The following blog post is a reprint from an article that was originally printed in the Oregon Veterinary Medical Association magazine. The author, MacKenzie Martin, is a financial advisor who works with many veterinarian clients. You can find out more information about her here. She has given full permission to re-print this article on this website. We have no financial relationship.
Benefits are such an important part of the total package when it comes to your new job. However, the transition time into a new job can be hectic, so it’s no wonder that benefits don’t get the attention they deserve. The following information will come in handy for those that are wanting clarity and advice regarding their workplace benefits. Enjoy!
The intricate, complex world of veterinary benefits and compensation is full of landmines and pitfalls. All employers are unique, and each individual employee situation is highly individual, potentially creating a lot of space for mistakes and misunderstandings.
More commonly, employees simply miss out on opportunities to maximize their savings or take advantage of opportunities and coverages not offered or understood. It is imperative to be aware of the differences in expectations between corporate and private practices. Understand these differences, especially if you are job hunting.
As your life changes (getting married, having kids, buying a house), carefully evaluate how you’ve arranged your finances. What insurance do you get through work? What do you need to purchase individually? Both your professional and personal lives will continue to evolve, and remembering to evaluate your coverages and financial arrangements can help pave the way to a confident future.
Always request the summary plan description (SPD) for all benefits. The SPD contains the fine legal print. You must know what’s in that document, especially if you file a claim! And if you don’t understand it, that’s where a financial professional can help.
Here are the most common pitfalls we see veterinarians encounter with regard to benefits:
Pitfall # 1: Auto vs. Voluntary Enrollment
Life and disability insurance options are either automatically enrolled via the employer, or the employee must proactively “opt in” to a voluntary benefit. As a new hire, understanding what happens automatically and what you have to elect is critical. If you miss your election period—usually the first 30-60 days of employment—you are generally unable to make changes until the following year. And, if you don’t enroll in voluntary disability or life coverage, you may have to prove your health status in the future to secure coverage. Be especially aware of this if you have pre-existing health conditions.
Pitfall #2: Defining Compensation for Disability Insurance (DI)
Does your disability cover base pay only? Base plus production and bonus? In the corporate hospital setting, we see both of these definitions: “Compensation includes base wage only” and “Compensation includes total paid wages, averaged over the past 12 months.” These are dramatically different compensation models. Most employer-sponsored disability insurance covers 50-60% of your income. If you were to receive base plus production (ProSal model), and your base is $60,000, but you actually make $120,000, you’re only covered for 60% of the $60,000, or $36,000. Many professionals think they have a lot more coverage than they actually do, as the stated coverage limit of “60%” is misunderstood.
Example: As I have seen in a large corporate practice’s benefits guide: “After you have been disabled for 180 days, long-term disability* coverage pays 50% of your salary, up to a maximum monthly benefit of $3,000.” This appears to be a typo because in small print below it states ‘monthly maximum of $15,000.’ This directly contradictory language exemplifies the rampant confusion, for both employees and employers, surrounding disability insurance.
Pitfall #3: Are Your Disability Benefits Taxable?
If you go on claim for a disability, and your employer paid the premium, you will owe taxes on that benefit. This can cause an unhappy surprise at tax time. If you pay for your own premium, often you can elect to pay pre-tax or after-tax. With disability, consider opting to pay the small premium after-tax, so you can get the larger benefit tax-free. If you pay the premium pre-tax and go on claim, you will be taxed on the larger benefit amount.*
Pitfall #4: Pregnancy, Maternity Leave and Short vs. Long Term Disability
Many plans have a one year pre-existing condition clause, so if you enroll in January and get pregnant in July, the pregnancy will most likely be excluded as a pre-existing condition. Also, waiting periods are important for using short term vs. long term disability for pregnancy. Many short term plans have a 7-14 day waiting period—which works well for pregnancy—whereas long term disability plans typically have a 90-180 day waiting period. Most pregnancy-related disabilities are over before this waiting period ends, due to delivery.
Pitfall #5: Portability of Life & Disability Coverages upon Termination or Resignation
If you have ongoing or expensive health issues, you need to know if your coverage includes a portability clause that will allow you to retain coverage if you leave your current employer. This is especially important if you leave a corporate environment with strong benefits and go to a private practice where it is often assumed that you carry your own disability and life insurance.
Pitfall #6: Spousal Health Issues or Insurability and Individual Insurance Coverage
Be sure to add a spouse with health concerns onto your group benefits via the spousal coverage option. Often this can be done without medical underwriting.
Pitfall #7: Does Your Disability Insurance Plan Have a “Buy Up” Option? Should You Use It? When?
Many employer-paid plans cover 60% of your income, but may also allow an additional 10% buy-up option. This option allows you to elect to pay for additional coverage. This optional feature is not well publicized and you have to ask about it. “Buy ups” may require proof of health.
Pitfall #1: Not Understanding How Employer Contributions Works
Example from a small, privately owned, animal hospital: The practice has a SIMPLE IRA which means there are two options (per the IRS) for matching contributions. The first option is a 1-3% match. The “fine print” to this option states that the match cannot be lower than 3% for any two out of five years. Option 2, the employer can choose to make a 2% non-elective contribution for all employees. We rarely see employers using option 2, and option 1 implementation is frequently riddled with mistakes and inaccuracies. Many small employers don’t understand the IRS rules, employees don’t either, and money may be left on the table. If you have a SIMPLE IRA, every Nov. 1st your employer should provide written documentation of the match for the coming year. The critical takeaway when you review your documents is to remember that the match cannot be less than 3% for more than two in five years.
Example from corporate hospital A: Requires a 6% employee deferral before contributing the maximum 3.5% match. If you only contribute 2%, they only match 1.5%, if you only contribute 4%, they only match 2.5%. You need to contribute at least 6% of your wages to get the maximum 3.5% match.
Example from corporate hospital B: This employer “may make a discretionary company match to your 401(k) account after the end of the plan year. To qualify for the company match, you must still be an eligible participant in the Plan on December 31st of the plan year. The company match may vary from year to year.” We have seen variable employer contributions from this corporate employer, while other corporates have a fixed and predictable matching plan.
Pitfall #2: Understanding “Highly Compensated Employee Limits” and a 401(k) plan
Some clinics, primarily larger corporate hospitals, limit the dollar amount a highly compensated employee—usually earning over $100K-$120K—can defer to the 401(k) plan. We normally see around $10,000/year, even though the IRS limit is $19,000/year. This limitation is called the “HCE Cap” and can vary from year to year. To help remedy this problem, some hospitals also provide a deferred compensation plan for retirement. Deferred compensation plans are often not included in general benefits guides, as they do not apply to all employees, just the highly compensated ones. There is significant nuance to these plans and they must be carefully reviewed before use.
Pitfall #3: Is There a ROTH 401(k) Option?
For 2019, the maximum annual income limit for a ROTH IRA is $137,000 for single filers and $203,000 for married filing jointly. If you make too much money to contribute to a ROTH IRA directly, you may be able to contribute to a ROTH 401(k). Many 401(k)s have a ROTH option, but it’s not well publicized, so you may not even know you have the option without asking.
Pitfall #4: Defining “Full Time” vs. “Part Time” and How it Applies to Plan Eligibility
Most employers define benefit eligibility based on full time or part time status. In many cases, especially in small employer settings, these categories are not sufficient to categorize or apply within the context of a retirement plan. Here’s a common example we see: SIMPLE IRAs are set up to require “an employee earn $5,000 in the prior plan year, and be expected to earn $5,000 in the coming plan year to be eligible.” Let’s say you were hired in Nov. 2018 and made $5,000 by the end of 2018. As a part-time doctor, you would definitely make at least $5,000 in 2019 to be eligible to participate as of Jan. 2019. Even though you’ve only been employed 2 months, and you only work part time, in this specific instance you would be eligible. Your benefits package may specifically state “all benefits require XXX amount of waiting period” when that doesn’t actually apply.
Pitfall #5: Understand What Vesting Means
Vesting is a legal term that means to give or earn a right to a present or future payment, asset or benefit. It is most commonly used in reference to retirement plan benefits when an employee accrues non-forfeitable rights. Simply put, it is how long you have to work before you can walk away and still keep the matching or profit sharing contributions in your retirement account.
Example from corporate hospital A: Has a 2 year period for “full vesting “of their matching contributions, which means the employee keeps 100% of the matching contributions after two years.
Example from corporate hospital B: Has a 5 year vesting schedule for their discretionary profit sharing. This is not guaranteed, contributions can be $0 and can change every year.
Pitfall #1: Health Savings Account (HSA) Or Flexible Spending Account (FSA) ?
Both types of accounts allow you to set aside pre-tax money. A health savings account (HSA) is money specifically set aside for health care, while a Flex Spending Account (FSA) can be for either health care or dependent and day care. The “use it or lose it rules” for FSAs recently changed and you can roll $500/year over in your FSA. HSA funds roll over
Example from corporate hospital A: It is also common for some larger corporate employers to add funds to your HSA account on your behalf. In 2018, one large corporate hospital gave $750/year to employees that participated without a requirement for them to contribute any funds themselves.
Pitfall #2 – Not Using an HSA to its Full Advantage as a Retirement Planning Tool
If you have the means to fund your current healthcare needs out of cash flow, then continue saving into your HSA and consider this bucket of money your “healthcare plan for retirement.” Do not touch this money and save it for your future self. Additionally, HSA money can often be invested like a retirement plan. Check your specific plan first. It is a statistical reality that you will use it for health care at some point in your life, and it is triple tax free when you do: it was tax free going in, any earnings are tax free, and the distributions are tax free if used for health care.* This is the only account of its kind!
Pitfall #3: Not Taking Advantage of a Dependent Care FSA Account for Child Care
If you’re in the 30% tax bracket, and contribute the full $5,000/year, you could be saving $1,500 on taxes for something you already are paying for.
Pitfall #4: Not Using a “Legal Plan” Benefit
More commonly offered in a corporate setting, a legal plan benefit provides a cost effective way to access legal help. For anyone with children that needs a will written up to provide legal guardianship of kids, this is the quickest, easiest way to do it. Caution: If you have any complexity to your situation (second marriage, own a business, etc.) you should spend the money to hire a lawyer.*
Pitfall #5: “Qualifying Events” Often Allow Benefit Changes
Birth, death, divorce, adoption, job loss—these big life events may enable you to change a wide array of coverages outside the scope of the open enrollment period.
Pitfall #1: What is Your Tax Withholding?
Your tax withholding numbers are usually small and hidden somewhere in the corner of your pay stub. Look for something like “M-0″ which means married, claiming no deductions, or “S-2” which is single, claiming two deductions. If you are married and see an “S,” or are single and see an “M,” you need to correct the inaccuracy. Once updated, it is worth following up to confirm the changes were actually processed.
Pitfall #2: Pre-Tax vs. After-Tax Benefits
If you pay for your own long term disability through your employer, you may want to pay it after-tax if you have the option. Double check that the payroll is set up correctly on your pay stub. Same goes for things like an HSA deduction (pre-tax) vs. employee life insurance (usually paid after-tax).
Pitfall #3: Production Pay – Get Paid What You’re Due
Pay close attention to your pay stub and production reports. Know what you are producing in revenue and make sure you’re being compensated fairly for it.
Pitfall #4: Check That Pay Stub Again!
If you enroll in new benefits during open enrollment, such as adding spousal life insurance or adding a flex spending account deduction, make sure to check your pay stub the next month after the change to confirm you’re actually getting the benefit. We find this is often overlooked, especially in smaller private practices. If you’re not actually paying for it, but you know you “signed up,” you are not covered.
Note: These examples are based on direct experiences with our clients.
From general, solo and specialty practices to multiple partner practices, our in-depth experience encompasses a broad range of corporate entities and unique business structures within the veterinary field. For a consultation, please contact: Mackenzie Martin at (503) 697-0817 or email@example.com
Registered Representative offering securities and advisory services through Independent Financial Group, Inc. (IFG), a registered broker-dealer & registered investment adviser. Member FINRA/SIPC. Medical Professionals Financial Group and IFG are not affiliated entities. OR Insurance License #708320.
*Consult your legal or tax advisor for your specific situation. The information provided here is intended to be educational and should not be considered or construed as legal, accounting (tax), or financial planning advice. The strategies described may not be suitable for all individuals. Examples are provided for illustrative purposes only.
Thank you, MacKenzie, for your informative article! As you can see, navigating your benefits package is not a quick process. Do you have any additional pitfalls that you’ve personally seen when it comes to benefits? If so, please comment below!