Oct. 10, 2018
Are you overlooking the real value of your benefits when you think about your compensation? Probably. According to the Bureau of Labor Statistics, benefits accounted for about 32% of employer costs of compensation for U.S. workers in June 2018, with salary making up the other 68%.
That’s an impressive number to start with, but when you look at it from the perspective of the employee, the impact is more striking. Employer-paid benefits improved wages for private industry workers by 46.6% ($11.50 average benefits costs for average wages/salaries of $24.72 per hour). Did I mention that most of those employee benefits are not taxable to the employee?
It’s a good time to practice some benefits appreciation.
While you’re making decisions about your health insurance and other employee benefits for the upcoming year during this open enrollment season, I invite you to take some time to calculate and appreciate their value. Think of it this way: if you were self-employed, you’d have to earn more than 50% more per hour to pay your own benefits costs plus the employer’s share of FICA taxes (Social Security and Medicare). That’s assuming you could get similar pricing on insurance, which is unlikely. While there are many advantages to being your own boss, lack of access to group insurance coverages and retirement planning contributions aren’t in the plus column.
How to estimate the financial value of your benefits
Health Insurance (typically $5,000 – $30,000) – Your health insurance is the most significant component of your benefits. How can you value what your employer contributes for you and your family, as well as the discount you receive on coverage for participating in a large group plan? According to the 2018 Milliman Medical Index, the cost of healthcare for a typical American family of four covered by an average employer-sponsored preferred provider organization (PPO) plan is $28,166, with employers typically picking up 56% of the cost. That means that participation in their company sponsored health care plan is worth at least $15,788 for that family.
Of course your insurance costs may be different, and your employer may subsidize more or less of that. In my case, my employer pays 100 percent of my individual health insurance premium. My husband’s employer pays most of the coverage for him and our kids. Don’t dismiss the enormous financial value of company-subsidized health insurance just because it’s a common benefit in large companies. You’d have to earn nearly twice as much as the premium costs to pay for that insurance on your own after taxes.
Health Savings Account (HSA) (typically $500-$1,500 plus current and future tax savings) – More and more employers are also offering high deductible health plans in conjunction with a health savings account (HSA). In many cases, they’re contributing to the employees’ HSAs as well. Financial Finesse, for example, contributes $1,500 to my HSA, and I contribute additional funds pre-tax (2018 individual limit $3,450, family $6,900).
HSAs are a widely misunderstood and underrated benefit, and if you fully utilize your HSA, the long-term tax advantages can be significant to you in retirement. Whenever possible, I use other funds to pay my deductible and out-of-pocket expenses, so I can invest my HSA funds to grow tax-free. I save all my receipts for future reimbursement. If I follow that strategy for ten years and earn an 8 percent return, that HSA account would be worth around $50,000, which could be withdrawn tax-free by submitting accumulated medical and dental expenses.
Retirement Plan (typically 2-6 percent of your salary in matching contributions) –According to the Society for Human Resource Management (SHRM), 42% of companies with employer-sponsored 401(k) plans match employee contributions dollar for dollar up to a certain amount. 56% of companies require workers to save 6% or more in order to receive the full employer-matching contribution. Your company may also make additional profit-sharing contributions to your account. A typical employee with a $50,000 annual salary who earns an 8% annual return on their 401(k) contributions and has a 3% employer match would see an additional $73,628 in their account from the matching contributions after twenty years.
There’s also the value of having an employer-sponsored retirement plan in the first place. If you don’t have one as an employee, you won’t be able to save as much for retirement in tax-advantaged accounts. The consequence: employees without a work-sponsored retirement plan are far less likely to save for retirement. In fact, according to the National Institute on Retirement Security, 45 percent of working age households in the U.S. have zero retirement account savings.
Dental Insurance ($1,500 – $4,500 annually) The next time you have a cavity filled or need a crown, you’ll be grateful you have coverage to pick up some of the costs. Typically, dental coverage pays for half of certain procedures, as well as for preventative care, up to a certain limit per family member per year. Some dental coverage also includes benefits for orthodontics.
Disability Insurance ($2,000 to $5,000 per year) – Premiums for insurance that replaces a portion of your income if you can’t work due to a non-work-related illness or injury can be paid for by the employer, employee or both. Purchasing this insurance as individual policies would be quite expensive. Group policies are much less expensive per covered employee, so even if you’re paying some or all of the premiums yourself, you’re a getting a good deal — if you have access at all. According to the Bureau of Labor statistics only 25% of U.S. employees have access to both short and long term disability insurance benefits through their employer.
Life Insurance ($250 to $500 per year) – Many large employers cover their employees with term life insurance at one times their annual salary. Supplemental term coverage is often available for a low, additional cost. The first $50,000 of group life is not taxable to you. The imputed value of coverage over that amount will show up on your W-2.
Employer Contribution to FICA (7.65 percent of salary) – What is FICA and why does it get so much money from my paycheck?! FICA stands for Federal Insurance Contribution Act, e.g., Social Security and Medicare, and your employer pays just as much as you do towards both programs. The employer contribution adds up to 7.65% of your salary and bonus (up to a max on the Social Security tax). When you are retired and draw Social Security and utilize Medicare for health insurance, know that your employers were partners in getting you there.
Employee Stock Purchase Plan (ESPP) (typically 10% to 15% of market value per share purchased) – In a typical stock purchase plan, the employer offers employees the opportunity, but not the obligation, to purchase publicly traded company stock at a discount from the market value. Depending on how much you contribute, that can add up to thousands in discounts annually. Remember that your discount is taxed like income and taxes are withheld on it from your paycheck.
Tuition reimbursement (typically $1,500-$5,000 annually for approved coursework) Many large companies offer tuition reimbursement for degree programs, professional certifications and courses related to your job. Reimbursement levels may depend on your grades. The first $5,250 of what your employer pays is excluded from your taxable income, but you may have to pay taxes on tuition paid in excess of that amount.
Student loan benefits (typically $1,000-$2,000 annually, with a lifetime maximum) Student loan repayment as an employee benefit is growing in popularity as the average student debt loan for those with a bachelor’s degree has hit $37,172. What’s that worth? For a student loan of $10,000 with a 6.75% interest rate, an extra $100 per month in company paid student loan benefits applied towards the principal could help pay off the loan in 55 months instead of 120 and save $2,144 in interest.
Unemployment Insurance (0.3% – 1.5% of salary) – Under the Federal Unemployment Tax Act (FUTA), employers pay your unemployment insurance, not you, as well as most states. If you lose your job through no fault of your own, and you meet your state’s requirements, you can file for unemployment benefits for some period of time (which varies by state). Like all types of catastrophic insurance, you hope you won’t have to file a claim – but it’s comforting to know that it’s there if you need it.
Financial Wellness benefits ($500 – $2,500 annually) If you’re fortunate to have access to employer-paid financial coaching and guidance, that’s like having a financial planner on retainer all year long. That could easily cost hundreds or even thousands of dollars a year. Use your financial wellness benefit to understand and maximize the value of your other employee benefits, as well as to take your personal financial plan to the next level.
Other great voluntary benefits – Your company may offer other voluntary benefits such as voluntary life insurance, gym membership, pre-paid legal assistance, commuter benefits, employee discounts, pet insurance, health and wellness programs, access to group long term care insurance, etc. The value can vary a lot. You will pay a cost for voluntary benefits, but because they are group plans, the cost is often much lower than what you would pay if purchasing them individually.
What’s your total?
What’s your estimate of what your employee benefits are worth? Add up the items and divide the total by your salary and bonus. When you look at those numbers, my guess is that you’ll appreciate those benefits more.