When you evaluate the pay and benefits package in a job offer, it can be tempting to focus on the headline salary number. However, the details of the benefits plan could help you create significant wealth in the long run. Here are a few things to look for when reviewing a benefits package.
Retirement plans
Most people we speak with know to look at a company’s employer match and to review the investment offerings and fees associated with the plan. In addition to these basics, consider the following:
Does the company allow after-tax contributions? Many companies allow employees to make after-tax contributions to a 401(k). These contributions grow tax free, and the principle is tax free in retirement, though you’ll pay income tax on your accrued gains.
Then, does the plan have at least ONE of the following requirements:
Is there an in-plan Roth 401(k) conversion option? Some companies allow you to set up a Roth 401(k) where you contribute after-tax dollars from your paycheck.
AND/OR
Does the plan allow in-service distributions? In other words, can you withdraw funds from your 401(k) while you are still employed with the company?
If an employer offers all three of these benefits, you may be eligible for mega backdoor Roth contributions in the future, which could significantly amplify your retirement savings.
Does the employer match student loan payments? Congress recently updated tax code so that if you make a payment toward your student loans, the employer contributes a matching amount to your 401(k). However, the law requiring this employer match only applies to new 401(k) plans created after the law passed. If you’re joining a company that created their plan prior to 2023, they may not offer this benefit.
Health insurance offerings
The important consideration when it comes to health insurance is the coverage. Can you see your preferred doctors? How much will you pay out of pocket? The latter question tends to depend on premiums, deductibles, co-pays, and out-of-pocket maximums. As you evaluate these considerations, one question to ask:
Does the employer offer a high-deductible health plan (HDHP)? This is a specific IRS designation. Just because a plan comes with a high deductible doesn’t mean it’s an HDHP. If the answer is yes, and that is the plan you decide on, you may be able to contribute to a Health Savings Account (HSA). These are the only investment accounts that come with a triple tax advantage.
Does the employer offer an HSA match? The IRS limits how much you can contribute to an HSA each year, and unlike a 401(k), employer contributions count toward the IRS limit. That means employer contributions will help you hit your max contribution sooner, with less money from you, as opposed to enhancing your max contribution amount.
Equity compensation
Many companies offer some kind of equity compensation, in the form of restricted stock units (RSUs), equity stock options (ESOs), and stock purchase agreements. We put together a complete guide to this type of compensation, but the key considerations when you’re evaluating a job offer include:
What is the vesting schedule? Most RSUs and ESOs come with a vesting schedule that depends on the length of your employment, your performance at the company, or certain company-wide benchmarks. If you leave the company before things vest, you’re probably forfeiting those benefits.
Are your equity stock options incentive stock options (ISOs) or non-qualified stock options (NSOs)? While the difference between the two is highly technical, ISOs tend to offer more favorable tax treatment.
In a stock purchase agreement: What are the terms, and what is your outlook for the company? The maximum discount for a stock purchase agreement is 15%, and to get favorable tax treatment, you must hold the stock for a year after purchasing it (two years after it was granted). If shares lose value during that time, it could offset the discount.
Keep in mind: Equity-based compensation creates a concentrated position, which adds risk to your portfolio. A portion of your net wealth will be allocated to a single company. It’s possible to offset that risk by selling shares and diversifying.
Bonus compensation
Companies often discuss bonus compensation as if it’s guaranteed since it boosts the appeal of an offer. But remember: It’s not. If you apply for a mortgage, for instance, the lender is going to look at your base pay. Here’s what to ask about bonus compensation:
What are the conditions? Often, bonuses are performance based. They may be linked to your personal performance, the company’s performance, or a combination.
How is the bonus paid? Bonuses may be cash or stock. They may be annual or quarterly. They may be included in your paycheck or issued separately. How a bonus is paid can have tax implications and impact your cash flow.
What are the terms? Companies usually retain discretion around bonus payments. That means the amount of your bonus, how it’s calculated, when it’s paid, and more may be subject to change after you accept an offer. Reading the fine print can help you negotiate; it can also help prevent surprises in the future.
Regardless of the terms of your bonus, make sure you understand how bonuses are taxed to avoid a surprise bill in April.
Deferred compensation
Many people don’t know that deferred compensation plans exist, or they confuse a deferred compensation plan with a basic retirement account. However, deferred compensation plans may be the best benefit that no one is using.
These plans are less common—they are only offered to the top 15% of employees of a company at maximum. However, if you’re an eligible participant, these plans offer significant perks from a tax and income planning perspective.
Be sure to look at the terms of the plan. You can make different contribution, distribution, and investment decisions each year that you participate in the plan. These decisions can dramatically reduce your tax bill. Look at the plan’s parameters to understand the potential benefits.
Read the fine print
Evaluating the benefits offered by a potential employer can help you assess your pay package beyond base salary. However, whether you use these benefits, and how you use them, will be up to you if you accept the offer.
A financial advisor can help you evaluate a pay package and navigate your benefits when you start a new job.
If you have questions about an offer, contact us to discuss.
