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Your Guide to Employee Benefits
We all aim to find work that fulfills us, but you can’t deny that healthy wages and strong benefits packages influence your job decision. After all, you want to earn your money’s worth for the knowledge and skills you bring to the table.Knowing the nuances of various compensation arrangements and benefits packages is vital to picking a job that pays you what you’re worth. To help you out, we’ve prepared a guide to employee benefits. Refer to this guide when you’re next on the job hunt to identify opportunities with the pay and benefits you desire.
Jobs: Salaried vs. Hourly vs. Commissions
As an employee, companies can compensate you in one of three ways: salaried, hourly, or by commission. Each has its pros and cons. Read more about each compensation arrangement below.
Salaried employees earn a fixed sum of money annually. Your employer divides this amount by the determined number of pay periods — usually 24 in a year (twice per month) — and pays you accordingly. For example, if your salary is $70,000 after all withholdings (taxes, retirement, and benefits), you’d receive $2,916.67 per paycheck in gross earnings. Some employers require you to track your hours, while others do not.
Advantages of working a salaried job include the following:
- Fixed paycheck: You receive the same amount of pay each month, making budgeting and planning simple.
- Greater income: Salaried positions tend to pay more than hourly jobs, as salaried jobs tend to come with higher expectations.
- Flexibility: Arriving a few minutes late due to icy roads or leaving a half hour early one day to grab the kids from school won’t affect your pay — as long as it’s not a common occurrence and you get all your work done.
- Benefits: Salaried positions receive benefits that we’ll discuss later. They also get paid days off for vacation and sick days.
- Job security: Salaried positions tend to be more secure. During economic downturns, employers tend to reduce hourly employees’ hours before laying off full-time salaried employees.
The only real downside to being salaried is that you may work more than 40 hours of work on any given week without overtime pay. However, the Department of Labor does require employers to pay salaried employees overtime if they meet certain requirements.
Hourly workers get paid a specified amount for each hour of work they perform. You are not paid once you clock out. Your employer may set your hours for each week, or you may be able to make your own schedule. Either way, you will usually be required to submit a timesheet at the end of each pay period. Hourly roles may be full-time or part-time. In some cases, hourly positions receive benefits — but it’s not common.
Some advantages of holding an hourly position include the following:
- Overtime: You are usually entitled to 1.5 times your hourly rate for each hour you work over eight hours per day or 40 hours per week. For example, if you earn $20/hour and work 9 hours one day, you’d make $30 for the 9th hour.
- Holiday pay: Many employers pay hourly employees double or even triple their wages if they work on a holiday.
Unfortunately, hourly employees tend to have more uncertain schedules. Leaving work for other obligations may be a challenge as well — if you clock out early, you lose some of your pay.
Commissions arrangements are typically seen in sales roles. Salespeople will earn a flat dollar amount per sale or a percentage of revenue each sale generates — although the latter is more common.
Here are some advantages of commission-based positions:
- Earning potential: Excellent salespeople can make a substantial income. Some employers may have income thresholds, while others allow for unlimited earnings.
- Flexibility: If you do especially well one pay period, you can work less the next pay period. As long as you’re hitting sales quotas, your boss may not care much about how you’re spending your time at work.
- Performance tracking is easy: Your pay almost directly measures your success in commission-based roles, making tracking your performance and progress easy.
There are two types of commission-based arrangements:
- Salary plus commissions: You earn a guaranteed base salary as well as commissions on your sales. Your base salary tends to be lower than comparable positions that don’t pay commissions.
- Straight commissions: You only earn money when you sell. Given the risk, commission rates tend to be higher than commission positions with a base salary.
The most considerable downside to commission-based jobs is unstable income. If you aren’t selling, you aren’t making money. Succeeding in commission-based jobs requires self-discipline and hustle.
Now that we’ve reviewed the three primary compensation arrangements, let’s look at the other benefits your employer may offer.
Fringe Benefits: Open Enrollment
Among everything else happening during the busy fall seasons, companies have open enrollment for benefits like retirement and insurance. You may be comfortable with your current elections, but it’s worth taking a second look to maximize your benefits.
Financial advice often dictates that you should contribute 15% of your pre-tax income in a company retirement plan. Your pre-tax contributions save you money on today’s tax bill while providing your future self with more funds. Depending on where you work, your company plan could be a 401(k), a 403(b), or a 457(b).
Many employers also offer matching bonuses, meaning they contribute funds to your retirement account based on your contributions. Matches are either $.50 or $1.00 for each dollar you contribute (the latter is called dollar-for-dollar matching), and employers typically match up to 6% of your salary.
Suppose you earn $80,000 per year, or $6,666.67 per month. You work at a company that matches your contributions dollar-for-dollar up to 6% of your salary. Your employer will contribute up to $4,800 in a year ($400 per month) if you do the same. After 10 years, you would earn an additional $48,000 for free — and that’s before considering compounding returns and salary increases.
Once you have your retirement goals figured out, open enrollment season is a good time to consider your insurance coverage, as well.
As life changes, you may need to adjust your insurance coverage and beneficiaries accordingly. For example, if you have kids, you’ll want to add them to your workplace’s health insurance policy. You may also consider taking out a life insurance policy through your employer to support your family should the worst happen.
You may also consider removing beneficiaries. Perhaps your adult child landed their first full-time offer with a company that provides excellent health insurance. You could remove them from your policy as a beneficiary and save on premiums.
If, while evaluating your current coverage/beneficiaries, you decide to move to a high-deductible health plan (HDHP) to save on premiums, you’ll want to save for health expenses. That’s where Health Savings Accounts (HSAs) come in.
Health-Related Accounts to Maximize Your Tax Benefits
Since high-deductible health plans put more responsibility on you to cover your healthcare costs, they offer you the ability to open an HSA — a tax-advantaged savings account designed for medical expenses. For 2020, HSAs have a contribution limit of $3,550 for individuals and $7,100 for families. These contribution limits increase each year to account for inflation.
HSAs have a “triple tax advantage,” which means:
- Contributions are pre-tax.
- Your funds grow tax-free.
- Withdrawals made to pay for qualified medical expenses are tax-free (as described by Internal Revenue Code Section 213D).
Some employers match your HSA contributions as well, leading to more tax-free medical funds.
Qualified medical costs include (but are not limited to):
- Prescription drugs
- Routine exams/procedures (health, dental, vision)
- Select over-the-counter items
If you maintain excellent health, HSAs can supplement your retirement income as well. Your non-medical HSA retirement withdrawals are taxed at ordinary income rates, just as your 401(k) or traditional IRA withdrawals would be. Avoid withdrawing for non-medical costs before retirement, though — you’ll owe ordinary income taxes and a 20% penalty.
Another type of health-related savings account is the flexible spending account (FSA). FSAs cover certain expenses that HSAs do not. Contributions to FSAs are pre-tax, but you must elect your contributions for the year up front. Additionally, FSA funds don’t roll over each year — you must spend them or lose them. That said, some employers give you 2.5 months the next year to spend your funds or might let you roll over $500.
Due to these attributes, FSAs are suited for people with predictable or ongoing healthcare expenses. If you’re healthy and don’t foresee any regular health expenses this year, you probably don’t need an FSA.
The following benefits aren’t necessarily part of open enrollment, but they can save you money and enhance other areas of your life. If you’re hunting for a new job, look for these benefits in the job description.
- Company Equipment: This includes company-provided laptops, cars, and other equipment. Some employers may give you the equipment. Others may offer you a stipend to pay for particular items.
- Dependent Assistance: To help employees with children, employers may offer on-site child care during the workday. Some even let you bring your pet to work, although these arrangements are often more informal.
- Education Assistance: Your employer may reimburse some of your expenses for pursuing a work-related degree. They may also allow for flexible scheduling to help you balance work and school.
- Fitness Access/Assistance: Healthy employees are more productive. Many companies are covering some or all of their employees’ gym costs — some companies even have on-site fitness centers.
- Meal/Cafeteria Plans: Employees may be able to access free or discounted lunches at the office. This benefit is often seen in industries with long hours, such as at accounting firms during tax season.
- Paid Time Off: Paid Time Off (PTO) is time off you can use for vacation, illness, and personal reasons. Some employers split these into separate “buckets” for each type of day off, while others bundle them together.
Thanks to increasing competition for top talent, many employers — especially startups — now offer to employees a benefit formerly exclusive to upper-level executive positions: a form of compensation known as stock options.
Understanding Employee Stock Options
An Employee Stock Option (ESO) plan gives you the right (but not the obligation) to buy shares of company stock at a specific price for a particular duration or at specified times of year. When you exercise your stock options, you get to become part-owner of your employer at a discount.
There are two types of stock options. Before we go further, though, here are some terms you should know:
- Market Price: The current price of the stock option.
- Grant Price: The price at which you can purchase your employer’s stock. Also known as Exercise Price or Strike Price.
- “In the money”: This phrase means the stock’s market price is above the grant price — in other words, you’d get your company stock at a discount if you exercised the stock option.
- Issue Date: The date your company gives you the options.
- Vesting Schedule: The intervals at which more of your options become available for you to exercise.
- Cliff Date: The date on which you’re first allowed to exercise any of your options.
- Exercise Date: The date on which you exercised your option.
- Expiration Date: The date on which your ability to exercise your option expires. You must exercise your option by this date, or you could lose out on the opportunity to get inexpensive company stock.
With these terms in mind, let’s explore the process of exercising stock options.
How Do Employee Stock Options Work?
To best illustrate how an ESO works, let’s break down an example of the process.
- On January 1st, 2020, your employer provides you an ESO plan that lets you buy 1,000 shares for $15 per share. This is the Grant Price. Your Expiration Date is January 1st, 2030.
- You have a 1-year Cliff Date (January 1st, 2021), on which you can exercise 250 of your options. From there, 20 options will vest every month.
- On January 2nd, 2021, your company is worth $30 per share — the Market Price — so you decide to exercise your vested 250 employee stock options. You buy the stock for $15 per share, spending $3,750. February 21st becomes your Exercise Date for these 250 options.
- By April 2nd, 2021, 60 more options have vested, per the Vesting Schedule of 20 options per month. At this point, your company stock is worth $35 per share, so you exercise your 60 vested options and pay $900.
- By March of 2023, all of your remaining options have vested. The stock price has settled at $31 per share, so you exercise your remaining 690 options.
There are a few ways to pay for your options:
- Cash Payment: You send your payment in cash to the brokerage firm handling and processing transaction options, and in exchange, you receive your shares of the company. At this time, you can either keep or sell your shares.
- Cashless Exercise: Your company’s brokerage firm redeems all of your chosen options and sells enough of your shares to cover the purchase price. This allows you to buy into the company even if you don’t have enough cash available. The higher the market price at redemption, the less stock you’ll need to sell to cover the purchase. In the previous example, recall that your Grant Price is $15 per share. If you redeem 100 shares while the Market Price is $30 per share, you gain $3,000 ($30 x 100) but owe $1,500 ($15 x 100). Your broker immediately sells 50 shares ($1,500/$50) to cover your purchase price.
- Stock Swap: You can exchange shares you own at their Market Price for options you’re entitled to at their Grant Price. To illustrate, let’s say you paid $1,500 last year to exercise 100 options at a $15 Grant Price. They are now worth $30 per share. You swap 10 shares — worth 300 total — to obtain 20 shares of the same stock.
Not all stock options are the same. There are two types, each of which receives different IRS treatment.
NSOs – Non-Qualified Stock Options
When you exercise non-qualified employee stock options (NSOs), you are taxed at ordinary income tax rates (the same rates that apply to your wages) on the difference between the Market Price and the Grant Price. Taxes are usually withheld from your proceeds once you exercise your options. For example, if the Grant Price was $15 and you exercised 100 shares of NSOs when the Market Price was $30, you’d be taxed on the $1,500 difference.
You also pay capital gains taxes when you sell your NSOs. If you sold the 100 shares mentioned above at $40 per share after one year, you’d pay tax at the favorable long-term capital gains rate on your $1,000 proceeds.
If you instead sold them at $40 per share one month after redeeming, you’d pay the higher short-term capital gains rate.
A benefit of NSOs is you have more flexibility with exercising them if you leave your company. The law doesn’t limit the time you have to exercise your options after leaving — only your company can impose a time limit.
These types of options may be granted to employees, as well as any company advisors and consultants.
ISOs – Incentive Stock Options
Employers can only grant ISOs to employees. Unlike NSOs, exercising ISOs may create weird tax issues as you may be subject to the alternative minimum tax (AMT). Talk to your tax advisor to see if AMT might impact you. Otherwise, If you hold ISOs for at least one year after exercise and two years after the grant date, your stock should be eligible for a lower capital gains tax on the difference between the price of stock sold – exercise price
For example, if you exercised 100 shares at a $10 Grant Price and $20 Market Price, you’d owe nothing. But if you sold these shares after they rise to $30, you’d owe taxes on the difference between 100 shares of $30 stock and 100 shares of $10 stock, or $2,000.
Proper tax planning can save you money on taxes when you redeem ISOs. If you wait longer than a year, and your company’s stock price increases, you will pay the favorable long-term capital gains tax on the entire spread between the sale price and Grant Price.
Whether your company offers you NSOs or ISOs, consider the effects your options would have on your current portfolio. Keeping your investments in line with your goals takes precedence over obtaining stock at a discount. Speak with a financial advisor to see how your stock options could fit into your overall financial picture.
The job market is just that — a market. Your pay and benefits compose the “price” companies pay for your labor. Whether you are an accomplished professional in your field, or you’re new but show great promise, employers should be paying well to acquire your skillset.
But employers are looking to get the best deal as well. Unless you advocate for yourself, you may not get the pay and benefits you deserve. Understanding pay arrangements, benefits packages, and stock options can help you find a company willing to pay you what you’re worth.