Employee Benefits: Quality of Life

The following is a chapter from Employee Benefits: How to Make the Most of Your Stock, Insurance, Retirement, and Executive Benefits by Josh Mungavin CFP®, CRC® and Edited by Chris Boren & Tristan Whittingham.

Employee Benefits - cover


Quality of Life


Time-off/Sabbatical Policy

Time off for sabbaticals may be paid or unpaid depending on the employer, the duration of service, and the type of service (i.e., full or part time). Taking a sabbatical can be beneficial both in the short and long term for both the employee and the employer. The employee can return to work with an overall sense of well-being, having recharged their batteries and stepped away from the day-to-day grind of working, allowing them to come back with long-term positive changes to thinking and creativity. While an employee is typically more inclined to check in with work during a vacation, a sabbatical may provide the employee the ability to “check out” of the office for one to three months. This also gives the organization time to make sure the other employees have been properly cross-trained to ensure that the organization would be stable if they lose any employee.


Planning for a sabbatical should begin far in advance by cross-training the other people in your department. This can be a learning experience for everyone involved, leading to a stronger organization overall. The people who are cross-trained to fill in for the employee while the employee is on sabbatical can become more effective and responsible by the time the sabbatical taker returns because they can see the organization from a different viewpoint and gain wider experience working within the organization. Employees may find creative ways to grow the business that they would not have otherwise been inspired to pursue had they not spent time away from the company seeing things from the outside or from a different cultural viewpoint. Ideally, no team should be so dependent on any one person that everything falls apart if that person leaves, and a sabbatical is an easy way to test that.

The sabbatical also gives the individual a chance to view themselves and the world around them from a new direction, take on a new project, volunteer for something they care about, do research, write a book, learn a new language, pick up a hobby, reconnect with friends, work on a passion project, explore new ideas, travel, improve their health, spend time on their retirement or estate planning, take care of their family, or learn something new. All these activities lead to a better mental state upon the employee’s return to work and their ability to concentrate on the work in front of them since they have already taken care of the personal things that they had either put off or that were weighing them down during the work day. An employee coming back from a sabbatical often feels rejuvenated, like they have a new job, and no longer shows signs of burnout, returning with renewed focus on their work and sense of purpose.

A sabbatical can also be a great time for employees not on sabbatical to step forward and act in the role of the person on sabbatical by gaining valuable experience and showing management that they have the ability to step into that role if that position becomes available. Extra work taken on during a coworker’s sabbatical should be seen as an opportunity to be trained in a new area and to achieve expanded potential within an organization.

It may be wise to consider taking a sabbatical before leaving a company since your desire to leave the company may be a sign of burnout rather than an issue with the company. Used properly, the sabbatical can not only change your life but also provide valuable insight for your firm and a renewed sense of vigor to push through to the next level of your career.


A sabbatical is not like a typical vacation in that you only need to spend a short period preparing the office for a vacation. The planning for a sabbatical should start a year or years beforehand so cross-training is thoroughly done and everything is thought through and planned far in advance of the sabbatical. Always be thoughtful when scheduling and coordinating your sabbatical so you do not wind up with multiple people out of the office, placing stress on the employer and employees who remain to cover multiple shifts rather than just yours.

If your sabbatical is thoroughly prepared for, you may find that rather than coming back to a desk full of work, you come back to employees who are more self-reliant and accustomed to solving problems, having taken care of everything in your absence. If things are handled well during your absence, you can see that you don’t need to micromanage people and rely more heavily on your coworkers and subordinates. On the other hand, if you come back and things have fallen through the cracks that were an employee’s responsibility, you can get further insight into that employee’s capabilities and shine a light on their work in their current position, ultimately affecting their further employment or promotion opportunities in the future.

Some employers will allow you to combine your leave with your paid time off, whereas some will not. In general, paid time off and sabbatical policies are based on an employee’s tenure with the employer. Make sure you know what will happen to your health benefits while you are on leave so you know if you will need to pay for health benefits, if your employer will pay for the health benefits, and whether FSA or dependent care accounts will stay in place. You’ll need to know if your job will be available upon your return and if there is there a penalty for failure to return to work (either monetary or through a complication in benefits).

Before taking a sabbatical, it’s important to make sure you are financially ready and secure to cover your living expenses for the time you are away if it is not a paid sabbatical. It may be possible to split your sabbatical in two or combine the sabbatical with PTO to extend the time you can be gone. You will also need to note the effect the sabbatical has on all your benefits, including health benefits; retirement savings (including 401(k) contributions and matches or pension years of service in your pension calculation as taking an unpaid sabbatical during the last three years of employment if your pension is based off your last three years of salary can cause significant long-term detrimental effects); and insurance coverage, such as life insurance and disability insurance.

It’s also important to know whether you can take a paid job during your sabbatical since your company may limit you to not taking paid positions; if you are allowed to take a paid position, you may be restricted from working at a competitor’s firm. In addition, note that it is important to know whether anything you produce during your sabbatical will be considered your employer’s intellectual property.

Paid Time Off, Vacation, and Sick Leave

Paid time off (PTO) can be a specific number of days per year after a certain number of years of service, or you can be given a certain number of PTO hours per hours worked as a credit towards the number of hours in a bank you can use. Most PTO expires at the end of a certain period, but occasionally employers will allow you to roll PTO over from year to year. There may even be an opportunity to sell your PTO days back to your employer at certain periods, such as banking PTO days throughout your career and selling back a large block of them to your employer before retirement.

PTO vs. Vacation and Sick Days

Employers generally have vesting periods for employees to start PTO so employees can’t take PTO immediately; for example, you may have to wait 60 days or a year. There may be PTO or vacation and sick days, with sick days requiring that you actually be sick. Employers have recently been moving to PTO days rather than a combination of vacation days and sick days, which has sometimes come to the advantage or disadvantage of employees. It is often the case that the combined number of sick days and vacation days are greater than the number of PTO days given under new policies, but there is more flexibility in PTO days for healthy employees. Some states or cities may require that a certain amount of paid sick leave be given per year, so you may find that you have a combination of PTO and a minimal amount of sick leave as prescribed by law. It might be a good idea to look at work-from-home options if you are sick and you must work because of a lack of remaining PTO or a desire to not lose a vacation day.

One major concern with the change to PTO banks is that it encourages people to come to work sick rather than losing out on a day of vacation, which may be a good reason to work from home if you have the ability to do so. There are also issues with employees trying to use all their PTO near the end of the year so they don’t leave any days on the table, in turn leaving the employer with far too few employees to cover the employer’s needs near the end of the year. This makes it very important to make sure your days off are scheduled well in advance and thought through so your employer is not put in a bind.

How to Get the Most out of PTO

You can make your PTO days go further by strategically combining them with three-day weekends throughout the year rather than taking random weeks off. You may find that by combining your PTO days with three-day weekends, you can fit in an extra week of vacation or have a few spare days over the course of the year to either stay home or to use for sick days. Some employers will allow you to combine your leave with your PTO, whereas some will not.


Flextime allows employees to have flexible schedules where they can customize their work hours within a certain range of hours and days. Flextime can come in the form of compressed work weeks, flexible daily hours, or telecommuting, and it provides the flexibility to meet family needs, personal obligations, and responsibilities. Some options can save you money and stress, such as shaving time off your commute to work by shifting your commute from rush hours to times when traffic is not as heavy. It can help you avoid burnout, allow you to work when you feel the most productive, or give you control over your working environment if you work from home. It may also decrease childcare costs if parents can stagger their work times to reduce or eliminate childcare.


Some employees who thrive in an office environment may be disadvantaged by people working flexible schedules or working remotely. To remedy this, some employers require employees to keep core days or hours so there are at least some days or times when everyone is in the office to coordinate and collaborate. For instance, an employer that requires core hours may require the employee to be in the office from noon until 3 pm everyday so the office benefits from coordinated efforts and people working together for at least a few hours out of the day while allowing employee flexibility.

It’s also important for people who choose to work at home to make sure to check in and show progress to those who choose to go into the office; it can be easy for office colleagues to perceive that those working remotely aren’t working if there aren’t tangible outcomes from the remote work.

Flextime Options

Some employees may be given unlimited or limited ability to work from home or telecommute while working remotely since many jobs do not require a person to be in the office to be productive. Some employers may allow compressed work weeks, e.g., working longer hours four days out of the week and taking the fifth day off, working shorter hours four days a week and having one long day to make up for the difference, or working shorter hours six days a week.

Some employers allow employees to work from alternating locations; in other words, the employee may work from the office for four days a week and then work from home or a remote location on the fifth day. If used properly, any flextime arrangement can lead to a significant increase in quality of life and the ability to be more productive since you can take advantage of working on things when you are most creative and productive. You can also coordinate things in your personal life that need to be coordinated while helping prevent burnout. Make sure you stay active in communication and collaboration as much as possible if you are working under a flex arrangement so you are not seen as taking advantage of the benefit and as a productive member of the team.

Work from Home

Some people work best in an office environment, while others work best and stay most productive working from home. So, it is important for you to know which camp you fall into before committing to working from home or the office. For the right people, working from home can increase productivity and decrease stress.


For employees who work best in quiet, stable environments, working from home can reduce the amount of distractions faced because people do not come into their offices to disturb them while they are concentrating. At the same time, you cannot stop by a coworker’s office to coordinate on an assignment as easily, so it’s important to set up proper systems to collaborate while maintaining a distraction-free work environment. Working remotely may allow you to avoid office politics that you would otherwise be pulled into. Often, workers will need large chunks of uninterrupted time to really make progress on a project, which they can get through working remotely, but it’s important to set up times during the day to check in on the people in the office and others working remotely. Introverts may find even more significant benefits from working from home because of the solitude it provides. Make sure to stay in touch with the office to not only keep up with changes in important information but also show you are working and engaged.

The lack of time spent commuting can save dozens of hours every week that can be put to better use in both your personal life and your work life if used appropriately. Some people use a combination of working from home and flextime to bifurcate their work day so they can wake up early, get started on work while they’re most productive, take a midday nap or work out, and then come back to work having had some time away and some physical exercise so their minds are working at full capacity. Even something as simple as taking a walk around your neighborhood or through a local nature trail can be incredibly valuable over the course of the day since it provides a mental reset.

You may be able to save money by making your meals at home rather than eating out and by having more casual attire rather than the normal wardrobe expenses and trips to the dry cleaner. In addition, you may be able to work in a newer, more comfortable environment. Working remotely can also allow you to spend time with your family and pets that you otherwise might not have; things like working from an aging parent’s home can be incredibly valuable to you now and in the future since that is time you can’t get back, which may give you fond memories of your parent you might not otherwise get to have.

What to Be Aware Of

Make sure that if you work from home to decrease stress levels that you are not “always on” when you normally wouldn’t be; otherwise, you risk compounding your stress and ending up burned out. It’s too easy to let the desire to make sure people know you are doing well at your job while working remotely take over your personal life if there is no dividing line between work and home, which can cause you to overwork yourself so you’re not seen as a slacker.

Dependent Daycare Expenses

Your employer may have a dependent care assistance program, which could allow you to allocate up to $5,000 per year (unless you file married filing separately in which case you can allocate up to $2,500 per year) for child-care expenses pre-tax. This money can generally be used for a nanny or daycare.

Rules and Limitations

While these tax-benefited savings are generally used to take care of dependents while a legal guardian is at work, it can also be used for children of any age who are physically or mentally incapable of self-care or adult daycare for senior citizen dependents who live with you. The person for whose benefit the funds are spent must be claimed as a dependent on your federal tax return. The funds can’t be used for summer camps, other than day camps, or for long-term care for parents living elsewhere. A dependent care FSA is federally limited to $5,000 per year per household.17 An FSA for dependent care is not fully funded at the beginning of the plan year by the employer, unlike medical FSAs. Unused amounts for dependent care also cannot be carried over, unlike some healthcare FSAs may allow.

The money allowed to be put in a dependent care FSA can be further limited if one of the spouses is not working and the non-earning spouse is not disabled or a full-time student.18 This can cause some very odd issues. For instance, if a single person elects to withhold the full $5,000 for childcare expenses and gets married to a non-working spouse before having filed claims for any of the money, the $5,000 would be forfeited because the newly married person can no longer take advantage of the dependent care FSA since the spouse is not employed; however, the $5,000 put into the plan would also be taxable. Thus, you would get no benefits and still have to pay taxes on the $5,000 you never received.


Your employer may provide housing to employees; thus, it is important to know whether the housing is provided in a manner that will cause you to have to pay taxes so you are prepared at tax time. You may be exempt from paying all or part of the taxes on employer-provided housing if it’s provided for the convenience of your employer, it’s a temporary work location, or it’s lodging furnished by an educational institution.


If you are provided with housing by your employer, you should ask for documentation containing a description of your responsibilities, a description of the lodging being furnished, the reasons why the lodging is required for you to perform your duties, a listing of taxable and non-taxable utilities, and services provided (such as phone, internet, housekeeping, and landscaping services). In addition, any events you have at the house connected with the business should be recorded in case of an audit. You should be very clear as to which utilities you will need to cover for the house. Furthermore, there are some very complex rules covering what is taxable and what is not, so make sure you understand what your tax liability will be after speaking to your CPA. If the employer owns or rents the home, it is also important to note who is allowed to occupy the property, if any pets are allowed, what rules are imposed on staying at the property, if smoking is allowed, if there are any quiet hours, if the employer can come in and inspect the property, any upkeep required for the property, and who is required to pay for utilities.

Potential Costs and Assistance

Housing assistance can come via specific dollar amounts for down-payment assistance or housing education programs and credit counseling. The employer may also provide closing-cost grants, deferred loans, mortgage guarantees, shared-appreciation mortgages, or donated or discounted land and buildings for development or redevelopment. Some states may also offer to match a certain amount of funds given to the employee by the employer for house down payments or closing costs. If you are staying in a home your employer owns or leases, make sure you know whether you are a tenant or under license. It may be easier for your employer to kick you out if you are under license if something happens at work and you are laid off, which creates a significant increase in insecurity.

Student Loan Repayment

Optimal Use
Your employer may offer to make payments on your student loans. In such cases, it may be wise to think about not paying off any student loan amounts your employer might pay off for you if you plan on staying with the company so no money is left on the table. There may be a period that you have to wait before you start collecting contributions, such as working at the employer for one year before they start repaying loans, and there will likely be a cap (either per year or over the course of your career) on what they will repay on your behalf.

If you know you are taking a job with a company that offers student loan repayments after you graduate, it may be wise to think about taking on a certain amount of college debt even if you otherwise wouldn’t have to in order not to leave money on the table.

29. Studen Loan Repayment 1

General Considerations

Do not let student loan repayment be a driving factor in which job you accept because many benefits can add up to a more beneficial pay package over the course of your career. In other words, like every other benefit, it’s wise to look at the combined benefits package rather than any benefit in isolation before choosing a job and negotiating for any missing benefits in the best benefit package offered to you before accepting a job. You want to look at the whole picture, including pay and the benefit package, rather than one benefit in particular, even if there is an emotional pull towards one benefit.

Special Considerations

  • Remember that any payments to you are currently considered income, so you’ll have to pay taxes on the benefit.
  • Note that there is the potential to deduct student loan interest from your taxes while your employer pays your student loan off for you.
  • Some employers will offer to match student loan payments up to a certain amount with non-taxable contributions to retirement accounts rather than paying off the student loan directly, so you get a tax benefit from the employer benefit.
  • Some employers will offer monthly payments while others will offer lump sums, so it’s important to understand the design of the plan.
  • Some will require you to have received your degree within a certain period before employment; for instance, you may have had to receive the degree within last two to three years to be eligible for student loan repayment.
  • Some employers will pay a certain amount per year with no cap, and some will make a certain payment amount per year with a lifetime cap.
  • Keep in mind that if you paid off your debt, you may not be able to get retroactive benefits for debt that no longer exist.
  • An employer may require you to refinance the student loan with a certain company. If they do, make sure the forgiveness terms, interest rate, and any loan servicing fees don’t change the loan. Otherwise, be comfortable with how they will change the terms of the loan and consider converting only some of your student loans so you get the max employer benefit but keep the other preferable terms of your currently existing loan.

Financial Advisor Fee Payment

The best form of this benefit is when the employer gives you a stipend to use to hire a financial advisor of your choosing. This ideal scenario is not universally used since your employer may also decide to contract with a single firm (which can create a false sense of security because you believe the information comes through or comes blessed by an employer). The employer may pay the upfront planning costs and depend on you to pay any ongoing costs, or they may pay a certain amount yearly for your benefit. This benefit can be provided on a one-on-one basis, through in-depth in-person workshops, or over the phone and computer consultations.

Potential Risks

Given what I do for a living, one would assume that I would be unabashedly for this benefit. However, it may come with strings attached that you need to be aware of. Sometimes, the person coming in to the company to give financial advice has volunteered to give the advice for free. This costs the employer nothing, and the advisor typically expects to make their money from commissions and other charges to the employee. A large red flag appears when you sit down with someone and within an hour, you end up with a recommendation to buy something that could affect the rest of your life. If that happens, you’re likely talking to a salesperson and not an advisor. A skilled, experienced advisor working on a team of very competent people can take tens of hours to create and truly understand your financial plan and how everything fits together. So, even the best, most well-intentioned advisor can only do so much during a one-hour phone call.

It is important to learn from the advisor your employer may provide to you, but always remember that you shouldn’t take for granted that the advisor has been vetted by the employer. It may be that the employer simply chose the person or company in charge of some of the company’s other benefits. Similarly, even though your employer is paying for the financial planner to come in and talk to you, it doesn’t mean that the advisor actually has your best interests in mind or that they won’t try to sell you something to line their, or their firm’s, pockets. This threat is ever present, making it important for you to make educated decisions about any options presented to you.

As with the college benefit, something that is free is not always without cost. This means bad advice, even if it’s free, can be very expensive in the long run. It is important to be very careful to evaluate the person with whom you are speaking. You may be routed to an individual in a call center reading off a script who has little financial knowledge. A good way to make sure you are dealing with somebody who is at least minimally competent is to make sure they have the Certified Financial Planner® designation. This designation does not speak to how good somebody is at financial planning but simply shows that they are minimally competent at performing financial planning.

Key Considerations and Regulations

Other financial advice can typically be found in the 401(k) education provided by the employer; you should take advantage of this information. There is a general legal requirement that as a fiduciary, a 401(k) educator must have your best interests in mind, whereas a financial planner or advisor who is not acting as a fiduciary is not obligated to have your best interests in mind but instead the best interests of their firm. That said, when working with your 401(k) or any other financial matter, it is always to your benefit to use an advisor who is a fiduciary. It’s important to have an ongoing engagement with the person who knows you and your financial plan due to the complexity and in-depth thought involved in financial planning. Oftentimes, an internet or call-in service is largely devoid of value outside very basic questions and financial education.

Some companies will pay you or give you health insurance premium discounts for participating in financial wellness activities or education, so it is always worth researching what is available to you.

Relocation Assistance

Employer-provided relocation services may be provided as a lump sum or a direct reimbursement, or your company may provide paid moving services with a company with which they have contracted. The moving benefit generally covers the movement of household goods and people; it can sometimes include scouting trips so a new employee can visit the new location with their family and decide where they would like to live while they are beginning to assimilate to the new community. It may also include retention bonuses to employees if they stay with the new company or stay with the old company that’s relocating them for a specific time frame. The employer may also provide trailing-spouse assistance for a spouse who stays behind while the employee sets up their new life in a new location. Housing benefits may come in the way of loss-on-sale benefits, quick-sale bonuses, and other incentives to help employees sell their homes and buy new homes.

Here is a general list of relocation expenses that may be reimbursable by your employer:

  • Travel
  • Hotels
  • Flights
  • Meals
  • Transportation costs
  • Household goods
  • Automobile relocation
  • Storage options
  • Miscellaneous cash allowances
  • Home search expenses
  • Real estate commissions
  • Temporary housing costs
  • Early lease cancellation
  • Home sale or purchase costs
  • Rental deposits
  • Home sale marketing
  • Physical move packing
  • Cost of turning off and on utilities
  • Cancelation fees to any clubs
  • Reinstatement fees to any clubs

*This list is by no means comprehensive. If you think that an expense might be reimbursable, ask your employer. It’s better to ask and be told “no” than not to ask and find out later you left money on the table.

Potential Advantages

It is almost always a good idea to use any rental or temporary housing available to you in a new city so you can make sure you are comfortable living in the area of town you plan to live in. The ability to rent a place for a few weeks or a month while you keep everything in storage at your employer’s expense and search for a place you are happy with is of substantial value, and you should utilize it if it all possible.

Potential Risks

Generally speaking, if the moving benefit is in the form of a lump sum or the reimbursement is given directly to you, it will likely have to be counted as income for tax purposes; this means you will have to deduct moving expenses from your taxes. If the money is paid directly to a third party, however, it may be excluded from work income. Make sure to work with your new company and your accountant to make sure you get the best after-tax benefit possible before beginning your move.

Key Considerations and Regulations

If a relocation package isn’t brought up during salary negotiations, it’s your responsibility to start the conversation; otherwise, you may not get an offer for relocation, especially if you have already signed a contract with the employer. Before negotiating, know what you’ll need, including any special assistance for services; any special moving needs, including boats and paintings; and the sale and subsequent purchase of a house. You’ll also want to know about how much your move will cost for each of the components so you have a baseline on which to negotiate. Make sure that when you are moving and you have a relocation package you know what it covers. Some may or may not cover packing or unpacking items; moving the car or second car; or moving exercise equipment, paintings, boats, and other items you may choose not to relocate given the personal cost to you if it’s not covered under the relocation agreement. Make sure you keep track of all expenses and keep all receipts in case you must justify anything to the IRS or your employer.

It is important to know when to expect the reimbursement if you are being reimbursed for travel services or any of the other housing allowances. You don’t want to depend on being reimbursed immediately and find out that reimbursement takes a number of years after vesting with the new employer before you receive any money. Following your move, your employer may provide relocation benefits in amounts paid incrementally rather than a lump sum.

It is always wise to get a quote from a moving company after they’ve seen everything in your current home since phone estimates are notoriously inaccurate. Make sure to walk through your house while recording a video of all your things on your phone so you have some documentation in case something is broken during the move. Finally, always make sure you deal with a licensed, bonded moving agency.

Legal Plan

An employer may offer a group legal plan that provides access to a network of attorneys who have agreed to provide legal services at discounted rates. This may or may not be a benefit to you.

Here is a short list of different services lawyers may provide:

  • Informational and advice consultation;
  • Review and creation of legal documentation; and
  • Litigation and negotiation representation.

Potential Advantages

It is worth looking at the value of the plan, especially if you do not already have estate documents including your healthcare power of attorney, durable power of attorney, and will at the very minimum. These are essential documents in any financial plan, and the ability to obtain such documents at a discounted rate can be invaluable.

Potential Risks

It is always recommended to have an attorney draw up these documents rather than using online form templates to create your own. As is so often the case, we do not know what we do not know. Trying to draw up your own estate plan leads you into very deep waters that very talented people have made careers of understanding. The cost for estate documents can be high, but the consequences can be exponentially higher.

Volunteer and Gift Matching

Volunteer and gift matching are excellent benefits that add value to employees, employers, and the community at large. With volunteer matching, your employer will usually donate money to an organization for which you volunteer for every hour you spend volunteering. With gift matching, your employer will match the money you donate to a cause you care about. For both of these benefits, your employer may set matching percentages up to a certain limit.

The types of volunteering work that qualify under volunteer matching can include all types of projects, from hands-on projects in the community to pro bono work in the area of your expertise. This can be personally rewarding for you and give you leadership experience, the chance to form connections with colleagues in your corporation, or the opportunity to mingle with people in varying industries outside the corporation. This leads to marketing for the firm and the ability to establish your personal brand.

Potential Benefits

Volunteering can provide a way for you to develop skills that are beneficial for your job and increase your value in the eyes of your employer. It also involves giving to a cause that you care about while your employer contributes to the same cause. This is a win–win for everyone involved: the cause, your employer, and you. Your employer gets a more well-rounded employee who gives back to the community in a meaningful way while potentially bringing in new business and garnering goodwill from the community that knows the employer is sponsoring the employee helping the cause. This brings about healthier communities that reap the rewards of employees and employers combining forces for the good of society.

Some companies not only match cash contributions but also contributions of securities to charitable organizations. This means there are additional benefits if you have highly appreciated stock you would like to donate to a charity. You get the tax benefit from gifting highly appreciated stock instead of cash, and there’s a match benefit from the employer so that in after-tax terms, you give much less but the charity gets significantly more. You may also think about gifting directly from an IRA account if you are over 70.5 years old since such gifts can be counted toward your required minimum distribution; you not only get to give money to a charity and have your employer match it but also avoid paying taxes on the part of the required minimum distribution that went directly from the IRA to the charity.

Potential Risks

It is important to be cognizant of any conflicts of interest in using this benefit. In cases in which money is given to private foundations or donor-advised funds, gifts that provide benefits to you or your family (including advertisements) may be out of line with the intent of the program, leading to more than a few raised eyebrows within the organization. This type of conflict of interest may have consequences up to, and including, termination, possible civil or criminal liability, and a demand to return the matching gift amount from either the charity or from you, the employee.

Key Considerations and Regulations

To get the gift-matching benefit, an employee may be able to simply provide receipts; some cases may require a payroll deduction to have the company match dollars given. Some companies only match contributions to certain charities and limit the program to certain employees. This makes it very important to know how much can be paid out and the process for getting that amount paid out. You may need to keep documentation along the way or ask your HR department for approval of the charity before the gift is given. There is no reason to leave money on the table by not following the stipulations of the program, thus leaving the charity with less than they would have gotten if you had followed the program’s rules. Gifts may have to be made during certain periods, and you may have to follow up with the organization you have given money to and confirm that the matching gift from your employer was made and received. It’s also important to make the distinction that employer matching is not a deductible charitable contribution for the employee.

With respect to volunteer matching, an employee may need to show volunteer hours logged to get the company to provide gifts matching the hours volunteered.

Tuition Reimbursement or Assistance

Your employer may pay for continuing education, part of your college tuition, or some tuition and college-related expenses for your family members. It’s important to know what type of education your employer will pay for, and it’s generally worth not leaving free money on the table when you can spend some of your employer’s money to further your own education, either through college or continuing education courses. Some tuition reimbursement assistance programs will help pay for GEDs or language classes, while others require you to only take courses in your particular field or classes the employer deems useful for its purposes.

Potential Advantages

Some employers also choose to reimburse for expenses associated with higher education. These reimbursements can include books and an internet connection as long as one of your courses is online or has some internet component. This opens availability for someone who has an interest in learning, maybe about a specific course or subject they feel will increase their value in the job market, but who don’t necessarily want to complete a degree program to gain the education they desire, and free internet or subsidized internet.  In the right situation, you can actually make money by agreeing to take college courses that you get an A in because the value of the internet subsidy, and any other costs covered by the employer, are paid for while you increase your value as an employee. To extend the time during which you receive these additional education-related subsidies, it may make sense to think about taking one course at a time rather than several courses simultaneously if the employer will cover the full cost plus additional fringe benefits. This is recommended even if you aren’t interested in furthering your education but are interested in having a certain number of subsidies from your employer.

Potential Risks

Some employers have teamed up with certain colleges, which can be a good or bad thing. The employer may have contracted, for a discount, with a for-profit school that is otherwise suffering for students and needs to attract the business. This could be troublesome since even after the discount, you may not get the value you are paying for. It is also important to consider that getting a discount on something worthless is far worse than paying for something that’s worthwhile at full price. Think about the end goal of taking the courses: can you receive another degree through the college that will be of value, and if not, are the courses transferable? If the answer is no to both those questions, then it may be worth considering paying full price elsewhere to achieve your goals.

It is possible that all the discounts on college tuition you receive are a reduction from the university expenses and not actually a contribution from your employer. An employer may give a scholarship of a certain level of discount after factoring in any financial aid available. This means, you may use up some of your lifetime financial aid benefits by pursuing the employer-sponsored education plan, get a small discount on an education that is otherwise nearly worthless, and be unable to use the same benefits for the education you actually want. As stated earlier, a discount on something that is overpriced to begin with or that has no value is not a discount—it’s a sales tactic.

Some of the discounted or free college education programs available to you might include online courses only. These can have value in terms of training you, but they may lack the value a normal college brings in terms of interactivity, such as getting to spend time with other people in your industry and growing your network, which can become a substantial asset over time.

There will almost always be an annual dollar cap on employer-provided educational assistance. In 2017, the IRS allowed your employer to reimburse you for or pay directly for any educational assistance up to a maximum of $5,250.19 Anything over that cap would be counted as income and taxed as ordinary income. This is an important distinction to keep in mind when it’s time to file your tax return.

Key Considerations and Regulations

It’s important to account for the cost of tuition and associated fees when deciding how to take advantage of this benefit since your employer may put a limit, either annually or per credit hour, on any courses taken.

Your employer may also require that you clear the specific course through HR so your program of study matches the employer’s needs for you as an employee. You will likely be required to receive at least a certain grade point average in the courses you are reimbursed for, and you may find that there is a depreciating reimbursement depending on your grade (e.g., as being paid out at a higher rate than Cs and so on).

It’s also important to know before taking a course when you will be reimbursed since your employer may not reimburse you until you have met a certain number of stipulations or certain vesting. You may also be required to provide proof of enrollment and your grade point average for all completed courses.

The amount of reimbursement you’re eligible for may depend on the length of time you’ve been with the company, and there may be a cap on the number of classes you can take at a time or overall throughout your entire career. Keep in mind that some of these programs require you to remain with the company for a set period; otherwise, you may be required to pay your employer back for any tuition reimbursement received.

Employee Assistance Programs

Employee assistance programs are meant to assist you with personal or work-related problems. They may offer confidential assessments, short-term counseling referrals, and follow-up services for those in your household. These programs generally provide short-term counseling and refer you to an outside resource. You may have only a few sessions or quite a number of sessions to take advantage of over the course of the year. The sessions can be either by phone or in person depending on your company.

Counseling sessions can be for any of the following issues:

  • Substance abuse
  • Occupational stress
  • Emotional distress
  • Major life events (accidents/death)
  • Healthcare concerns
  • Financial concerns
  • Legal concerns
  • Family issues
  • Personal relationship issues
  • Work concerns
  • Aging parent concerns
  • Marital trouble
  • Divorce conflicts
  • Depression
  • Weight loss
  • Mediation
  • Conflict resolution
  • Domestic violence
  • Workplace violence
  • Personal emergencies

*This list is by no means comprehensive. If you believe an issue is worthy of assistance, ask your HR representative for guidance and clarification.

There is a wide array of services offered by employee assistance programs and at your disposal. These benefits are generally also only given to family members covered by an employee’s health insurance, but they may also cover other household members.

Potential Advantages

These programs are a great way to discuss grief and concerns regarding personal and workplace issues. They can help you with guidance and communication through difficult situations, such as mergers, layoffs, or when employees die on the job. In certain cases, employers may provide leave for victims of domestic or sexual violence. These programs may also work with management and supervisors to plan ahead for situations such as organizational changes, legal considerations, emergency planning in response to traumatic events, and support for disaster and emergency preparedness.

These programs can also help you find childcare resources and even resources for elder care assistance for parents and other family members. Some programs can find information about schools or colleges and connect you with nannies, childcare centers, and summer camps. Counselors can help find in-home caregivers, help navigate Medicare and Medicaid services, and provide support while you deal with emotional and other stressors associated with being a caregiver. You may also be able to ask them about the best assisted-living facilities or nursing homes in your area, and they may be able to make a call on your behalf to narrow the field of choices based on what you’re looking for.

You can turn to financial counseling through these programs for ideas on budgeting, credit problems, foreclosure, bankruptcy, credit card debt, or any other financial issues that may bother you. They will in turn provide you with a base level of financial education and refer you to a good source for follow-up if necessary.

Employee assistance programs may also provide support for veterans’ issues for people returning to the workplace as well as unique issues that may surface during a veteran’s career both at work and home, including dealing with post-traumatic stress or readjusting to civilian life.

Key Considerations and Regulations

These programs are generally confidential; employers may request reports from the people who run these programs to see how much the service is being used and for what purpose, but they’re only allowed to get aggregate information that doesn’t identify any individuals using the service. However, when the counseling is mandatory due to disciplinary problems, the supervisor or HR representative may be told whether the employee is attending required sessions, and they may inquire about the employee’s progress. Otherwise, these programs are usually run by a third party that is federally bound not to release any individual information about services used.

Keep in mind that the service may have certain hours of availability, although many have 24-hour hotlines so the systems can be used whenever you’d like. This way you can call from home so you’re not worried about calling from a work phone.

Adoption Assistance

Employer adoption assistance programs can provide information, financial assistance, and parental leave. Informational assistance can include:

  • Referral to licensed adoption agencies
  • Support groups
  • Access to adoption specialists
    • A specialist will walk you through the adoption process, answer any questions you may have, and help with special situations such as special-needs adoptions and non-domestic adoptions. These services can all be done either in person or over the phone.

Financial assistance can include a lump sum payment for an adoption fee and partial reimbursement to employees for expenses associated with the adoption. Financial assistance can cover costs related to the following:

  • Public agency fees
  • Private agency fees
  • Court costs
  • Legal adoption fees
  • Medical costs
  • Temporary foster care charges
  • Transportation costs
  • Pregnancy costs for birth mother
  • Counseling costs
  • Home study fees
  • Translation services
  • Travel and lodging
  • Immunization fees
  • Immigration fees
  • Lost wages for time taken off through the adoption phase

*This list is by no means comprehensive. If you believe an issue is worthy of assistance, ask your HR representative for guidance and clarification.

 Potential Advantages

Employers may offer flexible time off and flexible work schedules for a set period after an adoption. A new adopted parent can generally take up to 12 weeks of unpaid leave after the adoption of a child, and it can be very wise to take advantage of this time with your new child to get them acclimated to their new home. The programs may also provide some employee education about adoption and post-adoption resources. These benefits can prove to be invaluable resources for you as new parents.

Potential Risks

You may find that the benefits paid to you for adoption assistance are taxable as ordinary income. This makes it extremely important to account for this additional income in any tax withholding that takes place over the course of the year and when filing your taxes at the end of the year. Make sure to speak with your CPA about how this assistance may affect your taxes as well as whether the adoption tax credit is available to you.

The employer may just provide a lump sum payment for the adoption rather than covering certain fees. You may also find employers that cover certain expenses or a certain percentage of expenses. In other situations, employers may only give a total dollar amount regardless of actual expenses.

Considering all these different scenarios available for adoption assistance, it’s important to know beforehand what your employer will reimburse, what they will not reimburse, and the manner in which they go about covering the expenses. This also makes it important to keep track of everything, including receipts, as you work your way through the adoption process in case anything is called into question or is needed for tax purposes.

Key Considerations and Regulations

Your employer may require you to meet certain criteria, such as length of employment, full-time employment, or participation in the company-sponsored health plan to be eligible for the program. In some circumstances, the type of adoption can also affect the benefits (things like adopting a stepchild or an older child may not qualify you for adoption assistance, whereas adopting a child with special needs may give you enhanced assistance). In addition, remember that some employers may only pay for a single child adoption, whereas others may pay for you to adopt multiple children.

Your window to adopt may come across suddenly, and immediate action may be required. It’s important to look at all the details of your employer-sponsored plan once you think about adopting and get everything lined up so you can act on a moment’s notice.

Some qualified adoption assistance benefits may be excluded from the rules taxing fringe benefits. This makes it important to keep an itemized list of all expenses the company has reimbursed you for and those they have not reimbursed you for. This allows your CPA to take advantage of any and all exclusions to income that may be achievable through adoption benefits. Keep in mind that although these payments may be excluded from federal taxes, they may be included in Medicare, Social Security, or state taxes. The IRS may also cap the exclusion amount you’re allowed to exclude from your income for any adoption assistance given to you by your employer per year, and it may also phase out the deductions allowed depending on your income; so that high-income individuals may not get the same tax benefits associated with adoption assistance programs as lower or middle-income individuals.20

Family Caregiver, Maternal, and Paternal Leave

The Family and Medical Leave Act allows certain employees to take up to 12 weeks of unprotected, unpaid leave per year.21 This can be expanded upon by the state or the employer. The employer will continue to pay the employer-paid portion of your health premium (you may have to continue paying your portion of the premium during the leave). Upon returning from leave, you must be restored to the same job or an equivalent job. This means that, the leave does not guarantee that the actual job you held prior to going on leave will still be available and yours upon your return. However, you should get a job that is virtually identical in terms of pay, benefits, and other employment terms and conditions, including shift, location, and overtime. You should also be able to get any unconditional pay increases that occurred while you were on leave, such as cost-of-living increases.

The Family Medical Leave Act allows you to take time off at any time during your pregnancy or even after childbirth within one year of your child’s birth. You may be able to take leave as a mother before and after having or adopting a baby, which is called maternity or pregnancy leave. Paternity leave for fathers is less common but is available at some firms.

If enough leave is not provided by your employer, you may be able to negotiate for more leave or negotiate to work from home or on a flex schedule to better suit your adjustment to life with a new child.

Potential Advantages

Some employers may allow you to continue working part or full time while technically on leave so that only days taken off to deal with acute issues qualify as leave. This provides the benefit of shortening the amount of leave time you need to take to deal with an issue and/or lengthening the amount of time over the course of the year you can stay on leave and still be considered an employee with benefits.

In certain cases, some states require employers to provide paid leave rather than just unpaid leave. Similarly, any loans taken from a retirement account may be allowed to have repayment suspended during the leave. Some employers will also provide community services, counseling, respite care, legal and financial assistance, and caregiver support groups for those on leave dealing with associated issues that would require those services.

After the birth of your child, a short-term disability insurance policy may cover part or all of your salary for a certain period. It’s worth knowing what is covered in advance since some insurance companies may pay out for longer periods if you experience complications or have a C-section. Going on leave for a disability may also qualify you to begin pulling out any non-qualified deferred compensation money that has been put aside for your benefit to be paid at a later date.

Some states have short-term disability plans that pay for a certain period of maternity leave out of the office even if the employer does not carry any short-term disability insurance; so, it’s important to know what is offered through the state for maternity or short-term disability leave. You may have to file within a certain period to take advantage of anything offered by your state in this regard. The state may cap the benefits at a certain level per person or at a percentage of your ordinary income.

Potential Risks

It’s important to make sure you know whether your short or long-term disability policies will stay in place while you’re on leave, especially if you may need to go on disability after the leave. If you find that going on leave may cancel your short or long-term disability policies, it may be worthwhile to debate going directly on disability rather than using leave. Short-term disability policies may also require you to use your sick time or vacation days before you start receiving payouts. Under these circumstances, you may strategically use your sick time and vacation days before the birth so your short-term disability policy kicks in sooner. The policies may also require you to be physically absent from your workplace for a certain period before receiving benefits.

Keep in mind that any decision to work part time before or after the birth may affect your ability to collect short-term disability payments.  So, it is wise to know what your short-term policy covers (and under which conditions) before going to work part time or remotely for your employer during the time you take as maternity leave. It is also important to know whether you may have to pay back any of the short-term leave on maternity pay in the event that you do not return to work or quit within a certain period after returning to work.

Time spent on leave may or may not count towards vesting of benefits for defined benefit plans and may decrease the average pay you received over your years of service in pension benefit calculations. Deciding whether to take leave or retire (for in cases in which your final average pay may be lower if you take unpaid leave in one of your final years) may be necessary to make sure you receive the highest pension payment possible. You wouldn’t want to decrease the pension payments for the rest of your life because you took leave for the last three months of your career, which makes any calculation of your last three years of pay much lower than it would have been.

Keep in mind that you may lose any bonuses, incentive pay, or equity-based pay during your leave of absence, typically depending on the type of pay and your role in the firm. Being out on maternity or other leave may affect things like raises, bonuses, seniority, participation in your company’s 401(k) plan, vesting of the company’s matching contributions, or stock options. In addition, you may not be able to contribute to your 401(k) or FSA while you’re on leave.

Dependent care FSAs are not required to continue during leave, unlike standard FSAs. There may be a period during which you will have some coverage for dependent care but after which you will not be allowed to get any reimbursement for dependent care even if you put money into the account. This makes it very important to pre-plan this if possible.

Employers likewise keep FSAs in place during leave, but the coverage can lapse if you elect to cancel the coverage—during which time your employer is not required to make any reimbursements for expense claims. Even if you decide to discontinue coverage, the employer can keep the FSA coverage in place, and any amounts given to you during this period must be repaid by you whether you return to work after leave.

Some other potential risks to keep in mind include the following:

  • Sometimes, even an employee on leave can be laid off (e.g., due to downsizing or if the employee is a highly compensated employee who does not meet certain standards).
  • Employee assistance plans may or may not continue while on leave.
  • Any insurance acquired through work may or may not provide coverage for employees on leave. Make sure to inquire about the continuation of any life, health, dental, and vision plans and how you will continue to pay premiums for any available plans.
  • If the employer continues to pay your portion of insurance premiums during a leave period, you may be required to repay those sums after the leave has ended.

Key Considerations and Regulations

To be covered by federal regulations, you are required to work for your employer for at least one year and at least 1,250 hours over the previous 12 months (as long as the employer has at least 50 employees within 75 miles).22 You may be required to provide 30 days of advance notice when the leave is foreseeable. Under some circumstances, the employer may require you to use all PTO and sick leave as part of your unpaid leave.

Some other key considerations to keep in mind include the following:

  • Vacation may continue accruing while you are on leave, or you may be required to use all vacation days while you’re on leave as part of the time you’re away from the office.
  • Smaller employers and part-time employees are generally exempt from any leave policies required by the federal government; however, some may still be covered under state law, or the employer may opt to provide leave even though it is not legally required.
  • It’s important to know how the health benefit coverage works while you’re on leave so you can elect for money to be withheld to pay premiums from any checks you receive or prepay or write a check for coverage while you are gone.
  • Federal law does not cover the care of your father-in-law, mother-in-law, brother, sister, grandmother, grandfather, or adult child because “family” is defined a spouse, parent, or child under the age of 18, except relatives or other people who helped raise you or for a grown child who is severely disabled.

 Military Leave

An individual leaving on military leave may be entitled to pay increases they would have normally received had they stayed at the employer during the time of the leave, although there are some exceptions. They are also entitled to be reemployed in the same or a similar position and the same benefits upon returning to work (with some exceptions, including circumstances in which reemployment is impossible or unreasonable or in which reemployment would impose an undue hardship on the employer).

Potential Advantages

You are not required to use your vacation pay while on military leave like you may be required to for general leave. It may be worth thinking about using your vacation pay during the leave time to use optimal tax planning strategies and to provide additional income you may not otherwise realize if you do not return to your employer. For example, since pay while you’re deployed isn’t taxable, using your PTO first means you get paid tax free, and you can then take unpaid leave in another year to lower a second year’s taxes. This strategy is better than having to pay taxes for your PTO days and being in a higher tax bracket than necessary the following year. Any time when you are deployed and not paying taxes on ordinary income may also be a prime time to convert some of your retirement plan money into Roth IRA money.

Keep in mind that leave provided by the government is unpaid leave, so the employer may choose to provide some pay during your absence. Under certain cases, if you perform work for the employer while you are on military leave, you must be paid your full salary from the employer minus any military pay.  Unpaid leave is required in some amount for certain employees. However, some companies may opt to cover non-required employees during leave, have extended leave, or provide a combination of these two solutions.

While deployed, the military provides its own benefit of allowing you to put up to $10,000 into a savings account, giving you a guaranteed interest rate of around 10% during the deployment period. It is generally worthwhile to maximize your contributions to this plan.

As long as you continue your health coverage, the full amount of your FSA, minus any prior expenses for the year, must be available to you at all times during your leave period. However, if your coverage under the health plan terminates while you are on leave, you are no longer entitled to receive reimbursement for claims during the period in which the coverage was terminated.

Military members returning from military leave who have defined contribution retirement plans must be given three times the period of their leave of absence, as long as it’s not greater than five years, to make up for any contributions missed during the leave period.23 This can be very beneficial in terms of allowing the military personnel to overcontribute to a deductible 401(k) plan, thus lowering their taxes for the years following the return from deployment.

It’s worth keeping four other potential advantages in mind:

  • Your state may have greater protections than federal law, so it’s important to look at not only federal law but also what your state has passed to protect you before going on military leave.
  • For pension purposes, returning service members must be treated as if they have been continuously employed for purposes of participation vesting in accrual of benefits.
  • You may be able to take leave to care for yourself or certain family members (e.g., parents, relatives, or even non-relatives depending on your employer).

Potential Risks

It is important to know which work benefits will be put on hold and what will stay in place. Don’t assume that disability insurance, life insurance, or any other benefits will stay in place while you are on leave, whether you are receiving pay from the employer, working part time for the employer, or just on leave. It is important to talk to your HR department so you know in advance what benefits will stay and what will disappear while you are gone.

Generally, employers don’t have to pay the cost of health insurance if you’re on military leave unless you’re on leave for less than 31 days. For longer leaves, you may have COBRA rights, which may require you to pay the full cost of your participation in your employer’s health plan. If there are any lapses in paying any of the employer health insurance money due, you may find that even though your employer agreed to pay health insurance while you are on leave, your health insurance lapses and you are pushed onto a COBRA. So, it’s very important to keep up with all necessary payments because you may need to write checks for the coverage since you are not receiving paychecks from your employer, which would otherwise withhold pay and send medical insurance premiums to the insurer.

If you have an FSA, you may find yourself in a position in which the Heroes Earnings Assistance and Relief Act (HEART) of 2008 (H.R. 6081) waives the “use it or lose it” clause of the FSA program. It’s important to know whether you will need to spend down any of this money for any given period and what happens to this money if something happens to you during deployment so all contingencies can be planned for.

For dependent care reimbursement accounts, remember that you will have to maintain eligibility to use this money; otherwise, the money will no longer be available. For instance, if the spouse who is not deployed quits their job, the family may no longer be eligible for their dependent care reimbursement account.

Key Considerations and Regulations

Keep in mind that to get these military leave benefits, you must follow all applicable rules (including giving notice for the need to leave for military service). You must also be released from service under honorable conditions, and you must not exceed five years of military leave with any one employer (with some exceptions, such as annual training and monthly drills; these do not count against the cumulative total). The five-year limit does not include active duty training, annual training, involuntary recall to active duty, involuntary retention on active duty, voluntary or involuntary active duty in support of war, national emergencies, or certain operational missions.

There are also benefits for military caregivers. Military caregiver leave entitles an eligible employee who is the spouse, son, daughter, parent, or next of kin of a covered service member to take up to 26 work weeks of leave in a 12-month period to care for a covered service member with a serious injury or illness.24

It’s important to note that you’ll have to report back to your civilian job in a timely manner and submit a timely application for employment. This timeliness depends on how long you were deployed for, so it’s important to keep track of all the rules and check off every box on your way back into civilian life.

Some other key considerations to keep in mind include the following:

  • Make sure you thoroughly read through anything your employer has you sign since you may be signing something that waives some of your legal entitlements.
  • You must report back to your civilian job by the appropriate deadline, which can range from eight hours to 90 days depending on the length of service.
  • Military leave coverage may vary for National Guard members performing state service rather than federal service for deployment.

Discounts and Special Programs

Large employers often create an employee perk program with vendors, and possibly with other companies, to give employees discounts on everything from travel and cars to event tickets and physical goods. It’s important to keep track of and know the criteria for the discounts you and your family can receive for goods and services from your employer and from other companies that have agreements with your employer. This can be a matter of using a special coupon code any time you go on to a certain website to buy a good or a service, downloading a form from the internet to order the good or service, or arranging for the purchase of the good or service through your HR department.

Your employer may also reimburse you for travel-related expenses or provide you with a company car; in such cases, free money should generally not be left on the table. If your employer does not provide for these expenses, they may still sponsor a qualified transportation plan that allows you to take up to $230 tax free per month out of your paycheck to pay for transit-related costs, including public transportation or even parking while at the office.

These discount and special programs have the potential to be extremely advantageous for employees. Knowing the benefits offered by your employer can lead to significant savings on things you would ordinarily spend money on.

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Employee Benefits: Highly Compensated Employees and Executive Benefits

The following is a chapter from Employee Benefits: How to Make the Most of Your Stock, Insurance, Retirement, and Executive Benefits by Josh Mungavin CFP®, CRC® and Edited by Chris Boren & Tristan Whittingham.

Employee Benefits - cover


Highly Compensated Employees and Executive Benefits


Deferred Compensation Plans

Deferred compensation is a written agreement between an employer and employee in which the employee voluntarily agrees to have part of their pay withheld by the company, invested on their behalf, and then given to the employee at a predefined time in the future. This allows the employee to potentially defer paying taxes on money earned until the employee is in a more preferable tax environment. Employees must pay taxes on deferred compensation at the time they are eligible to receive it and not when they draw it out.

You generally want to think about a nonqualified deferred compensation plan contribution as an unsecured loan between you as the employee and the employer, in which you lend your employer the amount of money based on the agreement that your employer will pay you that amount of money plus any earnings subject to the investment or a fixed stated rate of return at a certain point in time. Some employers may be worthy of this loan, while other employers are unlikely to pay it back; you must consider this reliability before you elect to contribute to a nonqualified deferred compensation plan.

Strategies and Timing

Deferred compensation can be significantly beneficial, especially when used in tandem with other employee benefits such as RSUs. The employee can sell the vested RSUs they would have to pay ordinary income tax on in that year anyway and live off the proceeds while deferring their regular wages in a retirement account, deferred compensation account, or other tax-deferred savings account.

The employee can also defer ordinary compensation (potentially until after they have left the employer) so they receive ordinary income during a period in which they might not receive any income, thus lowering the amount they are being taxed on during their working years. Although this can be very beneficial, it is not without risk, specifically employer-specific risk. This risk is realized when the employee participating in a deferred compensation plan is working for a company that declares bankruptcy or goes out of business. In this scenario, the employee is standing in line with other creditors of the business to collect on any portion of the deferred compensation plan they can during the bankruptcy proceedings.

You may also think about participating in the deferred compensation plan if you are on the border of receiving a financial aid award for children going to college, which can lower your income in the eyes of financial aid offices. This allows your children to potentially receive some financial aid that they might not otherwise receive. Furthermore, if you are involved or potentially involved in litigation, it may be worthwhile to put some of your assets into a deferred compensation plan since lawyers may be more focused on assets available now rather than money that will be available at some point in the future.

Typically, an employee chooses how much they would like to defer; any payout terms, including amounts in a period; or triggering event. When opting for the deferred compensation plan with little flexibility to change these options in the future, it is important to not only think about your current tax, income, and expense situation but also plan for the future to make sure you’ve done your best so it is unlikely that you will need to make any changes to the plan later.

It is also important to remember that the money is at risk any time it is held in the plan so you do not defer compensation for too long; the longer the money sits in the plan, the riskier it becomes. The deferred compensation amount also becomes larger, and what is known about your company now and for the next year may certainly change 10, 15, or 20 years down the road.

It’s generally recommended to make the maximum contributions to a retirement plan before thinking about enrolling in a nonqualified deferred compensation plan. There is a tax benefit to contributing to your retirement plan and the potential to take loans out of the retirement plan along with a potential match from your employer and protection from your employer’s bankruptcy. You generally have the ability to choose how much to defer from your salary bonuses and other forms of compensation every year, so some changes can be made.

Plan Portfolio and Risk

You may be able to guide the investment broadly in the deferred compensation plan, but you will generally be unable to make precise investments, such as choosing individual stocks to invest in, during the time it is invested for your benefit. However, you may be allowed to direct what percentage of your money goes into specific allocations of funds, such as how much goes into U.S. stocks vs. international stocks or into stocks vs. bonds.

Rather than allowing employees to invest money in the deferred compensation plan, some companies may pay a fixed or variable amount of interest on that deferred money, which may be a benefit in and of itself if you don’t need to live off the income. You may end up getting a higher percentage guaranteed return from the deferred compensation plan than you would expect to receive from a portfolio based on your risk profile (keeping in mind that putting the money in a deferred compensation plan certainly overexposes you to a single company by essentially accepting an IOU from your employer).

Tax Implications

When looking at your tax situation, it’s important to not only consider federal taxes and Medicare but also whether you plan to move from a high-tax state to one with low or no state income taxes or vice versa. In other words, if you move from a state like California, which has high income taxes, to one like Texas, which has no income taxes, you may be better off receiving the income while you live in Texas than while you live in California even if your federal tax rate remains the same. Likewise, if you plan on moving from Texas to California, it may be worth thinking about not participating in the deferred compensation plan even if your federal tax bracket will be lower in California. The difference between the lack of state taxes in Texas compared to the state taxes that will be due in California may push you into a higher overall tax bracket, meaning that it is worthwhile to receive the money while you are in a higher federal tax bracket while working in Texas—plus, you have the added benefit of not having to deal with the company-specific risk.

It is not necessarily the case that your tax rate will decrease during retirement even if the tax law stays the same since you may have Social Security earnings, required minimum distributions, and pensions, which could take you into a similar or higher tax rate than what you had during your working years. In that case, it may not be worthwhile to participate in a deferred compensation plan, especially given the company-specific risk you would be taking with both the deferred compensation plan and your earning power as an employed worker if your employer goes out of business.

As always, tax laws can and will change, and we may see income taxes rise in the future. This means that, even if you personally earn less money since it slowly comes through the deferred compensation payout at a lower rate than what you earned during your working years, that money may still be taxable in a higher bracket because the tax brackets have changed. As such, it is important to at least be aware of the risks faced by deferring compensation.

Remember that you may be able to receive a higher rate of return on the money if you can invest it in any way you want compared to the rate of return your employer’s investment options will provide you. This is very clearly a case of not letting the “tax tail wag the dog” and deciding whether it is worth accepting a lower rate of return for a lower tax bill or worth paying the taxes immediately and receiving the higher rate of return on your investments without being overexposed to individual company risk. The plan’s investment options may be limited to insurance options and fixed percentage return, or it may have limited investment options with high expenses.

Keep in mind that you will have to pay Social Security and Medicare taxes on any amount you choose to defer in the year in which it is deferred. This may mean that if you defer the money and your employer declares bankruptcy, you may not receive the money that was deferred, and you may have paid Social Security and Medicare taxes on that money in the past.

Plan Payout

As with everything that has a value for which it is possible to name a beneficiary, it is wise to speak with your HR department about naming a beneficiary on any deferred compensation plans just in case something happens to you while you are participating. The purpose of naming a beneficiary in this context is so your money will go directly to your beneficiaries rather than through probate.

Keep in mind that some circumstances can force you to realize the entirety of your deferred compensation plan payout earlier than you intended, pushing you into a higher-than-normal tax bracket. Such circumstances include being terminated from employment, passing away, or your company being acquired. This may force you to realize the entirety of your deferred compensation while you are still work. Hence, it is important to understand all the risks you face along with any potential changes to your employer before opting for a deferred compensation plan, even if doing so can be very profitable under the right circumstances.

When enrolling in the plan, it’s important to consider the distribution schedule your employer allows. Do they require you to take the payment as a lump sum distribution so your income is much higher for a single year than it would normally be, pushing you into a very high tax bracket when you would ordinarily not be in that tax bracket, or can you take money added over several years? Are you allowed to take money out of the plans before retirement, or do you have to wait until retirement? All these details should be laid out in the plan document, which will list the payment schedule and the event that will trigger the payments, every time the amount is deferred. Possible triggering events are a fixed date, a separation from service, a change in ownership or control of the company, disability, death, or an unforeseen emergency. This means that, it can be very important to monitor the health of the company you’re employed by so you know what may happen to your deferred compensation plan and then plan accordingly. You may find yourself in a position where you know the company finds itself on weak financial straits (which is not a triggering event) so you know you will be likely to have to attempt to get your deferred compensation through your employer’s bankruptcy proceedings if you stay with the company. With this knowledge, you can strategically retire or separate from service so you may be able to remove the deferred compensation from the plan before your employer goes bankrupt and not lose all or significant portion of your money.

Keep in mind that a nonqualified deferred compensation plan may also impose conditions on receiving the money, such as a non-compete agreement after retirement, so any decisions to change employer after separation from service can cause a claw back of the money in the nonqualified deferred compensation plan. Depending on how the deferred compensation program is written, you may end up forfeiting all or part of your deferred compensation by leaving the company early, which means you leave a substantial amount of money on the table.

Unlike a 401(k), you cannot take a loan from a nonqualified deferred compensation plan, and the funds are not accessible before the designated distribution event. In some cases, you may be able to change the election for when you will receive the deferred compensation. However, these changes must generally be made at least 12 months before the date on which the original payment is scheduled to begin, the election must delay the payment for at least five years from the previously scheduled payment date, and the election will not be effective until at least 12 months after it is made. This means that if you previously decided to retire at age 60 and you receive your nonqualified deferred compensation but decide to continue working until age 65, you may be able to extend the length of your nonqualified deferred compensation payout by the age of 59, 12 months before you turn 60 and are previously scheduled to receive the payout. So, you receive the payout at age 65 when you now intend to retire.

Capital Accounts

Capital accounts are the initial and subsequent contributions by partners to a partnership in the form of cash, assets, or profits as well as losses earned by the business and allocated to partners. The amount of money you get from liquidating your capital account does not necessarily equate to the reported balance of the account (whether prior to the business’s liquidation or the partner’s departure from the firm). Capital contributions can be variably based off a set amount of partner contribution tiers determined by years of service, the level of compensation, or the amount of equity you have in the firm.

Potential Advantages

Capital accounts can be very beneficial for employers and partners. The employer gets to show an asset on the books as long as it is kept in the books and not directly spent or distributed to partners with ownership shares. The company does not need to go to a bank for a loan when they can rely on partners for a loan. In addition, partners will often not closely look at the books—or not be allowed to look deeply into the books—before deciding whether the company is creditworthy. That being said, the interest rate given by the employer can be very enticing, and if the employer is stable, it can be very profitable for the partners who contribute to a capital account.

Like many things, this can be used for good or evil. The employer can get a loan cheaper from its worker than a bank, and the partner is less likely to have the ability to put the employer’s financials through a thorough underwriting process. It can be a win–win or a very one-sided affair, so it’s important to know whether you’re putting skin in the game or getting skinned.

Potential Risks

When contributing to a capital account, it is important to realize that in essence, you are giving an unsecured loan to your employer or partnership; thus, you are subject to the risk associated with loaning your company money. This is often seen as ownership in a partnership, but in reality, a number of capital accounts arrangements are calculated by way of a formula rather than as a true ownership in the partnership. This means your capital contributions may have a fixed valuation when you want to withdraw from the capital account, and they may earn a fixed interest rate or none at all while the money is held in the capital account (rather than giving you participation in the upside of the business’s growth). It’s not uncommon for the employee to receive a rate of interest tied to the return of some benchmark.

Your capital could be used to fund the short-term needs of the company or to shore up unsustainable distribution levels for partners. This may make the proposition look appealing in the short term, but it can have long-term consequences, similar to a Ponzi scheme held up by bringing in new partners’ capital and the ongoing operating cash flow of the business. In such a case, the capital account slowly destroys the firm for the benefit of a few people, and it’s a matter of getting your money out before the ship sinks.

Another important question to ask is whether the capital money being contributed is being used to run the business so no debt is taken on or if it is being wasted on bad decisions, expansions by management, or equity partner distributions that are higher than they should be. In other words, having funds in capital accounts can spur management to need to deploy the funds in investments, which in turn creates additional risk rather than shoring up the balance sheet.

Remember that the firm can find itself at a point where the equity partners making the decisions have the choice whether to continue an unsustainable path or to correct the path the firm is on. Under some circumstances, it may be in the best interests of the equity partners to continue on the destructive path and then jumping with their client base and starting over at a new firm. This may be substantially more lucrative to them than correcting the problems at the existing firm, which in turn makes the equity partnership look less valuable. Similarly, some partners in leadership positions have income levels that are well above what their book of business would be worth if they were to relocate, which means they can’t replace their income if they leave for another firm. This means the, the leaders at the firm may decide to continue the status quo to serve their best interests rather than serving the interests of the firm, and even if they wanted to, they be unable to change the firm’s business model due to the fiscal or political environment.  So, remember that while this may often be very beneficial, in some cases it is less risky and more profitable for a firm’s leadership to allow the firm to sink rather than save it. So, any capital accounts kept above the minimum account balance required by the firm should be well researched, thought out, and debated before any decision is made to contribute. It’s also important to note that the firm may have a model for calculating partners’ capital accounts upon departure, and the liquidation of a firm may not provide sufficient liquidity to pay out all partners’ capital accounts in full.

The economic environment is also an important factor to keep an eye on. Even a well-run firm can run into problems during a sharp downturn since the ability to get partner capital during a financial crisis can come when business is slow, banks aren’t lending to firms, and there is increased weakness in financials; this all happens at a time when the dollar opportunity cost is high for the partner who contributes and the employer that needs money to continue running the business. This can mean some partners become hesitant to throw good money after bad in a downturn so they decide to invest elsewhere, causing a larger-than-normal need for a business that was otherwise sustainable.

Key Considerations and Regulations

It is very important to know the terms that govern the return of your capital. It’s not uncommon for a firm to stretch out the period during which it will return capital to any departing partner. The firm may also have a period during which you will not be allowed a return of your capital if you take a job at a rival firm. You may also have a vesting period; during that time, if you leave or something happens to you, you may not get a return of capital even if you do not work for a competitor once you leave. It’s also important to know what happens to your capital account if you get let go.

Make sure you understand whether you have any equity interest in the firm as a partner or if you have explicitly waived your interest in the form of equity and agreed to essentially be a partner providing a cheap loan to the equity partners. In other words, is the value of becoming a partner worth the amount contributed since your money may be gone the moment it’s contributed?

When looking at the financials of a partnership, it’s important to consider that the liabilities encompass not only the direct liabilities we think of, like loans and capital contributions, but also things like leases on furnishings, equipment, and real property. All these can add up to a significant level of leverage across the firm.  This means, a company with no debt may still have a substantial financial risk.

It’s also important to know whether buying into the partnership will reduce your take-home pay and, if so, to account for that reduction in any decision of whether to be a partner in a firm that requires capital calls.

You may also find that high-ranking partners have special agreements to raise their flexibility in terms of partner capital, such as the ability to draw on non-interest-bearing loans, credit distributions against future draws, or guaranteed minimum distribution amounts.


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