Company Benefits & Definitions

What do these company benefits even mean?? đź’µ

Getting Started

So you just got a job offer? Congrats!! If you’re at all confused about some of the benefits your new job may come with (or simply wish to brush up) then you’ve come to the right place! Below is a list of common, but not mandatory, company benefits.

While it’s pretty easy to get focused on the salary/hourly rate for a position, if your company offers benefits, the total worth of the compensation package can often be quite a bit higher than just your ordinary pay.

NOTE: The purpose of this guide is not to help you maximize your benefits, but rather to help you understand what they mean and how they work.

Traditional 401(k)

The Traditional 401(k) is an Employer-Sponsored plan that encourages employees to save for Retirement with their Pre-Tax dollars. This tax-deferred account means that you won’t pay any taxes up front when you contribute, but rather you’ll be taxed as you begin to make withdrawals from the account during your retirement.

Example:

Say you’ll make $40,000/yr. If you elect to contribute 10% of your income to the Traditional 401(k), then you will only need to pay taxes on $36,000 for that year ($40,000 - 0.10*(40,000)). You will have contributed $4,000 of pre-tax dollars to this account.

Say you have the same $40,000/yr pay. Some companies may say something like “we will match 4% contributions on the first 6% that you contribute”. In this example, you personally will contribute $2,400 (6% of pay) to the account that year. However, since the company matches up to 4%, they will contribute $1600 to the account that year (4% of pay). In this case, the company is giving you “free money” if you simply contribute to your personal 401(k) account.

Note: Uncle Sam will always take his fair share… so you will have to pay taxes on this money (your’s & any company match) when you reach retirement age. The thought process behind this retirement account was that once you retire, your taxable income will be much less (lower tax bracket), so the taxes on this wouldn’t be very large.

Recommended Use & IRS Limits:

It is very common to contribute enough money to your Traditional 401(k) in order to get the full company match. So, if your company matches your contributions up to 5% of your pay, it’s recommended that you contribute at least 5% of your pay. In this case, you personally will be contributing 5% of your pay, but with the employer match, a total of 10% of your pay will be contributed to this account!

The maximum contribution for your 401(k) accounts (the sum of your Traditional, Roth, and After-Tax) is set at $19,500 for the year 2021. However, if you’re over age 50 you can contribute an extra $6,500 for the year as a “Catch Up Contribution.”

Read More Here!

Roth 401(k)

Much like the Traditional 401(k), the Roth 401(k) is an Employer-Sponsored plan that encourages employees to save for Retirement with their Post-Tax dollars. When contributing to this account, you will have already paid taxes on the contributions. Unlike the Traditional 401(k) though, the earnings on your contributions Grow Tax-Free, meaning that you won’t have to pay tax when you withdraw your contributions and earnings.

Example:

Ex: Say you’ll make $40,000/yr. Since the Roth 401(k) uses After-Tax Dollars, if you elect to contribute 10% of your (post-tax) income to this account, you will still need to pay taxes on $40,000 for the calendar year.

Say if during your working career, you (not your employer) contribute 10% of your $40,000 income to the Roth 401(k) account per year- so $4,000/year. Say also that you don’t start contributing to the account until 30 years old and that you work until you’re 65 years old. Assuming the market returns 10%/year, you’ll have $1.27 Million Dollars!! The best part is that since this is a Roth 401(k) account, you’ll get all of this money completely tax free!

Note: Uncle Sam will always take his fair share… so you will have to pay taxes on this money (your’s & any company match) when you reach retirement age. The thought process behind this retirement account was that once you retire, your taxable income will be much less (lower tax bracket), so the taxes on this wouldn’t be very large.

Recommended Use & IRS Limits:

It is very common to contribute enough money to your Roth 401(k) in order to get the full company match- that is, if your company matches Roth 401(k) contributions. So, if your company matches your contributions up to 5% of your pay, it’s recommended that you contribute at least 5% of your pay. In this case, you personally will be contributing 5% of your pay, but with the employer match a total of 10% of your pay will be contributed to this account!

The maximum contribution for your 401(k) accounts (the sum of your Traditional, Roth, and After-Tax) is set at $19,500 for the year 2021. However, if you’re over age 50 you can contribute an extra $6,500 for the year as a “Catch Up Contribution.”

Read More Here!

403(b) Retirement Plan

The 403(b) plan is very similar to the Traditional 401(k) plan- it is an Employer-Sponsored Retirement Plan that uses Tax-Deferred (Pre -Tax) dollars. The difference though is that the 403(b) plan is offered for certain employees of public schools, Code Section 501(c)(3) organizations, and certain ministers. Otherwise, the 403(b) functions identically to the Traditional 401(k) plan.

Refer to the Traditional 401(k) Plan for Example, Pros & Cons, and Recommended Use.

Roth 403(b) Retirement Plan

The Roth 403(b) plan is very similar to the Roth Traditional 401(k) plan. This Employer-Sponsored Retirement Plan uses Post-Tax dollars to help employees save for Retirement. The difference though is that the Roth 403(b) plan is offered for certain employees of public schools, Code Section 501(c)(3) organizations, and certain ministers. Otherwise, the Roth 403(b) functions identically to the Roth 401(k) plan.

Refer to the Roth 401(k) Plan for Example, Pros & Cons, and Recommended Use.

Defined Benefit Plan / Pension

This type of plan is another way in which Employers can help Employees save for Retirement. Nowadays, the 401(k) is the more typical option offered by employers; however some companies still offer this type of plan. Typically Only The Employer Contributes, and also handles all of the investment planning. Similar to the Traditional 401(k) & Traditional 403(b) Plans, the employer contributes Pre-Tax Dollars to fund the account.

Example:

Say you’ll make $40,000/yr. Remember, only the Employer contributes to your Pension, so your taxable income won’t be affected (neither will your after-tax income). Say your company contributes 3% of your salary to this plan. Assuming your $40,000 salary stays the same, your pension account will have $1,200 after the first year (0.03*40,000). If you’re at the company for 10 years and your salary stays the same, your pension account will have $12,000.

Recommended Use & IRS Limits:

These plans are typically entirely handled by the employer, so no decision is necessary on the employee side.

Health Savings Account

A Health Savings Account (HSA) is a Tax Advantaged Account that incentivizes individuals to save for their own Health Related Expenses. Like the Traditional 401(k) you contribute Pre-Tax Dollars to the HSA. As such, these contributions Lower Your Taxable Income for the current year. Like the Roth 401(k), the earnings of the HSA Grow Tax Free. Unlike ANY other accounts, you can actually Withdraw Funds Tax Free, so long as the funds are used for qualified medical expenses, as set forth by the government.

Example:

Say you (as an individual) make $40,000/yr. As per the IRS, the maximum contribution limit for an HSA is $3600/yr. If you elect to max out this account, then you’ll only be taxed on $36,400 for the year ($40,000 - $3,600). However, if your employer contributes say $500/yr to this account, you yourself can only contribute $3100 ($3,600 - $500).

Recommended Use & IRS Limits:

In 2021, the maximum HSA contribution is $3,600/year. It is recommended to contribute the maximum amount to this account (if you decided to use the HSA over the FSA), in order to be best prepared for medical expenses now and even for retirement. Read More Here!

Flexible Spending Account (FSA)

An FSA is a Tax Advantaged account through your employer that helps employees financially prepare for healthcare/medical expenses. By contribute Pre-Tax Dollars, an individual can Lower Their Taxable Income for the calendar year. Just like the HSA, as long as you are using the money in your FSA for qualified expenses, you can Withdraw the Funds Tax Free.

Recommended Use & IRS Limits:

For a Healthcare FSA you can contribute up to $2,750 in 2021. Your employer does have the ability to lower your contribution limitation. Your employer may also contribute to your FSA. If you don’t make any contributions on your own your employer can contribute up to $500 to your FSA. If you do contribute to your FSA, they can match your contribution dollar for dollar.

Tips: FSAs are best to use if you are expecting to incur healthcare or dependent related expenses. You want to make sure you are funding your FSA with the amount of money you are expecting to pay in medical expenses and/or the amount your employer will allow you to rollover to your FSA for the next plan year. If you have the choice between contributing to an FSA versus an HSA it is likely to be in your best interest to contribute to the HSA first as the money you contribute into that account never expires and the contribution limits are higher.

Deductible

Your deductible is the amount that you’ll pay for healthcare related expenses Before insurance starts to cover some of the cost. Deductibles can range from a few hundred dollars to a few thousand dollars. Some companies will even offer multiple coverage options to choose from.

Example: Say your healthcare plan has a deductible of $1000, and that after this is met you have a coinsurance of 20%. In this calendar year you...
Visit the doctor ($150)Have a dental cleaning ($100)Take prescription medications ($500)Have an operation ($500)
The total cost of these services is $1250. BUT, you don’t have to pay this full amount since your deductible is $1000. After you’ve met your deductible, insurance will start to help you pay for your medical costs at a certain % determined by your healthcare provider and your company. In the same example, the total cost for the $1250 worth of medical expenses you have to pay is $1050 ($1000 coming from meeting the deductible amount, and 20% of the amount over your deductible… 1000 + 20%[1250 - 1000] = $1050).

Premium

A Healthcare Premium is the amount of money that the Employee must pay each month in order to use the health insurance. This is a fixed monthly rate (paid every pay-cycle).

Copay

A Copay is a fixed amount of money that you’ll pay for Covered Health Care Services once you’ve Met Your Deductible. Specific amounts for specific service are pre-determined by your health-care provider.

Coinsurance

For specific services where a copay is not applicable, the coinsurance is the portion of the medical costs you’ll pay after your deductible has been met.

Out of Pocket Maximum

This is the absolute maximum amount of money you’ll pay for Covered health care related expenses in a given year. After you meet your deductible for the year, you’ll pay a portion of the medical bills for the rest of the year (either through copay or coinsurance depending on the specifics of your plan). You’ll continue to pay these lower rates for medical expenses until your total out of pocket maximum has been met for the year.

Life Insurance

This type of insurance is between an insurance company and an employee. It guarantees that the insurance company will pay a sum of money (typically a multiple of your yearly salary) to your beneficiaries in the even that the employee passes away.

Stock Purchase Programs

Some companies encourage their own employees to purchase shares of the company- often at a reduced rate. A common example of this is that for every $0.85 that you contribute, the company would contribute $0.15. As you purchase more shares over time, you actually become more and more of an owner in the company. If you’re able to contribute, you can get more “free money” by utilizing this option. Note: you’ll want to read up on the vesting period of the shares before you decide to participate.

Paid Time Off (PTO)

So you only have 10 days of vacation/year. Seems like a little right? Well the US recognizes 11 days as Bank Holidays as well. Note, some of these may fall on weekends, and some companies may not observe every bank holiday (ex: President’s Day). However, it's extremely likely that you’ll actually get more days off than just your vacation days!