By Tina Wood-Wentz
How are you compensated?
A job that’s a good fit for you will provide positive intangibles – camaraderie, a feeling of contribution, and a feeling of accomplishment. Additionally, work will provide you with financial rewards - pay and benefits.
The first compensation piece many of us think about when we think about work is being paid. No matter our work schedule as an employee, there is usually some amount of administrative lag between earning the pay and receiving it, although this may be a minimal amount of time in the gig economy when working as a freelancer (where same-day cash-outs are sometimes available). We may receive our pay daily, weekly, every other week, twice a month, or monthly.
The way we earn our wages may be hourly or salary, or in the terms of the IRS, non-exempt or exempt, respectively. Exempt (salary) means exempt from the Fair Labor Standards Act, where you do not have to be paid at least the federal minimum wage for all hours worked, nor is your employer required to pay you overtime (of at least 1.5x base pay) for hours above 40 per work week. Exempt employees are still usually required by their employers to clock their full 40 hours per week to get 40 hours per week of pay, however, they do have an effective hourly wage up to the 40 hours per week point.
For many employers, as one progresses up the career ladder there is a point where the positions transition from hourly to salary. Advancement offers in such situations should be considered carefully, as often that lowest tier of the salary portion of the ladder is actually a step backwards from the top tier of the hourly portion of the ladder in terms of net pay per hour because of how much overtime salaried employees are often expected to put in.
Health insurance benefits
One of the primary reasons people work in the U.S., besides pay, is for health insurance. Health care coverage in the U.S. is primarily tied to employment, but since the Affordable Care Act (ACA)’s provisions went into force in 2014, we have more health care insurance coverage options, whether as an employee with health care coverage through an employer or not. Unlike pay, health insurance can be hard to compare between employers and even within an employer, if they offer multiple plans, it can be hard to determine which one is the best fit for you.
Generally, if you have a large employer, it tends to be most cost effective to utilize one of the healthcare plans your employer offers. If you have a working spouse and both of you have healthcare options through work, you still want to coordinate those benefits carefully. Each plan should have a long document called a Summary Plan Description (SPD, highly detailed), and a Summary of Benefits and Coverage (SBC, with a uniform layout), that you can use to help compare plans.
If you choose a traditional health insurance plan, one with a lower deductible, then you may also be able to elect to contribute pre-tax dollars to a health care flexible spending account. These are use-it-or-lose-it dollars each year, possibly with a grace period provision for usage in the following year or with a provision of a small amount (the IRS limit is $500) of rollover to the following year. Due to COVID-19 and the COVID-related Taxpayer Certainty and Disaster Tax Relief Act of 2020, it’s possible you have additional options for 2021 and 2022 – make sure to consult your plan’s summary plan description.
If you choose a high deductible health insurance plan (HDHP), you are choosing to take the risk of a potentially higher out-of-pocket amount paid for health care, in exchange for a lower guaranteed premium payment. If you have a HDHP through your employer, you may be able to elect to contribute pre-tax dollars to a health savings account (HSA) through your employer, in which case they are also not subject to FICA taxes. If your employer doesn’t offer an HSA, you can set one up on your own through a custodian, fund it from your bank account, and then make sure to report those independent contributions on your tax return.
As of 2020, HCSA and HSA are both eligible to be used for over-the-counter medicines and menstrual care products in addition to the historic list of accepted medical expenses. There are rules controlling how much you can contribute. In 2021 if you are under age 55 then you may be able to contribute up to $3600 or $7200 (self vs. family plans), with a $1000 catch-up for each spouse at or over age 55.
Access to a 401k plan, the tax-advantaged retirement vehicle with a higher contribution limit and no earnings-based access limitation versus the self-arranged IRA (individual retirement account), is a wonderful additional benefit many mid- to large-size employers offer. Often the employer will also offer a match, a percentage they will contribute towards your retirement based on what percentage of your income you contribute. The quality of these 401(k)s, in terms of fees attached and which investments are available, varies widely. The 401(k) offered may be pretax (traditional) or post-tax (Roth), or you may be allowed to elect your preferred balance between the two.
Smaller employers may offer a SIMPLE IRA, to which you and your employer can both contribute. Or they may offer a SEP IRA, which is contributed to by your employer only.
Each tax advantaged retirement vehicle has its own eligibility, annual limits, and traditional versus Roth (pre-tax vs. post tax) possibilities.
Smaller employers may have ways for children to come to work with their parents when childcare is unexpectedly unavailable. Larger employers may provide access to backup child care facilities or connection services. Larger employers may also offer sick child care and/or on-site daycare. There may be access to a dependent care flexible spending account (DCFSA), which is up to $5000 of pre-tax dollars that could be pre-elected to be set aside for reimbursement of child care. That $5000 limit was set in 1986 with the establishment of the DCFSA provisions, and it wasn’t indexed to inflation. With the American Rescue Plan Act of 2021, for 2021 that number is temporarily $10,500, but will go back to $5000 for 2022, and employers are not required to increase their limit.
Highly Compensated Employee
The classification of “highly compensated employee” may feel like a lofty adjective if you’re straight out of your training and living in the Midwest, but since the threshold is the same nationwide, no matter your age or the local cost of living, it may be that you cross this threshold easily. The way most people encounter it is as a dollar threshold from your earnings the previous year, and if you cross that threshold in a for-profit company, the implications are all negative. Specifically, if in 2021 you earn more than $130,000, then in 2022 you may be subject to some additional limitations on your 4019k0 contributions, your dependent care flexible spending account (DCFSA) contributions, and/or your health care flexible spending account (HCFSA) contributions. The 401(k) contribution limit is the one that hits the most people and tends to be the most painfully felt as it limits tax-advantaged retirement savings. But it’s also one that can be alleviated by your employer by nudging lower earning employees towards higher contributions through higher default enrollments, or luring lower earning employees to contribute more with a more generous match.
Life insurance benefits
Group life insurance is often offered by larger employers. They may provide an automatic multiple of your annual base pay (without overtime or bonuses), something between 1-3x. You may also be able to buy additional multiples. Key pieces here include that the life insurance may not be portable when you depart that employer, and if it is it could be at a very high price. It may be cheaper at younger ages than equivalent term life insurance, but as you age it may be more expensive than term bought at your initial employment age. And as you age, and time goes by, health events may happen that leave you less likely to be able to qualify for lower priced term policies, potentially trapping you with employers who offer life insurance.
Large employers may offer an additional side fund for those employees who purchase additional multiples of insurance, which can act as a bank account that earns interest (with additional withdrawal restrictions) or that pays out at the employee’s death. Pros of this include that it is additional tax deferred space, you don’t pay taxes on the interest earned until you withdraw more than the principal, and it may possibly have a much better, stable rate of return than a money market account or CD. And unlike your retirement fund, there is no minimum age of withdrawal and no early withdrawal penalties. Cons include that it’s not necessarily a good rate of return compared to the market, and it may come with a front-end load that means it takes a while for you to break even.
Having ownership in your company
Whether you work in a large company that’s listed on one of the world’s stock exchanges, or you are working on buying out a one owner firm, with some employers there is a way to acquire ownership of the company you’re working for. Look for descriptions such as employee stock purchase plan (ESPP) and employee stock ownership plan (ESOP). These purchases may be at a discounted price, and/or may have minimum holding periods. This can be an opportunity to build great wealth if your company flourishes, but it is definitely a form of concentrated risk – both your investments and your paycheck are dependent on the same company.
Employers can offer a wide variety of compensation in the form of pay and benefits. Typically, the more expensive benefits are offered by larger employers, while smaller employers tend to focus on providing less tangible (and less expensive) benefits such as family friendliness and flexibility.
While the benefits and scenarios described here are those potentially available with a for-profit employer, the most common type in the United States, make sure to come back next month for a related article on the special situations that occur when your employer is a governmental and non-profit entity. And no matter your employer, make sure to look for my previous article on selecting your benefits when starting a new job.
About the author: Tina Wood-Wentz, MS
Tina Wood-Wentz wants to help you feel comfortable understanding your financial situation, and using your money as a tool for feeling more secure about your life. She is a financial educator, paraplanner, and founder of Wood Financial Services LLC. With an extensive background that includes whitewater kayak instructor, data scientist, tax preparer, and board member for many non-profits, Tina brings a passion for understanding numbers along with helping and educating others.
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