Company’s Benefits – How to maximize the benefits- Finance 101

 1. 401(k)

A 401(k) is a employer sponsor retirement plan for eligible employees. The employees can contribute to the plan and invest for their own retirement on a tax deferred basis.  The contribution is tax deferred, so there is a contribution limit set every year by the applicable law (contribution limits for 401(k) plan in 2020 is $19,500 for individuals who are younger than 50).  Depending the plan that the employer setup, usually the plan allows the owner to invest into stock, mutual funds and the in the long term, the fund grows.  The sooner you start, the longer your saving can build toward your retirement.

Keep in mind that in general, individuals may wait until they reach the age of 59 and 1/2 years old to start withdrawing money from retirement funds to avoid 10% penalty from early withdrawal.

Many employers provide a dollar to dollar match for  the first few percentage of employee 401(k) contribution.For example: If a person has a salary of $100,000, a  4.5% match means the company will contribute to the employee 401(k) fund a maximum of $4,500 if the employee also contributes $4,500 to his/her own 401(k) fund.

Salary     $90,000
Bonus     $10,000
Total Compensation   $100,000

Beginning of 2020 balance     $0
401 (k) contribution                $19,500
Employer matches                  $4,500

                Ending Balance                  $24,000
I have used the below 401(k) calculator to simulate hypothetical data for the sole purpose of showing a big difference of an individual 401(k) balance at the age of 65 when that person starts his/her 401(k) at  25 years old vs. at 50 years old.

https://www.calculator.net/401k-calculator.html

Per the above graph which is based on simulated data, the earlier a person contribute to the retirement plan, the more saving the person has toward the retirement funds.  The saving can be huge which individuals should not ignore.

On the hand, the retirement fund is tax deferred which meant you can save tax

Going back to the above example

• No contribution:

Income:                                                     $100,000
Standard Deduction for single:    $12,200
 Adjusted Gross Income                            $87,800
Federal Tax                                    $15,246
State Tax   *                                     $5,924
         * California Tax is used in this calculation

• $19,500 contribution to 401(k) 

Income:                                                     $100,000
401(k) contribution                      $19,500
Standard Deduction for single:    $12,200
Adjusted Gross Income                              $68,300
Federal Tax                                    $10,884
State Tax   *                                     $4,111
         * California Tax is used in this calculation

$19,500 of 401(k) contribution results a tax saving of $6,175 ($4,362 of federal tax saving + $1,813 of CA tax saving)

Author’s Note:   The contribution should be spreading out throughout the year in order to take the full “free-matching money” from the employer because the match is made on a per pay period basis rather than based on total contribution percentage at the end of the year.  Maximize the 401(k) benefit from the tax standpoint and from the “free-matching money” can be a big saving toward retirement years

Good news is that some companies have “true-up” contribution which means the company will review the whole amount of the employee contribution after the end of the year in order for employees to receive their full match based on the annual limit. You should check with your employer on the “true-up” contribution policy.

2.  HSA (Health Saving Account)

HSA is pre-tax money to pay for medical expenses like deductibles, co-payments and other qualified expenses.You can check eligible expenses for HSA at the link https://learn.healthequity.com/qme/

• Pre-tax income contribution
  • There is limitation on how much you can contribute per year.  Like 401(k), the limit changes every year.  Contribution limits for 2020 is $3,550 for individuals and $7,100 for family.  Some employers contribute certain amounts to employees HSA account if the employees qualify for  HSA contribution.  The employer contribution amount also counts toward the HSA contribution limit.
• Grow Tax-deferred
  • Depending on the brokerage that manages the fund, HSA money can be invested to buy stock, mutual funds and continue to grow
• Tax-Free withdrawn (to pay for qualified expenses)
  • Unlike 401(k) which is tax deferred, HSA is tax-free withdrawn if the withdrawn money pays for eligible expense (see above for the link to eligible expense).
• Unused amount automatically can be rolled over from year to year
  • Unlike Flexible Spending Account (FSA) which is owned by the employer, and only $500 of unused fund can be rolled over to the next year, HSA is owned by the employee and all unused fund will be rolled over from year to year.   As a human being, people will get sick and sooner or later the HSA will be used toward medical expenses.

LP-FSA is very similar to HSA/FSA in terms of pre-tax money but the fund can be used to pay for dental and vision expenses only while HSA and regular FSA can be used for broader medical services.

LP-FSA can be used in conjunction with HSA.  Other characteristics are the same with FSA

• FSA is owned by the employer whereas HSA is owned by the employee.  That means if you leave the employer during the year, the unused FSA balance  may go to the employer.
• LP-FSA contribution limit for 2020 is $2,750
• Only $500 of the unused LP-FSA fund can be rolled over to the next year while unused HSA fund can be rolled over from year to year.

Eligible expenses for LP-FSA – https://www.benstrat.com/downloads/HU-FSA-LP-Eligible-Expenses.pdf

DCFSA is a pre-tax benefit account used to pay for eligible dependent care services

• preschool
• summer day camp
• before and/or after school programs
• child daycare

 DCFSA has a “use it or lose it” rule.  Qualified expenses which are incurred up until December 31st can be reimbursed.  However, unused amounts that are lost, are not deductible.  So, it’s very important to plan a head of time before enrolling in any FSA accounts.

6.  Health Insurance plans

There are many different health insurance plans offered by employers.  These plans usually fall into 2 buckets:  high deductible health plans and low deductible health plans.

• HDHP – If an employee enrolls in the high deductible health plan (HDHP), he/she usually pays a lower monthly premium but have high deductible.  The deductible is the amount to be met before the health insurance starts to pay.  Enrolling in a HDHP qualifies for HSA and LP-FSA contribution and HSA can be used to pay for these high deductibles.  I have enrolled in a HDHP for almost 10 years to maximize HSA benefit.

• LPHP – on the other hand, enrolling in low deductible health plan (LPHP), an employee pays a higher monthly premium but having a lower deductible.  LPHP doesn’t qualify for HSA contribution but can contribute to FSA

7. Employment Stock Purchase Plan (ESPP)

Employment stock purchase plan is another great benefit to maximize.  In general, ESPPs allow employees to buy shares of employers’ stock at a discount by using after-tax payroll deductions

• Contribution and discount percentage limit may vary from employers.   However, IRS limits ESPP purchase of $25,000 per calendar year.

• Most companies allow its employees to contribute a maximum of 10% of the take-home pay and 15% discount of either the offering date or the purchase date, whichever is lower

• There are two-year offering period (look-back period), so the actual gain may be more than 15%

• Above is real examples showing the benefit of ESPP enrollment
  • The first example, the market price on the purchase date of 6/28/2019  was $54.73 and the ESPP purchase price was $33.03 which results around 40% discount rather than 15% discount
  • For the 2nd example, the cost of purchase on 12/31/2018 was $33.03 while the market price was $43.33 also resulting a discount of 24%

• Tax Treatment
  • No tax reports until the year of the sale
  • Qualifying dispositions
    • the discounted amount: Ordinary income tax rate
    • the remainder              : Long-term capital gain (lower tax rate)
  • Disqualifying dispositions
    • most of the sale proceeds as ordinary income
  • For more details about tax treatment for planning purpose.  Please visit my blog post Employment Stock Purchase Plan – ESPP

8. Education Assistance

Many employers offer tuition assistance for higher education if the employee is on the company payroll.  The assistance usually covers required textbooks, lab fees, registration fees, mandatory and recurring fees.

Some of these amounts are taxed and some are tax-free.  If the educational program is classified as job-related, the whole tuition assistance amount is tax-free.  If it’s classified as non-job related, the first $5,250 is tax-free, the remaining amount is added to your income for tax purpose.

Backdoor Roth IRA is also another way to save toward retirement.  I myself maximize this benefit every year.  Please visit the blog post for more information:  Steps by Steps to Backdoor Roth IRA

Bottom Line

As an employee, you should take these advantages to maximize the benefits as  many of them are just free money or you may have to pay a little tax.  As the contributions is taken out from your take-home income, your take-home paycheck becomes smaller.   Smaller take-home paycheck means you have to stay within a tight budget for all living expenses and lifestyles .  However, you should at least at a minimum do the followings in the priority order

Only $500 of the unused FSA funds can be rolled over to the next year and if you leave your company, unused amounts may go back to the employer.  So, it’s very important to plan a head of time before enrolling in any FSA accounts.

401(k) Calculator – https://www.calculator.net/401k-calculator.html

HSA and FSA eligible expenses – https://learn.healthequity.com/qme/LP-FSA eligible expenses – https://www.benstrat.com/downloads/HU-FSA-LP-Eligible-Expenses.pdf