Benefits: It’s the Season to Sign Up : Employees Can Boost Their Buying Power by 20% to 40%

It’s open season on employee benefits. Each fall, workers at the vast majority of American companies are given the ability to re-evaluate the non-cash rewards of working.

If you’re smart, you’ll take this opportunity to sit down alone or with your spouse and consider just what benefits you need and whether you can coordinate coverage if you have a working spouse.

Why bother? Because employee benefits can effectively boost your buying power by 20% to 40%, says Mark Philipsen, principal at the benefits consulting firm of Hewitt & Associates. Nonetheless, millions of workers fail to fully take advantage of their benefits--or even learn what benefits are offered. Now that so many companies try to keep the number of full-benefit employees at a minimum, they are an even more precious commodity.

“I would say that 80% to 85% of the people I talk to are not aware of what their benefits are,” says David Chilton, author of “The Wealthy Barber” and a frequent lecturer on benefits issues. “One of the biggest favors you can do yourself in financial planning is to learn about your employee benefits.”

Overall, benefits have been increasing far faster than direct wages in the last two decades, and some economists argue that statistics on wage stagnation in the United States are misleading primarily because they fail to measure how much more money companies have put into benefits. On the other hand, smaller companies employ a increasingly large number of Americans and tend to offer fewer extras.

There are all kinds of benefits and some are both complex and ever-changing. Here’s a review:

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Paid time off: Many people treat paid time off like a well-worn carpet--they know that it makes life more comfortable, but it’s generally taken for granted.

But, in reality, paid time off is much more like frequent-flier miles than a rug. If you don’t watch it, it could be pulled out from under you. And these days, there are plenty of part-time and temporary workers who don’t get paid time off, so don’t underestimate its value.

Many companies have added a new twist--expiration dates on all days off, regardless of whether the day off is for vacation, illness or “personal.” Other companies limit the time you can store. So pay attention to the rules, because unless you really hate vacations, you might as well enjoy whatever is offered.

With the exception of a few 15-minute breaks, employers are not required to give workers any paid time off. California law stipulates that if the company does offer time off--and allows that time to accumulate--they are legally required to pay you for unused time when you leave the company.

“Use it or lose it” has become a big issue because the vacation accrual can get very expensive for companies that allow it, consultants add. If time off doesn’t expire, it accrues. And accrues and accrues, leaving companies with potentially vast unpaid liabilities.

However, companies are also simplifying the paid time off system by increasingly turning to something called time “banking” that eliminates the distinction between sick days and other kinds of time off, says Philipsen.

A 1994 Hewitt survey found that 17% of the big companies polled currently offer time off “banks” and another 13% were actively considering creating them.

What time banks do is lump together different types of time off--vacation, sick days, personal days and, usually, paid holidays too. Instead of getting a set amount of each, workers simply get a lump sum--typically 23 to 33 days a year--to use however they like. Under such plans, no one can abuse free sick days and there is no need for doctors’ notes or policing of sick employees. Companies that use the system, such as Levi Strauss in San Francisco, say it is generally popular--although some acknowledge that it encourages sick employees to go to work in situations when they probably should stay home.

For workers, vacation banks add valuable options, especially when the plans allow carrying time over to future years or annual cash-outs.

Two-thirds of the employers that offer time off banking allow workers to cash out unused days at either their full or a percentage of their wage value. Most also allow workers to accumulate up to 53 days off that can be used later. Accumulated days can effectively serve as a short-term disability plan or an emergency fund in case you lose your job.

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Life and disability insurance: If you die, life insurance pays your heirs. If you are disabled, disability insurance will pay a steady stream of income to make up for missed wages.

However, before you buy life or disability insurance at work, determine how much you need. Even at good rates, unnecessary insurance is a waste of money. The rule of thumb for life insurance: You’ll need a death benefit equivalent two- to five-times your annual income. The more small children you have, the greater your insurance needs.

If you have a lot of assets, few debts and a working spouse, your need for life insurance is modest.

Determining whether you need disability insurance is similar, but a bit more complex because disability insurance comes in two varieties--long-term and short-term coverage.

In California, which has a disability program, you may not need short-term disability insurance at all, especially if you have a lot of vacation and sick time and your company automatically offers a short-term policy coordinated with the state program.

The Social Security Administration offers a long-term disability program for people who are severely disabled and unable to handle any job. Because it pays relatively modest maximum benefits, anyone with more than a poverty-level income would want to consider buying supplemental coverage if they thought a long-term disability could leave them financially devastated. Most large companies offer a group plan but rarely subsidize it.

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Health insurance: Ten years ago, the big trend in health coverage at work was new choices. Instead of just getting the ability to sign up for a fee-for-service insurance program, which paid 80% of medical costs after a deductible, workers were given the ability to sign up for a host of newfangled “managed-care” programs.

Managed-care plans limit patient choices--they require you to go to plan doctors and hospitals if you want your medical care paid for you--but they generally save you money.

However, today, health care choices are narrowing again. Fewer workers are being offered fee-for-service plans.

Indeed, where 61% of companies allowed workers to choose a traditional fee-for-service plan in 1991, only 46% offered that option in 1994, according to Foster Higgins & Co., a national benefits consulting firm.

Some companies offer such plans but won’t subsidize them anymore than they do HMOs, which means they can cost employees substantially more to choose them. In other instances, companies will continue to offer fee-for-service plans, but only for catastrophic coverage, consultants note. With this option, employees get to choose their own doctors and direct their own care, but they only get reimbursed for medical expenses that exceed a certain amount--often $2,000 per year.

The rising costs make it more important than ever that workers carefully consider their health choices at work, says Philipsen. Making a graph and using a typical year’s expenses can help sort out your real cost choices. Then consider whether you want an HMO or greater options. Remember, even if you choose an HMO you can still occasionally see doctors outside the system and pay the costs yourself.

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Tax savers: If you normally have some unreimbursed medical expenses or if you pay child-care costs so that both you and your spouse can work, you’d be wise to find out if your employer offers tax-saver accounts and use them if you can.

Tax-saver accounts come in two varieties--medical spending accounts and dependent care accounts. Although these accounts are separate--you can’t use money in a medical spending account to pay for day-care and you can’t use money in a dependent care account to pay medical expenses--what they do is similar.

They allow you to save pretax money through employee withholding and then use that money to pay these necessary expenses. Federal tax authorities act as if you’ve never earned the money, so the amount you save in these accounts can save you a fortune in tax.

For example, a family with three children and a $70,000 household income could put $2,000 into a medical care account to pay for deductibles and some major expense such as a child’s braces. They could put $5,000 in a dependent care account to use for child care. The effect would be to save the $2,673 in federal income, Social Security and Medicare taxes on the $7,000 in the accounts.

There’s just one catch--but it’s a doozy.

Any money that’s left unused at the end of the year is lost. You can’t get a refund. And, unless you’ve had a change in family status, you can’t adjust your contribution amount midyear either.

On the bright side, day-care expenses are reasonably predictable, so very little money is forfeited in these accounts. And as long as you pay attention to your health care expenses, it’s unlikely you would forfeit contributions to the medical spending account either.

However, a few months before the end of the plan year, you should take a look at how much is left in the account. If there’s more remaining than you reasonably expect to spend, you can accelerate medical appointments or elect to fill your eyeglass prescription a little early.

And note you can use tax savers for services not necessarily covered by insurance, such as chiropractors and acupuncturists.

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Retirement plans: When Mark W. Agnew reviews 401(k) plan statistics, he can’t help but marvel.

Assets in 401(k) plans--accounts that allow workers to save and invest their own money for retirement--have quadrupled over the past decade, with somewhere in excess of $400 billion saved. In 1994, about 78% of the people who were offered 401(k) retirement savings plans at work contributed to them. That compares to just a 62% participation rate in 1984, he says. Where fewer than half of the nation’s big companies offered 401(k) plans a decade ago, nearly all do now.

But it’s not the fast-paced growth in assets or participation that makes him marvel. What amazes Agnew, a principal at Buck Consultants in San Francisco, is that some people still choose not to contribute.

“What is that 22% doing? Are they so young that they just can’t think about retirement yet?” he wonders.

As far as Agnew and many other benefits consultants are concerned, there’s just no good reason not to contribute to a 401(k). It doesn’t matter if you’re young. It doesn’t matter if you’re poor. It doesn’t matter if you’re already covered by another pension. The financial argument for contributing--and contributing as much as possible--is simply too compelling.

Why should you contribute to a 401(k) if you’ve already got another company pension? Traditional pension plans may not pay enough to make you comfortable in retirement, and they are not portable. If you leave the company in less than five years, they usually evaporate completely.

On the other hand, you can take your 401(k) with you when you go. And, they have a variety of attractive features. Specifically:

* Income tax savings: Your contributions are taken out of your paycheck before tax. As far as the government is concerned, you never earned the money. That means you save a substantial sum in income taxes. (But unlike the tax-saver accounts, the money is still taxed for Social Security and Medicare.)

* Employer match: Companies typically match worker contributions of up to 6% of salary. Most commonly that means the company will kick in between 25 cents and 50 cents for every dollar the worker contributes. So, a person who contributes $250 a month--assuming that’s 6% of wages--actually has $312.50 going into savings each month with a 25% match. Where the match rate is more generous--about 29% of big U.S. companies kick in 50 cents for every dollar contributed by workers--our worker actually saves $375 for every $250 he contributes.

* Access: The disadvantage to contributing to most types of retirement accounts is that you lose access to the money until you retire, unless you’re willing to pay onerous tax penalties. However, many 401(k) plans have a borrowing option, which usually gives you the ability to borrow up to 50% of your account value to a maximum of $50,000 and then pay yourself back at a reasonable rate of interest.

“The 401(k) plan is turning into a personal credit union,” says Agnew.

But what may be the most compelling argument for contributing to the 401(k) is just how fast your money grows. Thanks to contribution matching and to the tax breaks, many workers are shocked to find that their accounts burgeon into six figures.

For the well-paid, there is a cap on the amount of money you can put in a 401(k). There are regulations that forbid highly paid employees of a company to contribute a lot more than other workers, and a general limit of $9,240 this year and $9,500 next year. But legislation now before Congress could loosen or remove those limits.

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Beyond Wages

What kind of benefits do employees of big companies normally get? Here are some of the results from a 1994 survey of 1,035 major U.S. employers, conducted by Hewitt & Associates. Data for smaller employers, which are generally less generous, is not available. Of the surveyed companies:

Vacation

* All offer some paid time off to full-time employees.

* Most offer between 10 and 14 vacation days to those with a year of service, 15-19 days for those with five years’ tenure, 20-24 days for those with 15 years, and 25-29 days for those who have been with the company 25 years or more.

* 11% allowed for the purchase or sale of vacation hours.

Life / Disability Insurance

* 88% offer workers the ability to buy life insurance through a group plan.

* 36% pay the full premium for a death benefit equivalent to one-times earnings; 25% pay the full premium for two times earnings.

* 78% offer some type of “salary continuation” plan, which pays full or partial salary during a temporary disability.

* 88% allow workers to buy long-term disability coverage in a group plan; 27% of those have more than one program from which to choose.

Health Insurance

* 80% offer a health maintenance organization (HMO) option.

* 61% offer a fee-for-service or “indemnity” plan.

* 47% offer a preferred provider organization (PPO) option.

Tax-Saver Accounts

* 86% offer both dependent care spending accounts and health care spending accounts.

* 82% of those offering dependent care accounts allow employees to contribute up to $5,000 annually--the IRS limit--to the account.

* 62% of those offering health care accounts cap contributions at $3,000 or less.

Retirement

* 82% offer a defined benefit pension, which pays a set monthly stipend to retired workers for life. The most common way to calculate the monthly benefit is to base payments on a percentage of the worker’s five highest years of wages.

* 82% reduce pension payouts based on the amount of Social Security benefits the worker gets.

* 97% offer a 401(k) plan and 85% of those offering a 401(k) match a portion of worker contributions.

* 46% pay in 50 cents for every dollar contributed by workers, up to set limits based on the worker’s salary.