Thursday, November 14, 2013

How Much Are Employer Benefits Worth?

When selecting an employer, understanding the value of the benefits offered is critical. Just because one company may offer a higher salary doesn’t mean they are offering more total compensation than other employers.

Let’s explore the value of benefits received by a 60 year-old employee who is married and has two kids (ages 18 and 15). We’ll assume this individual earns $51,017, which was the median average household income in 2012.

Payroll Taxes

The value of some benefits is easier to calculate than others. For instance, regardless of your income, your employer is required to pay half your FICA – Federal Insurance Contributions Act – taxes (covering Social Security and Medicare). The full FICA tax is 15.3% of your income, so you pay 7.65% and your employer pays 7.65%. Assuming a salary of $51,017, your employer’s FICA contribution is $3,903.

It should be noted that any employer you affiliate with will be required to contribution their 7.65% portion of the payroll tax. Of course, the actual dollar amount they contribute will increase as your salary rises. Alternatively, self-employed individuals are required to pay the full 15.3% payroll tax themselves. In comparison, a halving of the payroll tax is a significant benefit to non-self employed workers.

Retirement Plan Contributions

Of course, not all employers offer a 401k match, and the amount of the match offered varies. However, let’s assume a fairly common matching policy where the employer will match 50% of the first 6% of your salary that you contribute. Assuming you take full advantage of the match, your employer will contribute 3% of your salary to your retirement plan, or $1,530.

Paid Time Off

Most employers offer a mixture of vacation, holidays, and sick days. Assuming you get 10 days for vacation, five paid sick days, and seven paid holidays, you get a total of 22 paid days off per year. If you make $51,017 per year and work 260 days, your daily pay rate is $196 ($51,017/260). Multiplying the daily rate by 22 paid days off, you actually make $4,312 for days you don’t work.

Health Care

Some benefits, like health care, are much less predictable. Of course, not all employers offer health care, and it is difficult to determine the value of any benefits offered. However, according to ehealthinsurance.com, our 60 year-old married individual with two kids could purchase a health care plan from Select Health with a $1,000 deductible per individual and $2,500 deductible per family for $1,243 per month, or $14,916 per year. Many employers won’t cover this entire cost, but let’s assume the employer covers 60% of this expense, leading to a total health care benefit of $8,949 contributed by the employer.

Life Insurance

Life insurance, when provided by an employer, is typically term insurance and fairly cost effective. Assuming the employer provides life insurance equal to two times your salary, they would provide $102,034 of coverage. On intelliquote.com, I found that Genworth was willing to provide this level of coverage for $41 per month, or $492 per year.

Long-Term Disability

When offered, employers usually provide long-term disability coverage amounting to approximately 50% of your salary. On Mutual of Omaha’s website, I found that a long-term disability policy providing a $2,000 per month benefit (47% of salary) after a 60-day elimination policy would cost our 60 year-old employee $175 per month, or $2,100 per year.

Adding It Up

So how much are the benefits for our hypothetical employee worth?
  • FICA contributions: $3,903
  • Retirement plan contributions: $1,530
  • Paid time off: $4,312
  • Health care: $8,949
  • Life insurance: $492
  • Long-term disability: $2,100
Total employer-paid benefits based on a $51,017 income: $21,290

Consequently, although your salary may be $51,017, your total compensation is $72,307, and the benefits provided by your employer represent approximately 30% of your compensation. This example is typical -- the U.S. Department of Labor reports that benefits are worth 30% of an average employee's total compensation.

Clearly, benefits can amount to a significant portion of your compensation and should be closely analyzed when choosing an employer. Even if you aren’t currently considering changing employers, knowing how much your employer pays for your benefits might help you appreciate your job more.

1 comment:

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