Originally posted on GeekWire.com.
Seattle is quickly advancing as a tech hub. Large satellite offices and tons of startup options invigorate many employees to make the jump to smaller tech companies. I think the flow of talent is wonderful when it ignites a passion to fulfill your dreams. Feel the fear and do it anyways!
Everyone should be able to follow their dreams with as few obstacles as possible. One major difference between big tech company life and the start-up world is employee benefits.
Figuring out what’s best can take time and effort.
- What are my health plan options? Should I sign up for a HSA?
- Do I need additional insurance beyond what my employer provided?
- What should I do with my RSUs as they vest?
- What are my 401(k) options and how much should I save?
- Am I going to owe the IRS taxes at year end?
I started working with a client who moved from Microsoft to a start-up. We found there were quite a few differences in what was available under each plan. Microsoft offered disability and life insurance, a 401(k) with diversified stock choices at low expense ratios, and professional assistance perks. At the new start-up, he encountered implications with the benefits package: minimal health plan, no life and disability insurance, no 401(k), and limited perks beyond snacks at work. Having the right advisor help you determine what to do next can make a huge difference.
Minimizing personal risks
- Do you have an emergency fund? Small start-ups are less stable and have a higher chance of failure. Reassess your emergency savings and determine whether you need additional funds. Depending on your situation, this may include six months’ worth of expenses, or more. If you’re in a larger start-up, consider additional savings in case you believe it makes financial sense to buy out your vested stock options.
- 3,000 Americans become disabled every hour (1). Do not underestimate the crippling effect this can have on your family. If your employer provides disability insurance, generally this amounts to around 60% of your salary up to a cap (commissions not included). When your employer provides this group benefit and pays the premium, the benefit is taxable to you. Can your family survive on the provided benefit? Are there parameters that could change your ability to use it? Not all benefits are the same, and the applicable coverage varies widely. Individual disability insurance can fill the gap between your employer’s plan and what you need to survive financially.
- Employer plans may include life insurance. Generally I’ve seen this range from $50,000 to a multiple of your salary. The premium cost of the first $50,000 of life insurance provided through your employer plan generally is considered tax free for you. Beyond that, the premiums paid on your behalf may or may not be taxable to you under the plan.
Consult with your advisor and/or insurance broker to understand whether you need additional coverage to ensure your family’s ability to maintain financial stability if something happens to you.
Maximizing tax-deferral strategies
- Effectively manage your retirement options. Does your employer offer a Roth 401(k) component? A Roth is not always the winning choice and depends on assumptions you believe now and hope will prove true over time. You must preemptively decide: Will your tax rate during withdrawal years be higher? How much money will you need for annual expenses in retirement? Do you need the additional tax-deferral now? How large will your estate be when you pass? This will be an estimate your advisor can assist you with. Carefully weigh your options and check back in periodically since the best strategy will most likely shift over time.
- Sock away money in employer provided accounts beyond retirement. Most start-ups are focused on high-deductible health plans (HDHPs) with health savings account (HSA) options. All HSA contributions, up to the permitted max, are tax-deductible, and earnings accumulate tax free. If your current salary and bonuses allow you to budget savings and maximize your retirement options, consider setting up your HSA account and pay for medical expenses with your after-tax cash on hand. Your investment philosophy will help you determine what is best.
- Some companies provide further benefits for families through dependent care flexible savings accounts. These accounts allow a max pre-tax contribution annually for current year use. Covered expenses include qualified care for children, parents, or other dependents. Although unused contributions are lost at year end, this can be a great benefit for those in a higher tax bracket with known needs.
Accumulating wealth
- Negotiating your compensation package may provide a huge head start in accumulating long-term wealth at the right company. Have you negotiated for the right parameters in your agreement? Were you offered stock options but negotiated for restricted stock?
- Stock compensation planning goes beyond the tax implications (but make sure you have an idea of what to expect). Also consider planned selling and how to hold the stock. If you have highly appreciated stock, there are multiple ways to gift this with a lower tax impact. Alternatively, what if you want to sell early? Know the secondary market available for your stock.
- Minimize the golden handcuffs by ensuring you understand the long-term compensation structure. The initial compensation agreement sets the tone, but understanding how bonuses, stock grants, and salary work longer term will help you know where you want to be and evaluate where you are now.
Life gets tricky as you move from one company to another and you can no longer expect the same protections and benefits. Start-ups offer great personal perks, but may require you to think more about what you are doing on the financial side.
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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.
1Disability Divide: The Council for Disability Awareness, March 2010.
