COMMENTARY: The three pillars of financial security every employee benefit plan should offer

By J.J. Conway

Employee benefits are taking on greater importance as a tight labor market is requiring that employers become more creative and competitive in their benefit offerings. Often salary and wage considerations were the determining factor in accepting employment, but increasingly employees are looking at benefit plans as a source of considerable compensation in their own right.

Consider this scenario. Two different employers extend competing offers to a prospective employee. Employer A offers a salary and benefits of $75,000 which includes comprehensive health coverage, including coverage for infertility treatments. Employer B offers a salary of $85,000 with comprehensive health benefits but no infertility coverage. For an employee for whom starting a family is an important life objective, understanding this difference could affect the employment decision. The additional health benefits offered by Employer A could amount to upwards of $30,000 in extra (and non-taxable) compensation versus the higher salary offered by Employer B. The additional salary is taxed, and any uncovered healthcare expense would be out-of-pocket and non-deductible.

Employer A saves on salary costs and provides insurance for a scenario in which a claim may or may not ever be filed.

At one time, employers referred to an employee’s fringe benefits as the “hidden paycheck.” In real dollars, this means that up to one-third of an employee’s overall compensation is paid out to them in the form of benefits. Healthcare coverage, retirement matching funds, as well as life and disability insurance are critical components of an employee’s financial security. Good employee benefit plans have three pillars of financial security: immediate, short-term, and long-term. These pillars all play a role in an employee’s present and future financial wellbeing.

—An Employee’s Immediate Financial Security

The most important aspect of an employee’s immediate financial security is having a good and comprehensive healthcare plan. Since the passing of the Affordable Care Act, employees can reasonably expect that their “essential” healthcare needs will be met. Now that the ACA’s protections are near universally applied, employees and their dependents are protected from any surprise charges for essential healthcare like physical exams and emergency room treatments. Under the Act, health plans provide pre-existing condition coverage. Without proper healthcare coverage, expensive medical treatments can cause real financial harm, sometimes even bankruptcy. Having the right health plan is crucial for a family’s quality of life. 

—An Employee’s Short-Term Financial Security

A good employee benefits plan should have a disability and life insurance plan underwritten by reputable insurance companies. The financial protection of an employee’s income and assets is critically important, especially if the employee has dependents. If something unexpected happens, the ability to earn an income could be lost, and there should be a disability contract to help replace that income without a prolonged wait. If there is an unexpected death, an employee’s family should be protected by having adequate levels of life insurance coverage. Having good disability and life insurance can help when the unexpected occurs.

—An Employee’s Long-Term Financial Security

This is the third pillar of a benefit plan that should help an employee plan for a future when the employee no longer wants to work (or not work full-time). A good benefit plan should make it relatively easy to save for retirement through a 401(k) plan or other savings vehicle, by building up net worth paycheck after paycheck. A good plan should have solid investment offerings, low fees and be effectively managed.

Because the cost of employee benefits does not typically show up in an employee’s W-2, it is easy to forget they are a significant part of the overall compensation package. When an employee looks at an overall compensation offering, the three pillars of employee benefits that provide for immediate, short-term, and long-term financial security deserve close scrutiny.
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John Joseph (J.J.) Conway is an employee benefits and ERISA attorney and founder of J.J. Conway Law.