Understanding Company Benefits

Michael H. Bergman, CLU lays it out on the subject of benefit packages this month. He'll be contributing a regular column explaining the ins and outs of grown-up finance.

There are an infinite number of different benefit packages being offered to college students today, and each of them has its strong and weak points. The key to choosing the best package is to know the options available and the many terms used to describe them.

One important point is that you should never choose a job based solely on the benefit package it offers. This is because benefit programs can change at any time. There are no laws that require companies to maintain any level of benefits, so plans can and do change. Most reputable employers will not suddenly discontinue a benefit, or change it dramatically, but things do happen. Companies change insurance providers, 401k administrators, and that can cause changes in benefits. So - pick a job based on how you feel about the work, the salary and the future of the company, but know your benefit options (also handy in case you need a tiebreaker).

The first thing to ask is how much of the plan is paid for by the employer and how much of the plan premium do you have to pay. Some employers will now pay 100% of the plan costs (remember - they can change this at any time), but many do not. The next thing to ask is if your premium costs are before or after tax? That means: is your payroll deduction for the premium taken from your Gross (pre-tax) or Net (after-tax) pay. Careful when you ask this - the person answering may not really know. A good question to ask is: "Is this a Section 125 plan?" (Section 125 identifies the portion of the IRS tax code that allows you to pay for insurance with pre-tax dollars.) If you get a blank look, ask that person to find out.

Here's why you need to know:
Assume that XYZCorp pays 50% of a $250 per month premium for good health insurance. LMN.com has the same plan but you have to pay the whole premium. That means that you will pay $1,500 per year more with LMN.com than at XYZCorp. Simple, right? Now add this wrinkle - XYZCorp has a plan that lets you pay your share of the premium with pre-tax dollars (the aforementioned Section 125). And LMN.com makes you pay your cost with after-tax dollars. The difference is not $1,500 ($3,000 vs. $1,500) but $2,500. You have to earn over $4,000 to have the $3,000 Company B wants you to pay - but only $1,500 to pay your premium with Company A.

When it comes to looking at the actual plan, there are basically three kinds of medical plans:

1. Indemnity plans. With this model, you pay a deductible of $100/250/500 in a calendar year and you can go to any doctor or use any medical provider or hospital and the Plan will pay 80% or more of the bill and you pay for the rest. You won't see these types of plans very often. They are un-managed and out of favor with employers and insurance companies.
2. PPO (Preferred Provider Organization)/POS(Point of Service) - The Plan identifies certain doctors and facilities that are "In Network". You choose a Primary Care Physician, and that doctor refers you from doctor to doctor within the network. You pay a fixed "Co-Payment" ($10/15/20) each time you use their doctors or hospitals. With most PPO and POS plans, you're allowed to go "Out-of-Network" - meaning that you will be covered if you go to a Doctor or Facility that is not in your Network book. You will not pay a co-payment though - instead you'll pay a deductible of $250/500/1000 and in addition pay a portion of the bill (co-insurance)of 20% or 30%.
3. HMO(Health Maintenance Organizations) - these are plans that only allow you to use their Doctors and Hospitals alone and you have no ability to access anyone out of their Plan. They are often the least expensive, but they also offer you the least flexibility.

   Most Employers have contracts with several plans and you get to choose the one you want, based on services and price. One of the best ways to choose between the plans is to call your own Doctor, if you have one, and ask in which plan they participate. Warning! - read the fine print: not all plans of the same type are the same. There are large differences in the coverage allowed for chiropractic care, homeopathic medicine, psychiatric treatment (including regular visits with a therapist), birth control, allergy treatment and infertility therapy, among other things. If you have a specific medical condition, or plan to use one or more of the above, check the details with care to see what you're getting.

   As important as Health Insurance is Disability Coverage. Just imagine if you couldn't work and earn a living. Not for a week or month but for years or maybe forever. Accidents and sickness disable hundreds of thousands of people each year, and this benefit - even though its one I hope you'll never need - is key if something goes seriously wrong.

   There are basically two types of Disability plans - short-term and long term disability. Short-term plans usually cover between 13 and 26 weeks of disability. Only five states have mandatory short term disability coverage: New York, New Jersey, Rhode Island, California and Hawaii. This coverage is limited to a few hundred dollars a week in many cases, but it will usually be enough to make sure you don't have to dip into your savings too much.

   Long Term Disability Plans cover disabilities that last more than 3 or 6 months. These plans have benefits that pay 50% to 60% of your base pay in the event you are disabled, for as long as you are disabled or up to age 65. However, there are some twists - look at the plan and see if it includes a Cost of Living Benefit. This means that if you become disabled, your benefit will increase each year by the amount of the increase in the Consumer Price Index. This is especially important if you become disabled at a young age - your salary in 2000 will not buy the same in 2030.

   Also, see if the plan has a Partial or Residual benefit. This means that if you are only partially disabled and your income is reduced (for instance, because you can no longer work a full day, or drive) the plan will replace part of your reduced salary. The "Definition of Disability" should be read. It will tell you what disability means, how you qualify and for how long you are covered in your own occupation not just all occupations. The cost for these plans are small but the benefits can be more important than you can imagine. Take the highest benefit available, with all the bells and whistles available.