Knowing about these perks will help you get a better grasp of your compensation package and your full earning potential.
401(k), 403(b), and 457
These employer-sponsored plans allow you to save for retirement by setting aside “pre-tax” dollars from your paycheck. This is a big advantage because these savings are not taxed as you store them away. Only when you retire do these funds get taxed — but not before many years have passed, and the power of compounding interest has made your savings grow.Another advantage of having one of these retirement plans is that your employer may provide matching funds, up to a certain percentage of your salary. The types of matching include the following:
- Discretionary match: The employer is not obliged to do this but can match the funds you contribute to your plan at its own discretion. This is usually based on the organization meeting certain revenue, profit, or cash milestones.
- Safe harbor match: In this type of matching, the employer may be required to provide matching in a given year if certain tests are triggered. Specifically, if the organization has a lot of highly compensated employees (HCEs) contributing to their plans and not enough non-HCEs, the employer may need to match the contributions of non-HCEs. These matching contributions are typically 100 percent vested.
- Guaranteed match: In this type of matching, the employer guarantees a match up to a certain percent of your gross salary every year. For example, an employer may match 100 percent of your contribution up to 5 percent of your gross salary. So, if you make $60,000 a year and contribute 4 percent of your gross pay ($2,400 a year) to your 401(k), your employer will put in another $2,400. The percentages will vary by employer, but the idea is that they guarantee a match up to a certain percentage.
If an employer provides matching, you should take this match into consideration as you evaluate a job offer. You typically become eligible for retirement benefits upon hire or three to six months after your start date; ask your prospective employer when you’ll be eligible.
The 401(k) plan is for companies and for-profit businesses. The 403(b) is for public education organizations and nonprofits. Governmental and certain nongovernmental employers offer the 457 plan. Unlike a 401(k), the 457 plan can have independent contractors as participants. Another difference in the 457 plan is that, unlike with a 401(k), there is no penalty for withdrawing money before age 55.Health insurance
Health insurance can be expensive, costing hundreds of dollars a month for an individual or even thousands a month for a family. Employers tend to offer health insurance, along with vision and dental insurance, at a reduced monthly cost, referred to as a premium. Some employers may cover the entire premium for you; others will make you pay a small part of it.Just as important as the monthly premium is your annual deductible, the amount you pay out of pocket each year before the insurance starts covering your medical expenses. If your deductible is zero, then your insurance starts covering expenses as soon as you’re insured. If you have a high deductible, such as $5,000 a year, then you need to pay for the first $5,000 of medical expenses before your insurance starts covering medical costs.
Flexible spending and other accounts
Flexible spending accounts (FSAs) are similar to retirement accounts in that they allow you to set aside money before tax. But in this case, the money can be spent on qualified medical expenses such as prescription medicine and dependent-care expenses such as childcare.The advantage of these accounts is that the money you set aside is never taxed — not when you set it aside and not even when you spend it. The higher your tax rate, the more you save. For example, if you’re in a high tax bracket and pay 30 percent in taxes, $1,000 in income ends up being $700 after taxes, costing you $300 in tax. But if you save $1,000 in a pre-tax account, you get to keep that $300 and use it for medical-related expenses.
Types of savings accounts include the following:
- Health FSAs: These are the most common and allow you to save pre-tax funds for medical expenses such as prescriptions, co-payments for doctor and dentist visits, and birth control. The annual limit of what you can contribute to your individual health FSA is $2,650. If you don’t use all your funds for the current year, you can carry forward up to $500 to the following one. The employer keeps any unused amount over this.
When choosing how much to set aside for your health FSA, do your best to estimate how much you may spend on medical expenses in the coming year so that you have enough money to cover these, but at the same, you don’t end up leaving unused money. You can spend the money even before you’ve contributed it to your account.
- Health savings accounts (HSAs): HSAs are similar to health FSAs. They also allow you to take pre-tax money out of your paycheck for medical expenses. But unlike health FSAs, you don’t lose the funds if you don’t use them. The money carries over and accumulates, and it’s always available to you. HSAs are available to employees who are enrolled in high-deductible health plans, and you can have either an HSA or a health FSA, but not both. As with health FSAs, you can spend the money even before you’ve contributed it to your account.
In 2018, you can contribute up to $3,450 into a personal HSA account or $6,900 into a family HSA. These limits change periodically, so be sure to check with the IRS at www.irs.gov for the latest information.
- Dependent care FSA: These accounts cover expenses for childcare if you have children under 13 years of age. They also cover elderly care if you have a senior citizen as a dependent. The annual household limit of what you can contribute is $5,000.
Unlike FSA and HSA accounts, with dependent care FSAs, you can only spend what you have contributed so far in a given year.
- Commuter spending accounts: These accounts allow you to save up to $260 per month for parking at work and up to $260 per month for transit expenses to and from work. These accounts are also funded through pre-tax dollars.
Save your receipts and ask for detailed receipts whenever possible. These accounts often require proof of your purchases before you get reimbursed. For medical visits, the receipt should include your name, the date when the service was provided, and details of the service you received.
Bonus plans
Bonus plans vary from employer to employer and even within an organization. These plans tie bonus compensation to your individual performance, or your team’s goals or to the organization achieving certain milestones. You may be able to participate in one or more of these types of bonus plans at the same time.Bonuses may consist of cash, stock, or other incentives such as paid travel expenses and educational opportunities.
The frequency of these plans also varies. You can have quarterly bonuses tied to a quarterly goal. Team performance may also be measured quarterly. Bonuses tied to an organization reaching certain goals, such as revenue or profit markers, tend to get paid quarterly or on an annual basis.
Profit-sharing plans and profit-sharing retirement plans
Employers can set up profit-sharing plans at their own discretion. Usually these plans allow employees to earn bonuses based on annual or quarterly profits. These profits are also commonly referred to as earnings and are calculated on the organization’s after-tax net income. If the company does not make a profit, then the employer does not have to give a bonus.Profit-sharing retirement plans are similar to profit-sharing plans, but the employer makes a discretionary contribution, based on profits to an employee’s retirement account, such as a 401(k). In essence, the employer makes a discretionary contribution to your 401(k), but the match is based on the organization’s earnings.
Restricted stock units
Restricted stock units (RSUs) are a way for publicly listed companies (companies that trade on public stock exchanges such as NASDAQ or the NYSE) or venture capital–backed companies to give stock to employees. These stock units are called restricted because they usually vest over a period of time before you get them. They may have other restrictions as well.RSUs are intended to give you ownership in the company and to provide you with an incentive to grow the value of your shares, and the company, through your hard work. Instead of getting RSUs outright when you start employment, they vest over a number of years. This is to encourage you to stay at the organization until your RSUs vest.
After they vest, these RSUs are considered income and are taxed at your income level. The employer may withhold some of these RSUs in order to cover your tax liability. For example, if your RSUs end up being worth $10,000 and you owe $2,000 in taxes, your employer may keep $2,000 worth of RSUs to cover your tax liability and give you $8,000 in RSUs.
At some point, you’ll most likely leave your first job to pursue another opportunity. Take into account any vesting schedule for RSUs, retirement account matches, or stock options you have, and plan your departure date accordingly so you don’t leave money on the table.
Stock option plans
Stock options are similar to RSUs in that they’re also meant to provide you with an incentive to stay at the company and to help grow its value.Stock options are not stock. Instead, as the name implies, they’re an “option” to buy a certain number of shares at a specified low price. This price is often referred to as the exercise price or strike price. If you get a chance to sell your shares because the company goes public or gets bought, you make money on the difference between the share price and the exercise price at the time you sell your shares.
With opportunity often comes risk. You could encounter a scenario where the company’s shares have a certain price, you exercise your options at a lower price, and you decide to keep your shares and not sell them for the moment. This may create a taxable event for you. Then the company’s share price may drop sharply, causing you to lose money. On top of that, you may have to pay taxes and not have the money to cover those taxes. Check with a professional tax accountant if you ever find yourself in such a situation.
For example, if you have 1,000 options at an exercise price of $1 per share and the company ends up going public at a price of $10 per share, you make $9 per share. Your total gain is $9,000 because you have 1,000 options.Options tend to get taxed at the time of exercise.
There are two types of stock options: incentive stock options (ISOs), which are available only to employees, and non-qualified stock options (NSOs), which can be granted to anyone, including employees, contractors, and advisors. The tax treatment varies for these types of options.
Check with an accountant about your particular tax circumstances and how ISOs and NSOs affect you. You can also learn more about taxes from the IRS at www.irs.gov.
Tuition reimbursement
This benefit means what it sounds like. Some employers offer financial assistance to employees who take courses or who are working toward a degree. The amount reimbursed varies by employer, and sometimes the employer requires you to be employed with it for a certain period of time before this benefit kicks in.Employers may impose certain conditions for tuition reimbursement. You may be required to maintain a certain grade level. The course material should also apply to your work at hand, and often, your studies should contribute toward an advanced degree or certificate.
Employers tend to offer this benefit as a way to attract talent and to grow the capabilities of their workforce.
