Navigating Employer Benefits: 5 Considerations for Young Professionals

Article by: Patrick Torney

Navigating the world of employer-sponsored benefits can be complex, but understanding your options is essential for making informed decisions about your financial future. This article explores the key differences between Traditional and Roth 401(k) plans, the mechanics of employer matching, the advantages of Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs), and important considerations for your group health and disability benefits. Additionally, it provides insights on whether you should focus on investing or paying down debt with your discretionary savings.

Many employers offer the option of a Traditional or Roth 401K. What is the difference between these plans and the benefits of going with one over the other?  

The main difference between these accounts is when you pay taxes. With a Traditional 401(k), you skip paying ordinary income taxes now, so 100% of the money goes into the retirement account. When you take money out from the Traditional 401(k) in retirement, you pay ordinary income taxes at that time. On the other hand, with the Roth 401(k), you pay taxes today and pay no taxes when you withdraw money in retirement. When considering your options, you have to think of what tax bracket you fall into today and compare that to where you think you will be in retirement, which is challenging. Generally, when you are younger and in lower tax brackets, you should be taking advantage of the Roth. In high tax brackets, you should be taking advantage of the Traditional plan.

How does an employer match work and does that have an impact on how much I should be contributing?  

An employer match is basically a bonus from your employer in your 401(k). If an employer offers a match of, say, 3%, it means if you contribute 3% of your pay, they will match that 3%, and you receive a total of 6% into the 401(k) plan. As a rule of thumb, you should AT LEAST be contributing what the employer will match. If you do not, you are leaving free money from your employer on the table.

What are the differences between a Health Savings Account and Flexible Spending Account and what are the benefits of contributing to one of these accounts?

These are plans that allow you to take pre-tax money and set it aside for medical costs. Depending on your tax bracket, this could be a 20-40% boost on that money. Not all health insurance plans will offer an HSA or FSA. The HSA plan is offered for those who have a high deductible plan. The money you defer in your HSA can be used to cover qualified expenses of care before you meet your deductible and additional expenses. In addition, you have the ability to carry over money from year to year that you do not use. The FSA does not require a high deductible plan, but unlike the HSA, you are not eligible to carry the full amount over from year to year and must spend it. Because of the tax benefit of these plans, you should be taking advantage of them at least to the extent of your normal yearly medical costs.

Generally, what should I be considering when looking at my group health and disability benefits?

Health insurance should be a big consideration when looking at job offers. As a young single person, this might not be as big of a concern, but as you get married and start a family, the plan and costs should be carefully examined. The best health plans are going to offer the broadest coverage with the lowest deductibles. On a family plan, those deductibles can add up! A good portion of employers offer disability coverage for 60% of your pay, and they cover the cost of this insurance. Since they pay for the coverage, if you need to use the disability insurance, the 60% payout will be taxed as income. Often, this is not enough to continue supporting your lifestyle and should be reviewed to see if you need a personal policy.

With a fixed level of discretionary saving, should I invest now or pay down debt?  

This is not an exact science because everyone feels differently about carrying debt. The first thing you should do is make sure your debt is on a payment schedule with an end date. If you have high-interest debt such as credit cards, you should be looking to pay that off ASAP. If you have debt that is only 3% or 4% to carry, you could consider not paying that off right away and look for options that might provide the opportunity for higher returns. I think the best solution is to pay off high-interest debt right away and once that is complete, look to split your savings between investing and debt repayment.

- Article published 8/14/24 -