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Your Money

Understanding Your Law Firm’s Employee Benefits and Perks

By Ryan McPherson

If you’re an associate or other employee at a law firm, you want to make sure you’re taking full advantage of the benefits your firm offers. And if you’re a partner in a smaller firm, you should be aware of what employees will be expecting from your firm … or their next firm.

So dust off that employee benefits packet, or unearth the PDF HR emailed to you, and let’s examine a few common benefits and perks.

Before we dive in, note the items below are presented for educational purposes only. Nothing below is or should be considered specific financial advice for you. As your situation is undoubtedly nuanced, you should seek the advice of financial and tax43 professionals before using the strategies mentioned.

Health Insurance

This insurance is the foundation of an employee benefits offering and a cornerstone of managing one of your potentially biggest expenses. Larger firms may offer multiple plans from several insurers while smaller firms usually offer one or two options.

The most common plans types include:

  • Health maintenance organizations (HMOs)
  • Preferred provider organizations (PPOs)
  • Point-of-service (POS)

Generally, HMOs are more restrictive, requiring you to select a primary care physician from an approved list who will serve as the gateway to the HMO’s approved specialists. Referrals or some form of prior authorization are often necessary for the HMO to cover visits to specialists and certain hospital visits. Out-of-network providers typically aren’t covered at all.

Conversely, PPOs offer more freedom to select your physicians and referrals for specialists aren’t required. As PPO plans may vary substantially, be sure you understand the percentage of costs your plan will cover for in-network and out-of-network providers. PPOs are usually more expensive than HMOs.

POS plans are somewhat of a hybrid. As with an HMO, you’ll usually select a primary care physician from an approved list and that doctor will authorize specialist visits. Like a PPO, you may venture beyond in-network providers, but your plan will cover a smaller portion of those visits.

Exclusive provider organizations (EPOs), catastrophic plans and fee-for-service (FFS) plans (also called indemnity plans) round out the major types of health insurance offerings you might see on your firm’s benefits menu.

Plans can vary substantially, even from year to year, so make sure you understand what your plan covers and requires of you.

What about high-deductible plans and HEALTH SAVINGS ACCOUNTs?

A plan may be categorized as a high-deductible health plan (HDHP) based on its deductible minimums, out-of-pocket maximums and a few other coverage nuances. Your benefits menu should clearly state which plans, if any, qualify. The Society for Human Resource Management has summarized the needed deductible minimums and out-of-pocket maximums for 2018 here.

If you’re enrolled in a qualifying high-deductible health plan, you may have access to a health savings account (HSA). You make pretax contributions to your HSA via salary deferrals and your employer may contribute as well.

When HSA dollars are used for qualified medical expenses, the distributions are not taxed. Watch out: Distributions for non-qualified expenses are taxable as income plus a 20 percent penalty. (If you’re 65 or older or disabled, distributions for non-qualified expenses may just be taxable as income.) IRS Publication 502 outlines what qualifies as a medical expense.

Since HSA dollars do not have to be used by year-end, you can potentially build up a substantial “health care fund” over the years. HSA funds can even be invested. For 2018, an individual may contribute up to $3,450 and a family up to $6,900. Remember: Those limits apply to contributions from all sources — that’s you and your employer.

How about FLEXIBLE SAVINGS ACCOUNTs?

Flexible savings accounts (FSAs) are typically paired with non-high-deductible plans. Contributions are made pretax and distributions are not taxed so long as they’re for qualified medical expenses. The 2018 contribution limit is $2,650.

Dollars you, and possibly your employer as well, have contributed to your FSA may need to be spent by year-end. Your employer might offer one of two carryover options, though note that offering them is not a requirement:

  • Roll up to $500 of unused funds into the following year; or
  • Offer a 2.5-month grace period during which you may use your unspent FSA balance.

If you don’t have either of these carryover options and expect to have money left in your FSA, try to move appointments and medical- or dental-related purchases into 2018.

Resource Tip: Which health insurance plan should you choose? I wish there was a simple answer, but there’s not. Matt Becker of Mom and Dad Money provides a good framework for evaluating health insurance plans.

Life Insurance

Your employer likely provides some level of basic life insurance coverage. One times your salary is common. The cost of the first $50,000 of employer-paid coverage is not taxable to you, the employee. However, the cost of employer-paid coverage over $50,000 is viewed as a taxable benefit and will show up on your pay statement and on your W-2 (Box 12, code C).

Do you need life insurance?

If no one depends on you financially and no one would be harmed financially if you passed away, your need for life insurance is probably lessened.

However, if you have children, a spouse who doesn’t work, or a spouse who works but would be impaired by the loss of your income, and you are financially supporting anyone else — you likely have a life insurance need

For those who do need life insurance, be aware that basic employer-provided coverage is often insufficient. We’ll save navigating through a life insurance needs analysis for another post (or two).

What do you do if you need/want more coverage?

You may be able to purchase additional term life insurance through your firm’s group policy. While this is convenient and you usually won’t need to undergo a medical exam, the premiums for these types of policies often increase at set intervals and the policy might not be portable.

Portability is key if you need to keep your insurance after you leave the firm and don’t want to apply for an individual policy.

When does this matter? If you (1) need to maintain a certain level of life insurance and (2) have a medical condition that would make getting an individual policy impossible or cost-prohibitive. Remember: Your next firm might not allow you to buy enough additional insurance through its group policy to fit your needs.

Generally, if you’re older and less healthy, purchasing additional group coverage may be cheaper than buying an individual policy, since the cost of the group coverage isn’t tailored to your health and age as it would be with an individual policy.

Regardless, if you’re looking for additional life insurance, you should compare the costs and portability of options through your firm versus an individual or privately purchased policy.

Disability Insurance

This is especially important for younger lawyers. Your greatest asset is your ability to earn the above-average income afforded by your law degree. Protecting that future income stream is key.

If your firm offers coverage, you want to find out:

  • The projected monthly benefit and how that benefit is calculated
  • The definition of disability used and if that definition changes during the benefit period
  • The waiting period before benefits can be received
  • The total or maximum benefit period
  • The presence and mechanics of an annual inflation adjustment

Privately purchased policies can be customized far beyond those offered by your firm.

Pay special attention to the definition of disability used in your policy’s documents. Look for “own occupation” language (concerning the insured’s ability to perform the duties of his or her own occupation) and specifically how your occupation and activities are defined for the policy’s purposes.

Parking

If you pay for parking, you should be doing so with pretax dollars. Up to $260 per month (for 2018) of qualified parking expenses may be paid pretax. Take a look at IRC Section 132 for further details.

Retirement Plan

If your employer sponsors a retirement plan, likely a 401(k), use it. Since your contributions leave your paycheck without you ever seeing (or getting a chance to spend) those dollars, this streamlines and automates the retirement savings process.

Further, if your employer matches your retirement plan contributions up to a certain percentage of your salary, at least contribute up to that point. We’ve touched on this before here and here.

Firm owners: If you’re pondering adding a retirement plan, do it. It’ll help you save for retirement (which we’ll discuss in a later post) and your employees will thank you. There are many cost-conscious small business 401(k) offerings today.

Illustration ©iStockPhoto.com

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Ryan McPherson

Ryan McPherson is the founder of Intelligent Worth. He helps solo practitioners and partners in smaller firms align their personal and business finances to generate wealth and avoid missteps. Ryan is a Certified Financial Planner and an IRS Enrolled Agent. He is a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network. Follow him on Twitter @RyanDMcPherson.

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