When the 'hidden paycheck' becomes the whole paycheck


By J.J. Conway
J.J. Conway Law

The UAW strike is putting benefits back in the public eye. And with good reason. Employee benefits are a significant portion of an employee’s total compensation. Years ago, when employers distributed glossy benefit guides to their employees, they usually contained a letter from the company’s chairman extolling the generosity of the “hidden paycheck.” The hidden paycheck referred to the company’s benefits package. These guides encouraged a company’s workforce to look beyond the biweekly payroll cycle and take stock of the entire financial picture that came from one’s employment.

Estimates vary, but the most reliable data finds that approximately one-third of an employee’s overall compensation is delivered in the form of benefits. The most popular group benefit program offerings include individual and family healthcare, term life insurance, short and long-term disability programs, and defined contribution retirement accounts (e.g., 401(k) plans).

And a legal term most commonly used to describe these employee benefit plans is “qualified.” A qualified plan is one that enjoys favorable tax treatment by the state and federal government.

A qualified plan delivers direct monetary benefits to an employee without being taxed. Health insurance, for example, may cost an employer upwards of $20,000 per year to insure an employee and a family of four. With its qualified status, that healthcare benefit translates into around $26,000 (or more) in extra compensation that is paid directly to an employee and is tax-free.

Today’s benefit programs can be a serious recruiting tool for employers in competitive industries. The better the benefit plan, the better the talent pool. Some plans offer remarkable benefits – months of paid leave for both parents, reimbursement of adoption-related expenses, education reimbursement programs, sabbatical underwriting, and so on. Many of these programs receive favorable tax-treatment.

Employee welfare benefits, such as healthcare, life insurance, and disability insurance, act like a protective backdrop until they are needed. When they are, these plans quickly emerge into the foreground and become a major focus of an employee’s or the employee’s family’s financial life.

A few examples might help illustrate just how important certain benefits are for an employee and that employee’s family. Consider an employee who earns around $90,000 per year and has a standard benefits package. The employee’s wages are subject to state and federal taxes along with Social Security and Medicare withholdings. After these deductions, the employee’s net pay is reduced to around $58,500.

If this same employee enrolls in the company’s health plan, the employee is provided healthcare coverage on a tax-free basis. That benefit has its own value (the cost of the insurance and no accompanying taxes). Now, if the employee suddenly suffers an acute medical situation, the employee may require emergency services, and those services may be followed by intensive care at a hospital. Then, the employee may need recovery services after discharge. In such a scenario, the medical charges could easily reach $200,000 or more – almost four times the employee’s net salary.

In an expensive healthcare case like the one in our example, the healthcare coverage offered to an employee and/or the employee’s family is the essential employee benefit. Here, the healthcare plan protects not only an individual’s actual physical or mental health, but a family’s financial health and savings as well.

Now, let’s say, this same employee is unable to return to work full-time and earn the same $90,000 salary. Here, the focus shifts to the benefit of long-term disability insurance. The employee who is (for lack of a better term) an income-producing asset, has suddenly stopped producing an income. What happens now? The bills don’t stop, and the mortgage isn’t paused. Here, the disability plan is called upon to make up for the lost income.

Suddenly, these two welfare benefits are funding the employee’s entire financial life and protecting whatever net worth the employee has amassed. If either of those benefits fail, financial peril soon follows.

Benefit plans are an important part of an employee’s overall financial wellbeing. They are contracts, set forth individual rights, and contain enforceable promises. When valid claims for benefits are submitted and denied, there is a natural emotional reaction that develops.

With so much at stake, if there is a breach, the losses can quickly exceed the employee’s total income and can rapidly wipe out a family’s savings.

In such a scenario, enforcing the promises of the “hidden paycheck” may be the only hope of surviving financially.
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John Joseph (J.J.) Conway is an employee benefits and ERISA attorney and founder of J.J. Conway Law in Royal Oak.