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JOURNAL OF FINANCIAL SERVICE PROFESSIONALS | MAY 2018

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Employee Benefits: Thinking beyond the Paycheck by Emily Purdon, CFP

Vol. 72, No. 3 | pp. 11-15

This issue of the Journal went to press in April 2018. Copyright © 2018, Society of Financial Service Professionals. All rights reserved.

ABSTRACT

As a new financial planner, take the time to

help your clients through periods of transi-

tion by educating them on how their employ-

er-provided benefits package creates stabili-

ty. The purpose of this column is to highlight

common life events clients face and to offer

the new planner advice and guidance about

how employee benefits are intertwined with

these events.

As a new planner, you will soon learn that life tran- sitions provide an opportunity to add value for your cli- ents. This is because life transitions involve change, and even positive change can cause stress. While commu- nication and counseling skills are essential for guiding clients through these life changes, do not underestimate the power of financial planning basics to create a sol- id (and therefore calm) foundation for this change to occur. An often-overlooked, and fundamental, area is employee benefits. Financial planners typically request salary information; however, a detailed review of the en- tire employee benefits package reveals opportunities to set your client on solid ground in anticipation of inevita- ble life events. As a new financial planner, take the time to help your clients through periods of transition by ed- ucating them on how their employer-provided benefits package creates stability. The purpose of this column is to highlight common life events clients face and to offer the new planner advice and guidance about how employee benefits are intertwined with these events.

Contextual Variables More specifically, the new planner should utilize “contextual variables” as a guide.1 These variables include family status (traditional, single, blended), net worth (ultra-high, high, mass affluent), income level (high, medium, low), life or professional stage (student, starting career, retirement), and other cir- cumstances (health issues, divorce, aging parents). After the new planner has a good understanding of a client’s current financial state, he or she should begin

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to think about potential upcoming transitions or life events. Financial planners can provide much-need- ed advice and guidance to help their clients navigate these periods of change. Examples of life events in- clude buying a house, getting married, having chil- dren, changing jobs, and retiring. Over the course of a financial planner’s relationship with a client, he or she may experience 20-plus years of life events. Un- derstanding the stages of your client’s life is extremely important, because early and thorough planning can reduce stress and give them peace of mind.

Life Events and Employee Benefits In 2016, Glassdoor Economic Research conducted a study on benefits packages and discovered the top em- ployee benefits are health insurance, vacation and paid time off, pension plans, 401(k) plans, and retirement plans.2 In addition to these popular benefits are fringe benefits. Fringe benefits offer support in areas such as education and adoption assistance. Employer-provid- ed benefits can offer much-needed support in times of major life events. In financial planning firms, it is not uncommon to allow younger, newer planners to consult with the children of clients. This allows the new planner to improve communication skills and hone their con- sulting skills. Let’s assume the new planner has been giv- en such an opportunity to meet with a married couple in their late twenties. These conversations are often fo- cused on building a balance sheet, discussing debt pay- down, and reviewing short-term goals. Take the time to ask the clients about the employer-provided benefits that are important to them today and in the near future. These benefits may include policies around health in- surance, education assistance, maternity and paternity leave, and dependent care assistance programs. Listen to what your clients are telling you about their personal lives, and weave in financial recommendations utilizing the benefits they are already receiving at work.

Group Medical, Dental, and Vision Insurance This column limits its focus to providing value as a new planner through a deeper understanding of group medical insurance. However, it is equally im- portant to understand the broader health insurance marketplace. Healthcare.gov is a federally facilitated

marketplace that provides information about health insurance options and guides people through the en- rollment process. Some areas are served by a state-based marketplace. If your client does not have employer-pro- vided health insurance, understanding the marketplace enrollment process becomes extremely important. A health maintenance organization (HMO) pro- vides comprehensive health care services to a group of subscribers for a fixed premium. A primary care phy- sician (PCP) acts as a gatekeeper by determining what care is needed and makes referrals to specialists accord- ingly. A preferred provider organization (PPO) contracts with insurance companies and third-party administra- tors to provide care at a reduced fee. Health care pro- viders are paid on a fee-for-service basis. An advantage to a PPO is that your client can go outside of network for care, although this out-of-network care is normally more expensive. Most consumers have a tough time an- alyzing which health insurance plan is right for them and for their family. Having a brief conversation about the structure of health insurance plans may add a lot of value to your client’s decision-making process. Employers providing group health coverage with at least 20 employees must offer employees who have separated from service the opportunity to buy identi- cal coverage. Eligible employees may obtain COBR A coverage for different periods of time depending on the reason. For example, if your client voluntarily leaves or is involuntarily terminated, his or her cover- age can be continued for 18 months. This is also true if your client reduces his or her hours from full-time to part-time work. In certain situations, like death of an employee, divorce or legal separation, or the loss of dependent status or Medicare eligibility, coverage may be available for up to 36 months. A health savings account (HSA) is a separate account designed to fund future medical expenses and is associated with a high-deductible health plan (HDHP). An HDHP is a health insurance plan with lower premiums and higher deductibles. Funds in an HSA carry over year after year, which helps your client build an emergency fund for future medical expenses. Eventual distributions are tax-free for qual- ified medical expenses. The contribution limits are determined based on whether your HDHP provides individual or family coverage. In 2018, individu-

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nation with your length of service at the company? In addition to vacation, most companies of- fer standard paid holidays to their employees: New Year’s Day, Memorial Day, Independence Day, La- bor Day, Thanksgiving Day, and Christmas Day. Or, companies may choose to follow the federal holiday schedule, which includes the holidays previously list- ed as well as Martin Luther King, Jr. Day; Washing- ton’s Birthday; Columbus Day; and Veteran’s Day. Depending on the industry, a company may purpose- fully stay open on holidays due to high demand. Many companies offer a standard number of sick days. A company may strictly enforce its policy by re- quiring a doctor’s note or loosely apply a set of rules. Corporate culture can heavily contribute to how your client chooses to use sick or personal days. These benefits become very important particularly when a major illness, short-term disability, or death in your client’s family occurs. If one of these life events oc- curs, the new planner should immediately work with the client and his or her employer to review options.

Defined-Benefit and Defined-Contribution Plans Younger new planners may not be familiar with defined-benefit plans, also known as pensions. This is because in today’s retirement reality, most twenty-some- things have never been offered a pension plan in a bene- fits package. While many younger people will not have the metaphorical security blanket of a pension payment in retirement, many of our clients are receiving pension payments today. At a high level, a pension plan requires employers to make contributions into a pool of funds set aside for an employee’s future benefit. The purpose of this benefit is to reward employees with a consistent income stream in retirement. As succesive generations continue to live longer than previous generations, defined-benefit plans are becoming too expensive for employers to fund. As a result, defined-contribution plans like 401(k) ac- counts are taking over as the main savings vehicle. In a defined-benefit plan, the employer guarantees a future benefit at retirement regardless of investment performance. This leaves your client’s employer liable for any shortfall if the pension plan’s assets are not sufficient to pay the benefit. Traditionally, companies may choose defined-benefit plans as a means of com-

al coverage contributions are limited to $3,450 and family coverage to $6,850. Catch-up contributions of an additional $1,000 are available starting the calen- dar year your client reaches age 55. The cost of dental insurance varies considerably due to the size of your client’s company and location. Dental plans work similarly to health insurance plans in that there are dental HMOs (DHMOs) and dental PPOs (DPPOs). The DHMO, a prepaid plan, will re- quire your client to choose a dentist or dental facility to coordinate their needs. The primary care dentist will refer them to specialists if needed. The DPPO gives your clients freedom to visit any dentist and switch dentists as they choose. Costs will be lower when your client seeks treatment from a dentist in network. Vision insurance is a lower-cost addition to an employee benefits package. A client should evaluate current eye care needs to determine which plan pro- vides the appropriate services. Routine and annual eye exams are essential to preserve vision and ensure eye health. Vision insurance can make routine care and eye care services or products more affordable. Have you ever broached the topic of health insur- ance benefits with a client? Or, on the other hand, has your client asked questions about these benefits during a meeting? More often than not, a client is seeking comprehensive financial planning, which includes risk management and insurance analysis. For example, con- sider the contextual variable of getting married. Why pay for two employer-sponsored plans, when switching to a family plan under one employer may reduce costs?

Vacation, Holidays, and Sick and Personal Days A company’s vacation, holiday, and sick leave policies are usually transparent. This section brings attention to some of the most frequently asked ques- tions and common human resources policies to better support your conversations with clients. Ask your client a few of these questions to gauge their understanding of their vacation options: How many vacation days does your employer provide? Can you use vacation days before they accrue each pay pe- riod? If you do not use them by a certain date, will you lose them? Are you granted more vacation days as you earn promotions, or instead perhaps in coordi-

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money, which may include optional medical procedures and child or dependent care. Your client must use con- tributed amounts for qualified medical expenses within the plan year. The client’s employer may choose to offer either a grace period of up to 2½ months after the end of the year or carryover option of up to $500 per year. An employer is not required to offer either option. In 2018, the employee contribution is limited to $2,650. Group life insurance coverage is a benefit provid- ed to participating employees. If total life insurance coverage does not exceed $50,000, your client will not be taxed on premiums paid by the employer. If the coverage exceeds $50,000, the employer will cal- culate the cost of taxable group coverage and denote it on your client’s Form W-2. Group life insurance is usually offered as a flat dollar amount or as a mul- tiple of salary. Remember to think about periods of transition, because this benefit becomes increasingly important as your client grows his or her family. Short-term and long-term group disability insur- ance tends to be less expensive than individually is- sued policies and has simpler underwriting processes. If your client pays the total premium with after-tax income, the benefit will be tax free. If the employer pays the premium and excludes the cost from gross income, the benefits will be taxable. Planning for a loss of income is a key component to risk manage- ment. Your client can utilize sick leave and vacation days until the short-term disability policy (3 months to 6 months) begins. Short-term disability policies of- ten cover approximately 60 percent of wages. After a period of a few months, the long-term disability pol- icy begins and can provide up to 75 percent to 80 percent of monthly gross wages. The term of disability insurance should match the work-life expectancy of your client. Think of it this way: Life insurance acts as a hedge against premature death, and disability in- surance acts as a hedge against being unable to work during primary earning years. It is important to point out, however, that employer-provided benefits (espe- cially in the areas of life and disability insurance) may not provide all the coverage that your client may need.

Fringe Benefits Fringe benefits are usually not included in an employee’s taxable income. In fact, employers may

pensating employees in lieu of increasing their pay. The other type of pension plan is a defined-con- tribution plan. A company sets aside a certain amount or percentage of salary each year for the benefit of its employees. While the amount contributed is con- sidered fixed, the benefit received is dependent on investment performance. A 401(k) plan is a type of defined-contribution plan and is often the starting point for today’s employees to build a retirement nest egg. This is an attractive savings vehicle because it is convenient for the employee due to payroll deductions and lowers taxable income. An employer may offer to match contributions up to a certain percentage of salary (usually 3 percent to 5 percent) to encourage employee savings. Contributions and earnings are tax-deferred until distribution. Talking to your client about their potential employer match, investment op- tions and underlying expenses while considering their risk tolerance is a wonderful way to add value to the conversation. Employee contributions to 401(k) plans have increased from $18,000 to $18,500 in 2018. Catch-up contributions of an additional $6,000 per year are available to employees over age 50. As a financial planner, you can certainly add a lot of value by analyzing which payout option, monthly annuity or lump sum, yields more money over your client’s projected lifetime. By doing a bit of math and considering other contextual variables like your cli- ent’s current health, financial independence, and risk tolerance, you can help them make the right decision.

Other Employee Benefits The purpose of this column is to outline some of the more common employee benefits to help the new planner get a strong footing in an often-overlooked, but critical, area of a client’s financial plan. You can add further value to the conversation by asking if your client’s employer offers benefits such as a flexible spending account (FSA), group life insurance, and group disability insurance. An FSA permits employees, employers, or both to defer pretax income into an account to pay for health care expenses. These expenses may include copayments, deductibles, certain prescriptions and over-the-counter medicines, and other miscellaneous health care costs. A participant has total control over how to spend the

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an employer can no longer pay for or reimburse an employee’s moving expenses on a tax-free basis with the exception for members of the Armed Forces.7

Conclusion The new financial planner, especially young- er planners, can face many challenges when trying to relate to and advise older clients on specific areas such as retirement or estate planning. The topic of employee benefits is unique in the fact that it can lev- el the playing field between a new planner and the client. Your client may not know about some of or all the benefits discussed in this article. Always keep the contextual variables in mind as a guide to broach these topics more naturally with your client. Try to start the conversation with your client and ask about his or her employer-provided benefits early in the fi- nancial planning engagement, and you will be able to provide immeasurable value to your client from the beginning of your relationship. n

Emily Purdon, CFP, is a senior associate financial planner with Sullivan Bruyette Speros & Blayney (SBSB). She joined SBSB in January 2016 after graduating magna cum laude from Virginia Tech. Emily provides financial planning, in- vestment analysis, and client support to approximately 60 client relationships with total assets under management of $190M. She also supports the tax department as a preparer for individual and trust income tax returns. Emily complet- ed the Financial Planning Residency Program in October 2017, and was recently appointed to the Financial Planning Association National Capital Area (FPA NCA) Board as the NexGen Director. She is currently enrolled in Kansas State University’s Financial Therapy Graduate Certificate pro- gram. She can be reached at [email protected]

(1) “2015 Job Task Analysis,” CFP Board; accessed at: www.cfp. net/become-a-cfp-professional/2015-job-task-analysis. (2) Andrew Chamberlain and Gloria Tian, “Which Benefits Drive Employee Satisfaction?” Glassdoor, June 2, 2016; accessed at: www. glassdoor.com/research/studies/benefits-drive-employee-satisfaction. (3) Tax Cuts and Jobs Act of 2017, PL 115–97 (2017). (4) “H.R.1—An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,” Congress.gov; accessed at: www.congress.gov/ bill/115th-congress/house-bill/1. (5) Ibid. (6) Ibid. (7) Congress.gov (2017), endnote 4.

choose to share the cost of premiums with employees to offset total cost. Outlined below are benefits less frequently utilized but potentially very valuable to your client depending on the “contextual variables.” In 2018, an employee can exclude up to $5,000 from gross income for employer-provided depen- dent-care assistance. The dependent-care services must be necessary for the employee’s gainful em- ployment. During the congressional negotiations of the Tax Cuts and Jobs Act of 2017 (TCJA), the U.S. House of Representatives proposed to terminate this exclusion from gross income for dependent care assis- tance programs beginning after December 31, 2022.3 The House’s effort was ultimately unsuccessful as the Senate made no provisions to change the prior law.4 In 2018, an employee can exclude up to $13,840 of adoption expenses from gross income. This exclu- sion is phased out for taxpayers with modified adjust- ed gross incomes over a certain threshold. Qualified adoption expenses are reasonable and necessary adoption fees, court costs, attorney fees, and other expenses that are directly related to the legal adoption of an eligible child. Similarly, the House attempted to repeal this exclusion for adoption assistance effec- tive December 31, 2017; however, the final agreement kept the existing law.5 In 2018, up to $5,250 of educational assistance can be excluded annually from an employee’s gross income. This exclusion applies to education provided to your client, not to their spouse or children. Eli- gible expenses include tuition, fees, books, supplies, and equipment. The House bill would have repealed the exclusion for educational assistance programs ef- fective December 31, 2017; however, once again, the Senate made no provision, and the existing law re- mained unchanged.6

Qualified moving expense reimbursements are defined as any amount received from an employer as payment for or reimbursements of expenses that would be deductible as moving expenses by the em- ployee. The House bill contained a provision to repeal this exclusion (except in the case of a member of the Armed Forces of the United States) effective for tax- able years beginning after December 31, 2017. In this case, the Senate agreed with the repeal of the exclu- sion for moving expense reimbursements. Therefore,

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