Preparing for the Annual Compensation Review – Part II

Last month, I provided an overview of the elements of the compensation package for employees to consider as compensation review season approaches. This month, we’re going to talk about benefits, but rather than dissect the different programs, we’re going to focus on the financial impact of two programs: medical coverage and retirement plans.

Before we begin that discussion, here’s some context. Remember from last month, the big picture here is the company’s total rewards package, and that typically, these packages consist of five elements mentioned previously: compensation, benefits, well-being, development, and recognition. Benefits, the second element, is an all-encompassing term for the programs an employer offers which are designed to strike a balance between an employee’s personal and professional life. When we talk about the benefits a company offers, they fall into two areas: income protection programs and pay-for-time-not-worked programs.

• Income protection programs are designed to protect the employee’s standard of living and that of his/her family against catastrophic losses.
  • Mandatory (legally required) programs can include:
    • Unemployment
    • Medical
    • Retirement
  • Voluntary (at the discretion of the employer) programs can include:
    • Wellness
    • Mental/behavioral health
    • Life insurance
• Pay-for-time-not-worked programs—designed to protect the employee’s income during periods when the employee is not working
  • For time when the employee is at the workplace but not performing their primary job, these programs can cover:
    • Travel time (with certain exceptions)
    • Training time
    • Break time
  • For time when the employee is not at the workplace, these programs can cover:
    • Designated holidays
    • Personal/sick days
    • Vacation

Now, with this as prelude, let’s talk about the financial impact that two of the income protection programs can have on employees: medical benefits and retirement benefits.

Medical Benefits

Since most people in the United States get their medical coverage through their employer, medical benefits are a key focus for employees. Managed-care programs are the most common medical plans offered because the cost risk is shared between the company and the employee. While you don’t need to be a benefits expert to determine the extent of a company’s medical plan and the financial impact on your household, you do need to have some knowledge so that you can weigh different plans and understand possible costs. Typically, the more choices a medical plan offers, the more it will cost the employer and you. Here are the most common types of plans:

• Health Maintenance Organizations (HMOs) require the employee to choose a primary-care provider (PCP) from a fixed network and require the employee to get referrals from the PCP to see specialists in the network.
  • Preferred Provider Organizations (PPOs) do not require the employee to seek referrals from a PCP—the employee can see whomever they want, but if they see a provider outside the network, their costs will likely be higher; and
  • Point of Service (POS)—a hybrid of a PPO and HMO—requires the employee to select a PCP who provides referrals to specialists in and out of the network—fees will be higher for out-of-network providers, and the employee’s portion of the cost will likely increase.

In addition to these options, some companies may offer pre-tax health funds to help defray employees’ out-of-pocket costs for plans with higher deductibles. Employer contributions, employee contributions, or both can fund these pre-tax health fund accounts.

The bottom line from a financial perspective is that when you examine your current benefits package or that of a potential employer, you should be able to classify the medical benefits offered, determine the choices available, the level of coverage(s) you and your family will have, and what your out-of-pocket costs will be. Some companies offer very robust coverage and require employees to pay very little, while others are the opposite. An accident or prolonged illness can devastate a family’s financial reserves very quickly, so quality medical coverage, particularly if there are children in the picture, is a must. One element that can be negotiable is the amount of healthcare premiums the employee is required to pay. As part of their retention strategy, some companies pay their employees’ medical premiums, making that coverage a directly monetizable element to consider.

Retirement Benefits

While there are still some defined benefit plans (i.e. pensions) offered by companies, the most common plans are defined contribution plans, and these are almost always 401(k) employee savings plans. About 90% of employers offer 401(k) or similar contribution plans. Of these, 75% will allow catch-up contributions, and 66% will provide for hardship withdrawals.

While these plans can be quite simple, the IRS restrictions can limit their impact. Typically, an employee contributes pre-tax funds to a 401(k) account, and those funds can grow tax-free until they are withdrawn. Some companies match employee 401(k) contributions up to a certain percentage of the employee’s total cash compensation. For example, if an employee earns $100,000 and the company has a 3% match, the employee contributes $3,000, and the employer matches that contribution with an additional $3,000. Match percentages can range from 3% to 16% and herein lies the misunderstanding. If a company offers a very generous 401(k) match, the employee needs to do the math to determine how much money they will actually receive. As of 2025, the IRS limits employee contributions to 401(k) accounts to $23,500 annually for those under 50 and $31,000 for those 50 and over, with a combined limit of $70,000 for employee and employer contributions. In 2026, those limits will increase to $24,500, $34,500, and $72,000, respectively. Additionally, the IRS will only allow the first $350,000 of total cash compensation to be matched, increasing to $360,000 in 2026.

Here’s how that can work out. If the Widget Company offers a 12% 401(k) match, an employee with $250,000 of total cash compensation should glean $30,000 in matching funds if they put $30,000 of their pay away, but not so fast. The over-50 employee will indeed realize that match if he/she contributes, but the under-50 employee will be capped at $23,500 this year and $24,500 next year. If the total cash compensation rises to $300,000, the cap will take a greater toll, and at $350,000, the overall cap kicks in.

In summary, while the 401(k) match an employer offers is an important part of the overall package, the potential employee needs to do the math to determine the actual difference it will make.

One final piece of advice from the comp guy: If the company delays vesting matching funds for a 401(k), run for the hills. They’re basically communicating distrust before they even hire you.