Employee Benefits: How To Know What To Choose
We’ve all been there. It’s the first day of your new job, and someone hands you a stack of forms to fill out. You need to make all kinds of important insurance and benefit choices right now, so how in the world do you know which choices to make? Here we look at some of the most common benefit options and provide you with the background information you need to make immediate decisions regarding your employment benefits – and make changes to them down the road.
The Big Choice
The IRS allows you to contribute up to a set maximum, which changes from year to year, to your 401(k). Many experts agree that it is best to take out as much as you can afford right away instead of going back and trying to do it later once you are used to having the money. Try to sign up for the highest percentage contribution option you are allowed. You’ll be glad you did later.Usually, you will have to decide which funds you want the money to be put into. Remember, you can go back and change this later if you decide on a different strategy. If you really do not understand mutual funds and the choices offered, check to see if there is a fund based on your life stage or age.
One example of this is target-date funds (also known as life-cycle funds). These are mutual funds that adjust risk as you age and require little on your part in terms of adjustments. If you are younger, you can handle more risk because over time the market will balance out in your favor. (To learn more, read Life-Cycle Funds: Can It Get Any Simpler?)
You will probably have the choice of money market funds, as well stock and bond mutual funds. If you don’t have a life stage mutual fund choice, remember a younger person would probably do well to be in a more stock-based fund as compared to a money market or bond mutual fund, which would be better for those nearing retirement. (Mutual funds can be a great vehicle for investing beginners. To learn more, read our Mutual Funds Tutorial.)
Many companies handle taking taxes out of your paycheck for you. They know how much to take out based on your filling out an IRS W-4 form. On this form, you will need to fill in your name, address, Social Security number and how many allowances you want to claim. You are considered one allowance. If you are married, then you can add another allowance; if you have kids they count as allowances, etc. The more allowances you put down, the less your employer will take out of your check. (To learn more about this process, see Payroll Deductions Pay Off.)
Health Insurance Choices
You may have to choose between a Health Maintenance Organization (HMO) and a Preferred Provider Option (PPO) for medical insurance. An HMO allows you to go to doctors that are contracted with a specific insurance company. If you have a specific doctor you really like to use, ask to see the list of doctors on that plan, or go to the HMO website to find a list of its providers. (For more insight, see How To Choose A Healthcare Plan.)
HMOs can cost less, but you may have to be flexible about which doctor you see. A PPO is not quite as strictly organized as an HMO. The doctors still have relationships with the insurance company, but you can see a doctor that may not be on the PPO’s list and still get partially-covered services. You may have to accept more out-of-pocket expenses to do so, but there are fewer restrictions.
When deciding on whether to accept a dental plan, think about your past history with required dental work. If you very rarely have dental issues, it may be more expensive to have the insurance than to just pay for your dental work out of pocket. The same is true with a vision plan. Look at what the services cover and figure out how much you think you would use them.
Life and Disability Insurance
Life insurance is meant to reimburse the beneficiary for lost wages and income. If you are single and not supporting anyone else, you may not require life insurance. If you have a family to support, you need to think about how much they would need to survive in the event of your death. Disability insurance, on the other hand, may be more important for you personally regardless of marital status. If you were to become disabled, you would receive a payout in place of income.
Pretax Medical and Childcare
By paying medical care or childcare through pretax dollars, you can reduce how much money can be withheld in terms of income taxes and Social Security. If you know that you are going to use a certain amount of money each year toward medical care or childcare, this can be a great way to lessen your tax bill. (Read 10 Most Overlooked Tax Deductions for more on this, and other ways to save money on your tax bill.)
Benefits and More Benefits
You may be wondering how your company benefits compare to those that other companies offer. Benefits can vary widely from company to company. The most common ones are listed above. You might also have elder care benefits, employee discounts, wellness benefits, counseling programs, pension plans, flexible time benefits or many others. If you are offered a benefit that you do not understand, companies usually have websites set up to explain what they offer. Be sure to check how soon your benefits become effective. Something like medical insurance or 401(k) benefits may not start immediately.
Remember that if you quit your job, you will need to look into continuing health coverage. A consolidated omnibus budget reconciliation act (COBRA) health plan allows you to continue health insurance after leaving your job. It is important that you file right away for coverage as there is a time limit requirement. Also, COBRA is a temporary solution that generally only covers you up to 18 months after you leave. (To learn more about post employment insurance, read Find Secure And Affordable Post-Work Health Insurance.)
Remember that many companies allow you to change your choices periodically. Often, your 401(k) may be changed on a fairly regular basis, but the medical and life insurance choices may be set up so that you can only change them once or year. It is important to check with your benefits administrator if you think you need to make some changes. Remember that making inappropriate choices can be a costly mistake, especially with your 401(k). Also, it is important to revisit your benefit choices on occasion as your life circumstances change.
The Bottom Line
Many people make mistakes and choose inappropriate choices when filling out their benefits forms. Fortunately, you can still go back and make changes down the road. Younger employees may not require nearly as many insurance choices as an older employee. Younger employees also have a great opportunity to have a substantial retirement nest egg. The employee in his or her mid-20s who puts away between $3,000-$4,000 a year could have more than $1 million upon retirement. The key to doing the right thing is to start young, take out as much as you can before you notice it is missing and keep an eye on your choices to be sure you are adjusting them as your conditions change.
by Diane Hamilton, Ph.D
I have a lot of people contacting me about starting new jobs due to losing their previous job. If you have not had to pick your employee benefits in a while, this article I wrote for Investopedia may be helpful.