We work with many associates and partners in large law firms, and often find that they fail to take advantage of many of the benefits their firms may offer. Here’s a quick top-10 list of typical employee benefits and what they mean for you (we’ll leave out the medical and healthcare benefits for now).
1. The Humble 401(k): Generally all firms offer a 401(k) and, usually, an enriched version for partners. We’re often surprised that many employees fail to make the maximum contribution of $18,000 ($24,000 if over 50) or are even aware of the key 55, 59 and 70-year ages regarding the plan. Make sure you’re contributing the maximum and receiving the full company match, because the maximum employee and employer contributions are often as much as $54,000.
2. Cash Balance Plans: Many large law firms typically offer defined benefit cash balance plans for partners. These work a bit like the 401(k), except that employees cannot direct or change their investment options. Maximum annual contributions are age and compensation driven and can be as high as $150,000, although typically top-out at around $50,000. The maximum balance you can have in a Cash Balance plan is about $2.4 million, which is why these plans often close and then re-start. It’s common for us to see problems around these types of plans as a) partners underestimate the value of the plan b) they do not understand that, unlike a 401(k), lump sums are capped and c) they are not sure how to treat the plan in asset-allocation decisions.
3. Group Insurance: Most employers offer generous group life insurance plans. These are valuable because they a) are paid with pre-tax dollars b) do not require medical underwriting and c) offer a death benefit calculated as a multiple of salary, rather than a fixed sum. Many policies are portable, which means you can take them with you if you leave your firm without undergoing an underwriting process. Group life is the quickest and simplest way to acquire life insurance protection.
4. Health Savings Accounts (HSAs): Employers often offer attractive HSAs that do not impose a monthly fee, typical with individual accounts. Maximum contributions are up to $8,750 (for a qualifying married couple, both over the age of 55 years) and can be tax deductible. As long as you eventually use the funds for medical expenses, no income tax is assessed on the funds. Of course, you need to have the right plan (called a HDHP).
5. Venture Funds: Some law firms with securities or IPO practices offer venture funds, which work like late-round venture capital. While these investments can be speculative, the cost basis for the stock is usually very low and they can be effective gifting instruments. Many firm members overlook the value of these investments.
6. Capital Plans: Although these are normally required and set by the firm, we find some attorneys do not take full advantage of attractive financing terms. They may also not know how to treat the return of capital upon retirement and how to factor it into their retirement income.
7. Deferred Compensation Plans: Many firms offer non-qualified deferred compensation plans, which are supplemental to qualified plans and have no creditor protection. Many of these plans offer self-directed investments. We find employees often overestimate the risk of these plans and undervalue the tax benefits. Issues of constructive receipt and restrictive pay-out options also arise.
8. Defined Benefit Plans: We rarely come across active final salary defined benefit plans, as most are grandfathered or closed to new employees. However, we find people undervalue the benefit of any residual guaranteed lifetime income stream and how that should affect their asset allocation.
9. Long Term Care Insurance: Most employer plans are voluntary and employees pay all costs. Firms often offer minimal benefits, but allow employees to buy additional coverage on their own. We find such plans tend to have low participation. Firms also offer long and short-term disability policies over and above those required by law.
10. COLI or Split Dollar Insurance: These are less frequent now, perhaps because of low rates. They can provide a supplemental benefit, including a tax-free death benefit, to certain highly compensated firm members.
If you have any questions, or would like to discuss how to leverage any of these benefits further, please feel free to e-mail us or call (415)435-8330.