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The Benefits Package: What’s it Worth?

May 22, 2011

Ever wonder what your benefits package is worth? Knowing this value may help you decide whether to accept a job, negotiate for a higher salary, or stay where you currently work. Two benefits that are often offered to applicants are retirement plans and health insurance. Health challenges can appear out of nowhere, so even those lucky enough to have never been sick should take health insurance seriously.

Health Insurance

Pay attention to what your health insurance covers, how much of the premium you will pay each month, and how big the annual deductible is. For example, one employer may pay 100% of the premiums for you while you pay $800/year as a deductible before the insurance takes effect. Another employer’s plan may cover only 80% of the premiums – so you might pay $400 out of each paycheck and your deductible might be $1200.

Let’s compare two offers:

Employer A: salary is $60,000 and the employer pays 100% of the premiums, so you take home $60,000/year. If you need to claim against your health care insurance, the first $800 is your bill, the rest is the insurance company’s, so your gross salary declines to $59,200.

Employer B: salary is $63,000 and the employer pays 80% of the premiums, while you pay the remainder which is $400/month leaving your gross annual salary at $58,200. If you need to use your health care insurance, the first $1200 is your bill, so you are spending an additional $400 of your salary on the deductible (compared with employer A), bringing your gross salary down to $57,000.

Retirement Plans

A couple of common retirement plans are the 403b and 401k. You may elect to invest in any publicly traded securities, options and mutual funds within your 401k, while only money market funds, annuity contracts, and mutual funds can be purchased within a 403b plan. Let’s consider the same two employers that we used for the health insurance calculations. Employer A will match your 401k retirement plan contributions dollar for dollar up to an annual maximum of $3000 effective the first day you work for employer A. Employer B has a 403b plan and will only match 50% of your contributions, which are limited to $1200/year and employer B won’t start contributing to your plan until the start of your second year working for employer B.

Let’s calculate the value:

Employer A: Given your $60,000 salary, if you contribute the maximum amount ($3000) each year, your employer has to match it so your employer pays you an annual salary of $63,000 total.

Employer B: Given your $63,000 salary, and an employer who pays nothing into your 403b in year 1 of the job, your salary remains at $63,000 in year 1. In year 2 on the job, if you contribute $1200, your employer must contribute $600, bringing your year 2 annual salary to $63,600. Looks good right? Keep reading.

In terms of total salary, it won’t matter which employer you work for in the first year, but in the second and subsequent years, if you make a maximum contribution to your plan, you’ll earn $600 more working for employer B but you will not be able to make as big a contribution to your retirement plan if you work for employer B. Assuming your investments grow equally well in a 401k and 403b, employer B’s contribution limit of $1200/year will severely restrict your retirement plan’s value, because if you work for employer B, you lose the opportunity to invest $1800 every year ($3000 - $1200) of your own money, and $2400 annually ($3000 - $600) from year 2 onward, of your employer’s money. That adds up to $4200/year starting in year 2! Employer A lets you invest more than twice as much as employer B, and employer A contributes up to $3000/year while employer B only contributes up to $600/year. If you are able to max out your contribution each year with employer A, then accepting the job with employer B would be a bad personal finance decision.

Get the Answers You Need

When considering a job offer, ask for specific information about the benefits – contribution limits, when benefits take effect, what percentage of premiums you are expected to pay, deductibles, and so on. Any decent employer will provide this information, especially if the benefits package is an enticing one.