You Got a Better Job. Now, How Do You Handle the Benefits?
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You sat through the interviews, you picked the perfect “worst quality” to highlight, and you psyched yourself up enough to ask for what you deserve. Congratulations, you got the job! But now what?
Over the last 12 months, 21% of Americans changed jobs, according to audit firm Grant Thornton's survey "State of Work in America." If you’re among them, your new gig may come with new perks that it will pay to learn about.
For people who are receiving new forms of company benefits, here are some common ones you may run into, and how you should prioritize them.
401(k)s: Getting the full match
“The place that I recommend starting would be to take advantage of any free money that you can,” says Frank McLaughlin, a certified financial planner and wealth advisor at Merriman Wealth Management in Seattle. “And usually that would mean looking at the company match, or the 401(k) match if you have one. A lot of people don't realize that if you aren’t contributing enough to get the full match, the rest of that money just disappears and it's off the table.”
A match can mean different things depending on your employer, but often it means your employer will match the amount of money you contribute up to a certain percentage of your income. For example, if your plan offers a 4% match and you make $100,000 annually, as long as you put in 4% (which would be $4,000), your employer will kick in $4,000 as well. That means you get $8,000 total but pay only half that.
Gaining free money through an employer match isn’t the only way to benefit from a 401(k). The more you contribute, the more you reduce your taxable income, which could potentially reduce how much you owe at the end of the year. And for tax year 2022, you can contribute up to $20,500. If you’re 50 or older, you can contribute up to $27,000.
Health savings accounts: The triple threat
When exploring any new medical benefits you may be offered, it’s worth considering a health savings account.
Health savings accounts, or HSAs, function as bank accounts for health-related costs. You save up money in the HSA, and then when you have health-related expenses, you can use the funds in your HSA to pay for them.
HSAs have a triple tax advantage: The money you put in reduces your taxable income; investment growth inside an HSA is tax-free; and qualified withdrawals (those used for medical expenses) are tax-free. And since the money in an HSA never expires, investing in an HSA — similar to how you would through a regular brokerage account or individual retirement account — can help you build wealth over time.
“Consider [HSAs] a supercharged retirement account because you get the benefits of both a traditional IRA and a Roth IRA in terms of the tax deduction,” McLaughlin says. “When you make that contribution at the start, you get tax-free growth, and you can have tax-free withdrawals if it's used for medical expenses, and if you ended up not using it for medical expenses, you can still spend it in retirement as if it was a traditional IRA or 401(k), and you just pay the income tax.”
One potential downside of HSAs is that they're paired with high-deductible health insurance plans, which means you’ll likely be paying out of pocket for your health expenses until you hit that high deductible. According to 2021 research from the Kaiser Family Foundation, the deductible can be pretty high: The average general annual deductible for single coverage is $2,454 for HSA-qualified high-deductible plans and $4,572 for families.
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Employee equity: A way to build wealth
There were 13.9 million participants in employee stock ownership plans in the U.S., according to 2019 data, the most recent available, from the National Center for Employee Ownership.
Employee equity can be a great vehicle for building wealth: In 2019, those employee stock ownership plans paid participants more than $137 billion.
But equity can be confusing, and it can come in several forms.
Employee stock options allow you to buy a certain number of company shares at a specified price during a specified time.
Restricted stock units, or RSUs, are similar to stock options, but you don’t have to purchase them. The stock simply becomes yours when it vests.
Some companies offer an employee stock purchase program, or ESPP, which allows employees to purchase shares at a discount, often via payroll deductions.
If you receive stock options, or would like to participate in an ESPP, you’ll need to think carefully about when to purchase your shares and how much of your paycheck you can afford to allocate to company stock. Buying stock options or reducing your take-home pay to participate in an ESPP can be expensive, and it's worth budgeting for, to ensure you can afford to do so.
Myah Moore Irick, founder of the Irick Group at Merrill Private Wealth Management in Pittsburgh, said in an email interview that it’s important to educate her clients about their compensation awards, and help incorporate those positions into their wealth plan.
Ensuring your investment portfolio isn’t too heavily allocated in one stock is still important, even if it’s your own company’s stock. Investing in broad, low-cost index funds can help you avoid too much exposure to one company. Many 401(k)s invest in broad funds (often target-date funds), so even when there is market volatility, it’s likely you're invested in a well-diversified portfolio.
Putting it all together
While determining exactly how much to contribute to each of your new employee benefits will be different for every person, there are a few guidelines that may be worth keeping in mind.
You’ll also have to consider your personal budget. If contributing to your employee stock purchase plan will cut into your housing or grocery money, it might not be worth it right now. And just because you might not be able to participate in each benefit as much as you’d like right away, that doesn’t mean that you won’t get there eventually.
1. Contribute enough to your 401(k) to receive your full company match. Read through your company’s benefit offering to make sure you’re getting every penny of free money.
2. Consider maxing out an HSA. This may be a difficult goal to balance (especially if you're also investing in a non-work-related account, such as a Roth IRA), but because HSAs have additional tax benefits, it may be better to focus on maxing out an HSA over maxing out a 401(k), McLaughlin says. Maxing out an HSA (totaling $3,650 for individuals and $7,300 for families) also costs significantly less than maxing out a 401(k).
“In retirement, once you reach age 75, you could pull money out of that health savings account, spend it on whatever you want, just like a 401(k), and when you pull that money out, it'll be taxed as income, also like a 401(k),” McLaughlin says.
“So at the very worst with an HSA, it's just as good as a 401(k). Where the extra benefit comes from and kind of why I would prioritize it is that if you do use it for medical expenses, which everyone has and everyone will have, it will be completely tax-free. So tax break on the front end, tax-free growth with investments inside, and then tax-free withdrawals when you spend it on medical expenses. And that's an extra benefit that the 401(k) doesn't have."
3. Look at your portfolio and assess. In order to know where best to invest the remainder of your available funds, it may be wise to look at your existing portfolio and think about your risk tolerance. If you’re confident your company will perform well in the future and you can tolerate taking a lot of risk, you may consider investing more heavily in an ESPP. If putting all your investing eggs into one company’s basket feels too risky, investing further in a well-diversified 401(k) may be a better option.
And if you’re not sure how to allocate any newfound funds, it may be worthwhile to speak with a financial advisor.
“It can be overwhelming to sort out corporate benefits, understand your compensation and plan for financial success,” Irick said. “My advice is to look to experts." The top two people Irick suggested consulting for advice and guidance are the benefits/human resources partner at your company and a wealth advisor.
“The benefits and HR partner can help you navigate the offerings specific to your company and your role. A wealth advisor can help you choose which options offered are best for you based on a holistic understanding of your current needs and your future goals.”