Employee benefits: Opt in or opt out?

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More than 75% of workers say that the employee benefits package is extremely important when they’re decided whether or not to take a job. Think about it: If you’re looking at two jobs that both pay $60,000 per year, but one offers a ton more benefits, which is more attractive?

But it doesn’t always make sense to participate in your employee benefits, especially when private options may be less expensive or provide you with more choice. In this article, we’re going to look at four popular employee benefits – health insurance, 401(k)s, disability insurance and life insurance – and walk you through whether or not you should opt-in or opt-out, along with our investigation of what your alternatives are. (And if you're a freelancer trying to build your own benefits package, you can find a step-by-step guide here.)

Health insurance

According to the 2015 Bureau of Labor Statistics’ National Compensation Survey, 72% of workers have access to health insurance as an employee benefit. Out of all workers, only 53% participate in an employer-provided health insurance plan. Why do the 19% of workers who opt out of their employer’s coverage do so, and what do they do instead?

Top reasons to opt out of your employer's health insurance

There are several reasons you may want to opt out of your employer-provided health insurance plan. Let’s go through some of the most common scenarios.

The most common reason people opt out of employer health insurance coverage is because they’re already covered. A few examples of outside coverage you may already have:

  • If you’re under 26, you may have coverage under your parent’s plan.

  • You may have coverage from a spouse’s plan.

  • You may own your own plan.

If you’re coming into a job with health insurance coverage already, you’re probably already leaning towards keeping your existing coverage. You should consider, however, whether or not your employer’s benefits may fit your needs just as well (or better) and can provide you with some potential cost benefits.

For those of you under 26, there’s a good chance you’re not paying to be a dependent at all, while you likely have to pay some amount for your employer’s health coverage. However, there are three big reasons you may want to switch over to your own health insurance plan:

  1. You’ve moved out of state.

  2. You’re concerned about your privacy.

  3. You’re planning on having a kid.

If none of those apply to you and you’re happy with your current coverage, there’s little reason to switch to your employer’s plan.

For those of you who are dependents on a spouse or partner’s health insurance plan, consider the cost – if your employer’s plan covers the same doctors, hospitals, and prescriptions, but costs less than what you and your partner have to pay for dependent coverage, you might want to consider it. Take a look at the deductibles, too – your employer coverage may cost less, but have higher deductibles (or vice versa).

Another reason that people opt out of their employer’s coverage is that it’s unaffordable and they would prefer to shop on their state or federal marketplace.

Your employer’s plan may also fail to cover your preferred doctors, hospitals, or necessary prescriptions, forcing you to look for coverage elsewhere.

Your alternative

Regardless of the reason behind opting out of your employer coverage, you still need to make sure you have a backup plan. If you’re opting out because you’re already covered, great – just make you stay covered (it’s the law). If you’re opting out because you want to look for better coverage, make sure you know exactly what you need.

Health insurance is one of the more complicated types of insurance to buy because it requires a series of trade-offs. To use the above example on deductibles – if you want a lower deductible, you typically have to pay a higher monthly premium and vice versa. Not all plans will offer exactly what you need, so the best way to go into a shopping experience is to know what it is that you need. If you’re opting out of your employer plan because it doesn’t cover your preferred doctors, for example, consider that a high priority for your privately purchased plan. Same goes for hospitals or prescriptions covered.

You can look for health insurance plans on your state or federal marketplace during Open Enrollment or, if you just recently changed your job, during a Special Enrollment Period. Open Enrollment for 2018 starts on November 1, 2017 and ends December 15, 2017.

Some businesses may offer you a waive allowance if you choose to opt-out of your health insurance policy. This typically isn’t very large – anywhere between $25 to $200 depending on the size of your company. If you’re opting out of your health insurance plan, ask about a waive allowance, but don’t be surprised if your company does not offer one or offers only a nominal amount.


57% of workers have access to a defined contribution retirement plan, which most commonly manifests itself as a 401(k) plan. But, according to the National Compensation Survey, only 39% of workers take advantage of their employer’s 401(k) plan. Why do 18% of workers who have access to retirement benefits choose not to take advantage of them?

Top reasons to opt out of your 401(k) plan

There’s a good chance that most of those 18% aren’t actually opting out, they just never opted in in the first place. Why? A major pain point for employees is that their 401(k) benefit is not effectively communicated to them, causing them to feel intimidated by the process of signing up for the plan.

Even if you’re not intimidated by signing up, there are still other reasons that people don’t sign up for their 401(k). Not all of these are good reasons, however. For example, you may feel that you don’t have enough money to put aside for retirement, perhaps because you’re feeling the crush of student loans or other debt. Depending on your financial situation, this might make sense – many financial experts, such as Dave Ramsey, suggest putting off retirement savings if you’re in severe debt or don’t have an emergency fund.

But it’s also likely that many people could find room for retirement savings in their budget if they cut spending from somewhere else. The cliche example is the savings you’d gain by cutting your morning latte, but let’s face it: we need our morning lattes. Instead, it’s likely that you’re overspending on other items or have hidden monthly expenses, like subscriptions, that you don’t even realize are taking up a huge amount of your paycheck. Implementing a budgeting solution such as You Need A Budget can help you carve out a space in your budget for savings.

We suggest putting money into a 401(k) specifically because of matching employer contributions. If your employer offers it, they’ll actually match your contribution with one of their own up to a certain amount. For example, if you put 1% of your income into your 401(k) every month, the company will match that 1% out of its own pocket. This can easily double the amount you’re saving for retirement without taking any additional money out of your paycheck.

Not all employers offer matching contributions, however, which is one good reason not to participate in your 401(k) plan. However, not participating in a 401(k) plan does not mean you don’t have to save for retirement.

Your alternative

The most popular alternative to a 401(k) is an IRA, or individual retirement account. Unlike 401(k)s, you don’t sign up for an IRA through your employer. Like a 401(k), the actual investment or savings product inside the IRA differs depending on who is administering the product. However, the tax benefits are consistent between providers. IRAs can also complement your 401(k), if you want to save even more money.

You don’t necessarily need an IRA to put money aside for retirement (though the aforementioned tax benefits do make them more attractive). Apps like Acorns or Stash market themselves specifically to people who don’t feel like they have the money to invest or are otherwise intimidated by it. Other companies you may have heard of, like Betterment or Wealthfront, allow you to set up an automatic deposit every month.

While you may get a better deal or better investment opportunities by investing somewhere other than your job’s 401(k), one huge benefit of the 401(k) is that you can set it and forget it. Once you opt-in, it usually automatically deducts your contribution from your paycheck. Most people, once they decide not to enroll in a 401(k), don’t set up an automatic contribution elsewhere, and let retirement savings fall by the wayside. Don’t be that person. Find the product that works for you and set up an automatic deposit.

Short-term and long-term disability

Disability insurance is usually not at top of mind when you think of employee benefits. However, according to the Council for Disability Awareness (CDA), the number of companies offering long-term disability is on the rise. Unfortunately, in that same report, the CDA estimated that fewer workers are participating in their employer-provided disability policy.

Top reasons to opt out of a disability plan

Before we get any further, let’s explain exactly what disability insurance does. Both short-term and long-term disability protect you during periods of disability where you’re unable to work. If you’re in your twenties, you have a one in four chance of experiencing a disability at some point before you retirement. What you may not realize is that most disabilities are temporary and due to illnesses, not debilitating workplace accidents. According to the CDA, the most common causes of long-term disabilities are back injuries, cancer, and heart disease, and the average absence lasts just over two years.

The difference between short-term disability (STD) and long-term disability (LTD) is that short-term disability only protects you for the one to six month period after your disability begins (the exact length depends on the policy). Long-term disability, on the other hand, kicks in three to six months after your disability begins and can potentially last for the rest of your working years (again, depending on the policy).

Our resident disability insurance expert, Tyler End, CFP, says that it’s usually smart to take a short-term disability policy from your employer. "You can buy a private STD policy, but it’s very expensive. It’s better to accept an STD policy from your employer and use your money to build up an emergency fund." When it comes to long-term disability, you may be better off turning down your employer’s coverage. "Your employer may not offer strong coverage," says End. "I talk to a lot of young people who decline employer coverage and buy a stronger policy that is portable, which means they can take it with them if they change jobs."

Your alternative

If you decide to turn down your employer-provided long-term disability insurance, you should immediately start looking for a private option. Our guide to long-term disability can help you with some of the basic terminology you’ll need to know when researching a policy. You can also get long-term disability quotes from our quote engine.

Life insurance

Life insurance is actually one of the more popular employee benefits – according to a study from LIMRA, 70% of employees have life insurance as an employee benefit, and 80% of those employees participate.

Top reasons to opt out of a life insurance plan

Most employer-provided life insurance coverage is entirely paid for by the employer; companies can deduct life insurance premiums as a business expensive on their taxes. If your company pays for your life insurance premiums, it doesn’t make a lot of sense to opt out of the coverage. Even if you don’t think you need it – you’re young and don’t have any dependents, for example – you should still take it and mark your parents (or whoever else would be responsible for your funeral) as the beneficiary. This holds true if you have a privately purchased life insurance policy as well.

But what if your employer requires that you pay your own premiums or offers additional coverage that you can pay for? If you already have a life insurance policy, this is a personal decision as to whether or not you want to pay the additional premiums; there’s no other detriment to having multiple life insurance policies from multiple sources. If you don’t have a privately purchased life insurance policy, I would encourage you to look at private options before purchasing coverage through an employer. Privately purchased life insurance may be cheaper and you’ll be able to take it with you if you change jobs.

Your alternative

The alternative to employer-provided life insurance is a privately purchased life insurance policy. A privately purchased policy is not always a true alternative, however. More frequently, the two policies complement each other. Employer-provided life insurance coverage is rarely enough to cover your needs, and many workers choose to buy a private policy to cover the gap.

What’s your experience with employee benefits? Do you prefer to always opt-in, or do you scrutinize all of your options? Tell us your story in the comments below.