Workplace Benefits 101
By Dan Nastou, CFA
Have you recently started a new job? Or maybe you’ve just been meaning to get to those benefits your employer offers. Either way, it’s time to talk about workplace benefits – what they mean for you, and whether or not you should sign up.
Of course, your particular benefits will depend on what your employer offers. But we’ve included overviews of some of the most common benefits out there. We also have more detailed explanations of most of them, so if you’re interested, just follow those links.
Let’s get to it!
Workplace Retirement Plans
Retirement plans tend to get a lot of attention when we’re talking about workplace benefits. And for good reason. Investing can play an essential part in growing and maintaining our wealth. And workplace retirement plans are often a great way to get started.
For the most part, workplace retirement plans fall into two main categories;
Defined contribution plans – like a 401(k) (or a 403(b) if you work for a non-profit). With this type of plan, it will be your responsibility to decide how much money to contribute from your paycheck and to select which investments you want to hold in your account. You’re in charge here.
Defined benefit plans – aka traditional pension plans. With these plans, your employer takes on the responsibility of funding it and managing the money for you.
Defined benefit plans used to be the norm, but over time, that’s changed. Nowadays, more and more employers are now offering defined contribution plans. So that means more responsibility now falls on us to contribute to and manage our retirement savings. But the upside is, this can be a great way to start investing for two important reasons;
1) Defined contribution plans, like 401(k)s and 403(b)s, offer a tax advantage.
2) Some employers even offer a match, meaning they’ll contribute money in addition to what you elect to contribute. This is like free money once it has vested.
Both of these reasons mean your money will likely grow faster than it would in a standard taxable investment account. So for many of us, signing up for a workplace retirement plan, and signing up early, can be a great financial decision.
Learn more about 401(k)s, including how to set one up.
Health Insurance
This is another biggie, because, well, health insurance is expensive. And those hospital bills can get really expensive if you don’t have it.
If your employer offers health insurance, it can make up a meaningful part of your compensation, so it’s important to know what’s available. Chances are you’ll be asking about it before you even start. But if you aren’t sure what’s offered, check your benefits resources or talk to someone in HR.
And keep in mind, if your employer does offer health insurance, you may still need to sign up for it or select which specific plan you want if multiple are offered.
That brings us to types of plans. There’s a wide range of health insurance out there. But broadly speaking, most plans fall into one of two general categories; HMOs and PPOs.
While the exact differences will depend on the specific plan, PPO plans tend to cost a little more but also typically offer more flexibility in terms of which doctors you can see and whether or not you’ll need a referral for seeing specialists. HMO plans on the other hand tend to be a little more affordable, but sacrifice some of the flexibility you usually get with a PPO.
How much you personally end up paying for your insurance premiums will also vary. Typically your employer will cover a significant portion of the cost and you’ll be on the hook for the rest (although this is often deducted directly from your paycheck).
And if your employer doesn’t offer health insurance, you can buy it on your own directly through an insurance provider or through a government exchange.
Learn more about how health insurance works in our Core Content.
Health Savings Accounts (HSA)
In addition to offering health insurance, some employers also offer a Health Savings Account, or HSA. This is a little bit like a 401(k) but for medical expenses instead of retirement savings.
The money you contribute is tax-deductible (meaning you don’t pay taxes on it now). And you can invest the money and carry it over from one year to the next and then spend it on qualifying medical expenses when they come up. Some employers will even contribute some money to your HSA on your behalf. Free money!
To be eligible for an HSA, you need to have a High Deductible Health Plan, as defined by the government. But as of 2023, this is an annual deductible of at least $1,500 for individuals and $3,000 for a family. So it’s a fairly low threshold to meet.
Learn more about Health Savings Accounts.
Flexible Spending Accounts (FSA)
Similar to an HSA is something called an FSA, or Flexibile Spending Account. Like with an HSA, you can use this money for certain out-of-pocket health care costs. And also like an HSA, you can contribute pre-tax money to the account.
However, there are some differences between the two types of accounts, especially when it comes to rolling over your account balance from one year to the next.
With an HSA, the money is yours and the balance will keep growing from one year to the next. With an FSA, you essentially have to spend the balance in that calendar year. Some plans allow you to carry over a portion of the balance, and some allow for a grace period of a few extra months to spend the money. But for the most part, if you don’t spend it, you’ll lose it. So HSAs are better for funding longer-term medical expenses and growing your balance.
Learn more about Flexible Spending Accounts.
Life Insurance
As you probably know, life insurance is there to help support your family financially in case you pass away unexpectedly.
Yes, it’s not the most pleasant to thing think about. But if you have children, or if anyone else relies on you financially, it can be a crucial component of your finances. And because it’s so important, many employers offer it as a benefit to their employees.
If you’re interested, you may need to sign up during your benefit open enrollment period, or some employers will automatically sign you up when you start working.
But before you sign up, you’ll want to make sure you know just what you’re getting.
It’s fairly common for employers to offer a small amount of life insurance coverage for free. If that’s the case, then it’s pretty much a no-brainer to sign up. There’s really no reason not to.
However, your employer may also offer you the chance to buy additional coverage, potentially up to several times your annual salary. This may or may not make sense depending on your situation.
Employers can sometimes negotiate a discounted price on your behalf, which is good. However, the insurance you get will likely only last as long as you work there. So if you think you may leave your employer within the next few years and will still need coverage, you may be better off buying insurance outside of work. You’ll also have more choice in terms of policies when you buy on your own. Long story short, you’ll want to weigh your options before buying.
And of course, if your employer doesn’t offer life insurance at all, you can always buy it directly from an insurance provider.
Learn more about life insurance in our Core Content.
Disability Insurance
Similar in concept to life insurance, disability insurance is there to help protect you in case you can no longer work to support yourself or others.
Some employers will offer it as a benefit and will even cover a portion of the cost or possibly the full amount. While anyone could technically benefit from having disability insurance, it generally makes more sense if you work in a more physically demanding or dangerous job where injury is more likely to occur. Although injuries and disabilities can happen anywhere.
Plans will vary in terms of what portion of your income they’ll replace and for how long. So you’ll want to consider your options before choosing one. In general, plans that offer more coverage will be more expensive (charge higher premiums).
Learn more about disability insurance.
Other perks and discounts
We’ve covered some of the main benefits that employers typically offer. But our list is by no means exhaustive. These days, employers offer all sorts of creative benefits beyond the standard.
It’s fairly common for employers to offer discounts on things like gym memberships, commuting passes, or tickets to local events and museums. So be sure to check with someone in HR to see what your employer offers and take advantage of them. Those discounts will add up, which means more money for that retirement account, right?
Summary
Long story short, your salary and wages will make up the bulk of your compensation, but workplace benefits can give your finances a big boost and also provide some well-deserved conveniences. So be sure you know what’s offered and take advantage!
This is intended for educational purposes, not financial advice. Talk to your financial professional if you need help or are thinking about making changes to your investments.
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