Benefits are an important yet often misunderstood aspect of worker compensation. All too often, opaque tax rules and stuffed insurance guides deter employees from taking full advantage of their benefits packages. Understanding how benefits work can have a sizable impact on the quality of your healthcare, your retirement savings and more.
How Do Benefits Work?
Employers in the U.S. attract and retain workers by offering benefits that go beyond standard wages. In many cases, these benefit packages will include health insurance, retirement plans, disability and life insurance. Sometimes employees will have to pay a portion of their wages towards these benefits, like in the case of health insurance. When signing up for any benefits package, it is important to review all the fine print so you know what will ultimately be taken out of your pay.
Common Job Benefits
Here is a look at some benefits employers will commonly offer employees.
Retirement plans are one of the most commonly provided forms of employee benefits. In recent years, 401(k) plans have become the dominant form of retirement saving in the U.S.
401(k) plans let you contribute pre-tax income to your retirement investments, lowering your income tax burden at the end of the year. As your investments grow, you’re also shielded from additional taxes on dividends and capital gains. You only have to pay taxes when you withdraw the money.
Many employers offer matching sums as an incentive to contribute. For example, an employer might offer a 100% match on up to 5% of your salary. If you make $50,000 a year and you contribute $2,500 to your 401(k) then your employer would contribute an identical $2,500.
More than half of the U.S. population receives health insurance through employment-based plans. If you belong to this group, you may need to choose between different insurance options, such as an HMO or a PPO.
Good To Know
HMOs provide less flexibility when it comes to choosing your doctor. In exchange, they offer lower expenses compared to other healthcare plans.
PPOs provide greater freedom but at a higher cost. You might also be asked to select a deductible, which is the amount that you pay before your insurance kicks in. A higher deductible will lower your monthly premium cost while a lower deductible raises your monthly premiums.
Employer-provided disability insurance helps keeps workers afloat if they’re no longer able to fulfill their job duties due to an accident or ailment. Disability insurance provides a fixed percentage of the worker’s income for a set period of time. Short-term disability insurance typically covers between 60% to 75% of a worker’s wages and usually lasts for about six months.
Long-term disability insurance covers between 50% and 80% of a worker’s wages and it may last for a fixed number of years or until you reach retirement age. Some states require businesses to provide disability insurance while in other states it’s optional.
Life insurance pays out in the event of death. It’s commonly used to cover funeral expenses, and to make up for lost income.
More Benefits You Might Encounter
Other benefits that might be offered by employers include:
- Eldercare benefits
- Subsidized public transportation
- Subsidized tuition or ongoing educational expenses
- Wellness programs
- Pension plans
- Paid time off
- Health savings accounts
- Dental insurance
- Vision insurance
- Flexible spending accounts
If you don’t feel like you understand how your benefits work, get in touch with your company’s HR department. Request that they walk you through any parts of your benefits package that you don’t understand. You can get the most out of your benefits by tailoring your choices to your individual needs.
FAQHere are the answers to some of the most frequently asked questions regarding how benefits work.
- Can you change your benefits?
- Your initial choices aren't written in stone, so you may be able to change your benefits. For example, you might choose to shift your retirement investing strategy away from stocks and into bonds, or you might decide to lower your health insurance deductible. Be advised that some benefits can only be changed at certain times of the year.
- Do benefits come out of your salary?
- Some benefits do come out of your salary, and others don't. For example, contributions made to your 401(k) plan are made at your discretion and come from your pre-tax salary. However, your employer match does not constitute a part of your salary.
- If you signed up for a health insurance plan through your employer, more likely than not you're splitting the cost of your monthly premiums and will see the cost coming out of your salary.
- Are benefits worth more than salary?
- It's uncommon for employer benefits to outweigh salary. Benefits cannot cover all of your expenses, but they do lower the cost of many daily needs, so it's important to consider both salary and benefits when negotiating pay.
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- SHRM. "Open Enrollment Guide & Resources."
- EHealth. 2022. "Employer & Employee Cost Sharing Health Insurance."
- WebMD. 2021. "HMO vs. PPO."
- Nolo. "How Much Does Long-Term Disability Pay?"
- Business News Daily. 2023. "How Does 401(k) Matching Work for Employers?"
- Business News Daily. 2023. "401(k) Plan: What It Is and How to Choose One."
- IRS. "Publication 15-B (2023), Employer's Tax Guide to Fringe Benefits."
- IRS. "401(k) Plans."
- Insurance Information Institute. "Life Insurance Basics."