Maximizing Your Company Benefits

Cory Bittner, CRPC?,?recently joined me on?Upticks?to discuss how you can maximize your company benefits, a particularly timely topic as the year comes to a close. A summary of our conversation is below.

Jake:?One of the services we offer at?Falcon Wealth Advisors?is that we review clients’ company benefits and help them determine a strategy to maximize those benefits in accordance with their financial plan. Let’s kick off our conversation by talking about?401(k) plans. Most people are familiar with these employer-sponsored plans that allow an employee to save for retirement while often receiving a matching contribution—up to a certain percentage—from their employer. Depending on your company’s plan, you can contribute pretax, Roth, or post-tax dollars to a 401(k) plan. The IRS does limit how much you can contribute to your 401(k) account—in 2023, the limit for individuals will be $22,500.

Many people wonder how much they should save in their 401(k) account and how much they should save in other investment vehicles. Our team encourages anyone with a 401(k) plan to make sure they’re contributing enough to receive their company’s full match—that’s essentially “free money” and we wouldn’t want to see you leave that on the table. This does not necessarily mean you are maxing out your 401k plan though.?It’s important to understand the?IRS limits?and see what makes most sense for you and your financial plan.

What’s the next company benefit we should discuss, Cory?

Cory:?Let’s talk about employee stock ownership plans, or ESOPs. It’s an employee benefit plan that gives workers ownership interest in the company via shares of stock. ESOPs, which can come in a number of forms, encourage employees to do well because they directly benefit from the company’s success.

Jake:?And under the ESOP umbrella is an employee stock purchase plan, which allows employees to buy?company stock?at a discounted price. Buying company stock isn’t a no-brainer for every employee, but if you can buy it at a 15% or 20% discount, it may very well make sense.

ESOPs can be beneficial, but it’s important to understand the details. It’s vital to know how the benefit works, its vesting schedule, and its tax implications. An employee stock purchase plan is taxed differently than restricted stock units, which is another example of an ESOP. Deciding whether you should participate in an ESOP and how much you should invest is the type of important decision we help clients with each day. The key details to share with us are what you were awarded; when you were awarded it; and the vesting schedule. Our team can add these details to your?financial plan, which only enhances our financial planning and tax planning capabilities.

Let’s now talk about life insurance. What do readers need to know about life insurance as a company benefit?

Cory:?Term life insurance policies are often awarded to employees from their employers. This involves the company paying premiums on a policy for you so that your beneficiaries would receive a payout if something were to happen to you. If employees want more life insurance than their employer provides, they are often able to pay out of pocket to increase the value of that policy. This is generally a cost effective way to increase your life insurance.

Jake:?And we should note what life insurance should be used for: replacing lost wages, taking care of financial obligations and raising dependent children. You and I are both licensed life insurance agents, Cory, so we have knowledge in this area. With that being said, we don’t sell life insurance because we prefer to focus on our role as wealth advisors as fiduciaries. And as you alluded to, we generally encourage clients to purchase life insurance through their employer plan, especially if they’re planning to stay with their employer for a long period. It’s often the most cost effective option, as you’re part of a group plan.

Next up is?health insurance, Cory.

Cory:?Many employers provide healthcare benefits to their employees through a group plan. It’s important for workers to understand how their health insurance works and its benefits. As you get closer to retirement, it’s critical to research how you will access health coverage in retirement.

Jake:?Yes, there are so many details you need to know—PPO vs HMO, networks, premium costs, deductibles and more. We typically refer many of our clients with healthcare questions to a?health insurance agent?who is totally dedicated to healthcare coverage. She can not only help you review your company’s benefits but can help you examine the marketplace as a whole and make important decisions for you and your family.

Cory:?We should also talk about?COBRA, which allows you to continue to use your employer’s health insurance plan for up to 18 months after you separate from your employer. However, you have to pay the entire premium—your employer typically doesn’t contribute to the cost of the premiums.

Jake:?Yes, it’s important for people to have health insurance lined up if they’re planning to separate from their employer. And if they are unexpectedly let go from their employer, they should know they will still have a number of options to attain health coverage.

Some employees are also able to participate in health savings accounts (HSAs). Cory, can you talk about the triple tax benefits associated with an HSA?

Cory:?Sure. First, contributions made to the plan can be deducted from your income taxes. Second, the funds in the account can typically be invested, where they can grow tax free. And third, if distributions from the HSA are used for qualified medical expenses, your withdrawals aren’t taxed, similar to a Roth IRA.

Jake:?Yes, sometimes it feels like people don’t realize the power of HSAs. There are contribution limitations—around $3,000 annually for a single person—but if you don’t use the money in an HSA by age 65, you can make withdrawals for any reason, not only qualified health purchases. However, you would have to pay ordinary income taxes on these withdrawals.

We typically want?Falcon Wealth Advisors?clients to start an HSA at least several years before they retire so they can build it up to help cover their healthcare costs in retirement. And if you’re 20 or 30 years away from retirement and you can afford to max out your HSA, you will likely be thankful you did down the road.

Cory:?Yes, a couple other things worth noting. Funds in an HSA roll over from year to year. And if someone is retiring and is not yet 65, and they purchase a high deductible plan on the healthcare exchange, they are often eligible to contribute to an HSA.

Jake:?Good points, Cory. Let’s now talk about deferred compensation. If you make a nice salary and you’re getting a bonus and don’t necessarily?need?the money, some companies will allow you to defer that money into another account with the company so that you’re not taxed on it in that particular year. This has the potential to keep you out of a tax bracket that is higher than ideal, and then in retirement when your income is likely lower, you can pull the deferred compensation from the account and pay taxes on it at that time. After reviewing your tax return and financial plan, our team at?Falcon Wealth Advisors?can offer insights into whether you should pursue deferred compensation.

Defined benefit plans, also known as pensions, are worth discussing. Pensions can sometimes be rolled over into an IRA when you retire, or you can receive a monthly annuity payment. Pensions aren’t as common as they once were, but for employees who have them, they play an important role in maximizing your company benefits.

It’s important for workers to know all the details associated with their pension. The year and age at which they retire, even down to the day of the month, can affect how much they receive in retirement. And it’s worth noting that lump sum pension payments typically go down as interest rates rise, so clients should talk to?Falcon Wealth Advisors?about how that affects their decision about when to retire.

Cory:?And don’t assume what your colleagues are doing is the right choice for you. It’s critical to understand your specific benefits and how they fit into your overall financial plan.

Jake:?That’s a good point. I work with two clients who work at the same company, and they’re making different choices about the lump sum vs. annuity payments. This choice gets down to your financial plan and personal preferences. And once you make a choice, you often can’t change it. It’s a very important decision that we can help you with at?Falcon Wealth Advisors.

Prepaid legal services are another benefit some companies offer employees the opportunity to purchase. I would offer caution on these, as I believe you get what you pay for. If you’re only paying a couple dollars a month, are you getting exactly what you need? Are you going to trust that attorney to build a complicated estate plan?

Cory:?I agree. And as someone who recently established a trust, I know how important it is to work with someone you have confidence in.

Jake:?Indeed. And the last benefit we will discuss is gym benefits. Sometimes your employer or health insurance will pay for a gym membership, or your employer may even pay for a cell phone plan and other benefits. I encourage people to understand these benefits and use them when they make sense. No one likes leaving money on the table.

Thanks so much for joining me today, Cory. I think an important takeaway from this blog post is the importance of working with a fiduciary wealth advisor, like?Falcon Wealth Advisors, to make these important decisions. And another key takeaway is the importance of financial planning. Decisions become more clear when you see how they fit into your larger financial plan. If you would like to discuss these topics and more, please contact our team today. You can reach me directly at?[email protected].

Clients choose to work with us to enhance their financial literacy and explain exactly what?their?financial plan means to?them.

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.