that are worth an
additional $10,000 to $20,000 per year. Make sure youre taking full
advantage of these programs.
Cafeteria plans. The idea is simple: Employers want to offer
their workers benefits, but workers cant agree on which benefits they
want, and the budget is limited. For example, some want health care
benefits. Others who already have those benefits, perhaps because they are
covered by their spouses plan, would rather have paid parking. But
parking is of no interest to those who use mass transit. Thus, the
employer often is stymied because the budget is limited, and the company
cant provide everything to everyone.
Enter the cafeteria plan. Through these programs, the employer offers a
wide variety of benefits everything from health care and child care to
paid parking and elder services. Each of these benefits are offered a la
carte, and employees use their allotted dollars to buy the benefits they
want like eating in a cafeteria.
Flexible Spending Account. In many cases, employees pay for
their own benefits, and again, the tax code offers you advantages. Say you
expect to spend $2,000 a year on daycare, medical expenses, and eyeglasses
costs the employer wont pay for. If you were to pay for these costs
routinely, youd have to spend after-tax income to do so. But the FSA lets
you handle these expenses pre-tax.
Heres an example. Kim knows what her health insurance deductibles and
co-pays are. She estimates that her out-of-pocket medical expenses will
average $100 a month. So Kim, who is paid twice monthly, asks her employer
to place $50 from each paycheck into her FSA account. Then, as she wishes,
she withdraws the money from the account to pay the bills she knows shell
Why does she bother doing this? Simple for the tax savings. By
diverting some of her paycheck to the pre-tax FSA account, she reduces her
Social Security taxes and income taxes. Indeed, for every $100 she
deposits into her FSA, she saves nearly $8 in Social Security taxes, $28
in federal income taxes and $6 in state income tax (based on a 28% federal
income tax bracket and 6% state tax rate). Thats more than $500 a
To make sure this isnt too good to be true, the IRS imposes one
important restriction: Once you tell your boss to place some of your
income into the FSA, you must spend all of it during the calendar year. If
you dont, you forfeit the unused balance. This is the IRSs way of making
sure workers dont eliminate their entire tax liability by placing 100% of
their income into these accounts. Also diverting money to the FSA could
cause future Social Security benefits to be reduced, since less income is
being taxed by Social Security during the working years. However,
higher-paid employees are not affected by this issue.
You can use the
FSA to reimburse yourself for the money you spend caring for dependent
children and elders. Be aware, though, that every plan dollar that pays
for dependent care reduces the dependent care tax credit that might be
otherwise available to you. For this reason, lower-income workers may be
better served by taking the IRSs dependent care tax credit. To see which
is in your best interest, compute the savings both ways, or ask your tax
advisor for a recommendation.
Life, disability and long-term care insurance. If your employer pays
for these coverages, get as much as you can. But if you must pay for some
or all of the cost, talk to a financial advisor or insurance agent to see
if you can get lower-cost coverage elsewhere. If you are young and
healthy, odds are you can. And buying your own policies, rather than
relying on your employer-provided one, is always a safer approach: If you
leave the firm, you usually lose the coverage, and your employer or
insurer might cancel coverage at any time. That cant happen if you buy
your policies directly from an insurer.
Health insurance. You dont need me to tell you that you need
health insurance for yourself and your family. You also know from
experience that health insurance is expensive, complicated and confusing.
Your employer is likely to offer at least two types of policies: An HMO
and a Preferred Provider Organization. Premiums are usually lower for the
HMO but you may not get to select the doctor you see. If you and your
spouse are employed, you may each have your own policy because employers
often pay employees premiums. But employees usually pay part or the
entire premium for other family members. If you pay premiums, check to
make sure you pay them on a before-tax basis.
If you are self-employed, get a comprehensive major medical policy with
unlimited coverage. Select the largest deductible you can live with. You
may be able to deduct part of the premiums on your federal income tax
Retirement plans. If your employer offers you the opportunity to
contribute a portion of your paycheck to a company retirement plan,
contribute the maximum. However, limit your contributions to pre-tax; do
not make after-tax contributions. Some employers add money to employee
accounts. If your boss does this, great. Even if your employer does not,
do not allow that fact to dissuade you from contributing the