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Build Your Own Benefits Package
Most people automatically think of health insurance when the subject of employee benefits is raised. It is true that health insurance is one of the more important benefits that employees are likely to receive. But, as we learned in the discussion on Annual Salary vs Hourly Pay, the typical corporate employee receives many more "benefits" than health insurance alone. One tends to overlook the considerable "personnel overhead" associated with the care and upkeep of a permanent employee.
Corporate accountants typically figure on a labor load of 30% to 40%. But, the contract employee generally pays for these expenses out of pocket, at full price, and with "after-tax" income, so the equivalent labor load may approach 55% or more in replacement costs. Moreover, corporate employees receive up to ten weeks of paid time off every year, including paid vacations, national holidays, sick days, personal/mental health days, and time set aside for training, conventions, retreats and special events. Contract employees are not similarly compensated.
|Insurance For Contract Employees|
Workers Compensation Insurance
Payments for workers compensation coverage are part of the employer's cost of doing business, and are not withheld from employees' paychecks.
Federal and state unemployment taxes (except for the four states noted above) are part of the employer's overhead, and are not withheld from employees' paychecks.
In addition to providing insurance for the employee, the employer may also pay a portion or all of the premiums for the employee's spouse and legal dependents. Many larger companies offer cafeteria plans. In a cafeteria plan the employer gives the employee an allowance with which to purchase insurance from a wide selection of insurance plans. What the employee doesn't spend on insurance is usually kept as additional income. Most employees, however, have little choice but to enroll in the one health plan provided by their employer.
When insurance is provided by the employer, its coverage automatically ceases when the employee quits or is laid off. This is not a serious problem when employees work their whole lives for one company. But in today's employment environment it is not unusual for employees to change employers every two or three years. And contract employees may change agencies several times a year as they move from assignment to assignment.
In a move to increase employee loyalty, and in response to competition from other agencies, many agencies now offer group health insurance to their employees. In most programs contract employees pay 100% of the premium with pre-tax income, thereby receiving access to group rates at a discount equal to their tax bracket. As attractive as this option appears, it is probably not advisable that contract employees obtain health insurance through their employment agency. The reasons are described in the following paragraphs.
Employees may extend their health insurance after termination through COBRA, the Consolidated Omnibus Budget Reconciliation Act. COBRA mandates that employers with 20 or more employees must offer continuation coverage with a premium no greater that 102% of the actual premium cost. Coverage under COBRA can last for up to 18 months, at which time the former employee may convert to an individual policy, usually at a significantly higher cost. There are two advantages to COBRA. First, it provides coverage until the worker gets another job, and can qualify for insurance under the new employer. Second, COBRA provides for coverage in the event a covered individual has acquired a preexisting condition that would otherwise result in denial of coverage.
In 1996 Congress passed a law that makes employee health insurance portable from one employer to another. In other words, group health insurance coverage can no longer be denied to a worker solely because of their health status, claims history or medical condition. Coverage for preexisting conditions, however, may be excluded for a period of 12 months. As appealing as this law is for permanent employees, it provides only a stopgap solution for contract employees who may change agencies as frequently as every several months. Can you imagine going from agency to agency, first applying for coverage under COBRA, then waiting out the qualification period with your new agency until you can sign up with their program, only to go back under COBRA almost as soon as you have adjusted to your new coverage? Even with the new law, purchasing insurance through your contract employment agency is certainly possible, but hardly practical for most contract employees.
Types of Insurance Coverage
Groups may consist of the employees of a single company, or a group of companies. But, insurance groups needn't be defined by what company you work for. A group can be the membership of a trade group or professional association. A group may even consist of isolated individuals whose only commonality is that they joined an association whose primary purpose is to sell insurance to its membership.
Insurance plans fall naturally into three general categories:
Traditional Plans are increasingly rare, being supplanted by HMOs and PPOs. Traditional plans allow policy holders to go to any health care provider they want. Because traditional plans exercise little control over the cost of health care, they tend to be more expensive, and require that the insured share the expense by paying a deductible and co-payments. Deductibles discourage numerous small claims, each having a relatively high administrative overhead. Co-payments discourage unnecessary, expensive procedures.
Health Maintenance Organizations offer pre-paid plans that require their members to use doctors and hospitals belonging to the HMO. HMOs have no deductible, and they typically charge a nominal fixed co-payment for office visits and prescriptions. The HMO assigns a primary physician who acts as your general practitioner, and you are not allowed to seek the care of a specialist without a specific referral from your primary physician. Ironically, physicians in an HMO may be overruled by office workers who are simply following written guidelines, and who have no medical training at all. The operative word here is pre-paid. Doctors and hospitals that belong to an HMO have already been paid all they will ever get before you even seek treatment. The most effective way for an HMO to increase its profit margin is to discourage, delay or deny the provision of health care. Indeed, some HMOs actually pay their physicians a bonus based on how few referrals they make for additional tests and treatments.
Because HMOs are relatively inexpensive (You get what you pay for!), they are favored by employers who provide paid health benefits to their employees. Unfortunately, this practice often locks employees into what many are coming to believe is a marginal delivery of health care. Contrary to appearance, HMOs are NOT insurance companies, so they are not regulated by the State Department of Insurance the way insurance companies are. For example, in California HMOs fall under the aegis of the Department of Corporations.
Another disadvantage of HMOs is their local or regional coverage. If you accept a temporary assignment outside your HMO's service area, you may find yourself disenfranchised from easy access to health care.
Preferred Provider Organizations offer the advantages of both Traditional Plans and HMOs with few of the disadvantages of either. PPOs establish a network of doctors and hospitals that agree to provide health care services at rates set by the PPO. You may be required to pay a deductible and co-payments, and if you seek health care outside the network you will be required to pay a higher portion of the bill.
Although most PPOs are regional, some have networks that span the country. And, if you do accept an assignment outside your PPO's area of coverage, you are not entirely disenfranchised. You can still select a doctor or hospital of your choice, and pay a higher deductible and co-payments.
The doctors and hospitals that belong to a PPO are paid after the delivery of health care. Thus there is little or no incentive to discourage, delay or deny the provision of health care. Indeed, within reasonable limits, the more health care a physician prescribes, the more the physician is paid.
Americans can now take advantage of a new law that allows the establishment of medical savings accounts. MSAs are similar in concept to an IRA. You establish your MSA at a bank or other financial institution. Interest earned on money in a medical savings account is not taxed, and money withdrawn to pay for deductibles and other medical expenses is tax free. Properly used, a medical savings account can significantly lower your medical expenses.
As a savvy contract employee you will want to obtain health insurance having the following characteristics:
Contrary to popular belief, affordable, quality health insurance coverage is available for contract employees, just as it is for self-employed business people. In fact, as a contract employee you have access to a much wider selection of policy options than most permanent employees who feel obligated to take what their employer has to offer.
Some membership programs establish agreements with dentists that set limits on the amount they will charge for specified procedures. If you require very little oral care, this may be the way to go. These programs are not a form of insurance, and you must pay the full amount specified by the program. Nevertheless, membership fees are lower than insurance premiums, and if your teeth are healthy you may come out ahead over the cost of insurance.
Long Term Care Insurance
Medicare provides only limited coverage for rehabilitation following a stay in the hospital. With limited exceptions, Medicare does not cover long term nursing care for the mentally and physically frail. If you cannot afford to pay for long term care yourself, Medicaid will make payments for you. Medicaid (not to be confused with Medicare) is a form of social security. Medicaid makes minimum payments to participating nursing homes and other long term care providers.
Nursing homes typically charge $3000 to $5000 per month. Medicaid pays for only the most basic home health and nursing home care, and you must exhaust all but $2000 of your life's savings before you become eligible for Medicaid benefits. Without careful prior planning (Who plans to become permanently incapacitated?) your chronic infirmity can force your spouse into a life of poverty. If your children cannot stand to see you in a "Medicaid nursing home", and they decide to place you in a "private pay facility", their assets as well may be seriously depleted.
Approximately 80 percent of nursing home residents are women, and the average stay for permanent residents is about five years. At $60,000 per year for decent care, you and your family can expect to pay over a quarter of a million dollars in long term care during your final years. Of course, this is all before your beneficiaries collect a single penny of any life insurance you may have taken out.
Medicaid has a particularly perverse restriction on third party augmentation of Medicaid payments. This means you are either restricted to a facility that accepts absurdly low Medicaid payments as total payment for your care, with correspondingly marginal delivery of care, or your family must pay 100% out of pocket for a higher level of care, even if you qualify for Medicaid. Medicaid does not allow your family to supplement Medicaid payments in order for you to afford better care.
A few enlightened larger corporations are beginning to offer long term care insurance to their permanent employees. As a contract employee you will need to purchase long term care insurance on your own. The premiums are really quite low if you sign up while you are still relatively young. Long term care insurance is one of the wisest investments you can make for your senior years.
|Other Benefits And Perks|
Large corporations provide their permanent employees with a great many fringe benefits and perks in addition to insurance. For contract employees, who must provide their own benefits and perks out of pocket, the aggregate replacement value can be enormous. If you fail to take into account the full dollar value of all the benefits and perks you received as an employee, you are likely to grossly underprice the value of your services, and cheat yourself out of thousands of dollars in annual compensation. The following discussion is based on the list of additional sources of compensation given in the section called Annual Salary vs Hourly Pay.
Companies also routinely subscribe to trade magazines and professional journals, as well as pay their employees' dues to job related professional organizations. As a contract employee, you pay for these out of pocket.
If you gave up a company car to become a contract employee, you must factor in the real value of that car, including gas, oil, tires, scheduled maintenance, insurance and incidental expenses.
You may have been provided a laptop computer, pager, cell phone, data line to your home, and other tools of the trade, including rental, usage and maintenance fees. The aggregate value of these services can be $1000 to $2000 per year, or more. As a contract employee, you will pay for these items out of pocket.
Permanent employees often have access to their company's in-house fitness center. Some receive corporate memberships at a local gym. Contract employees are denied such benefits. In fact, access to the corporate fitness center by contract employees can be used by the IRS during an audit to establish a pattern of co-employment, with adverse consequences for the client. A contract employee may have to pay a thousand dollars or more each year for equivalent health club benefits.
Larger corporations routinely pay the tuition for work related courses and training classes. They send their employers to seminars, conventions and "team building" retreats, all at company expense. Each day of formal training costs your company at least $500 per person. If you have ever paid your own admission to a fast-track training seminar, you probably paid more than that. If the training is out of town, add at least $200 per day for travel, food and lodging.
Corporate employees typically spend more that two weeks a year in some kind of corporate training at a minimum annual cost of $5000 ($500/day times 10 days). Make sure you budget an equivalent amount when you compute your minimum acceptable hourly pay rate as a contract employee.
Despite legal precedents to the contrary, contract employees do not receive generous retirement plans from their clients, and certainly not from their own employers, the contract employment agencies. More and more, agencies are offering their contract employees access to 401(k) plans which the employees can roll over from agency to agency as they accept various assignments. But the principle advantage would seem to accrue to the agency in the form of employee loyalty and retention. Agencies do not make matching payments to their employees 401(k) plans. That benefit is only given to permanent employees by the client companies themselves.
The employer's contribution to a typical mid-level employee's retirement plan can equal 10 to 20% of the permanent employee's annual salary. Contract employees, on the other hand, must build their own retirement plans through savings, prudent investments, their personal IRA, and preferably a 401(k) plan that is independent of any one agency. A good source for your 401(k) plan would be a participating professional association, perhaps the same one you used as a source for your group health insurance.
As a contract employee, it is imperative that you add 10 to 20% to your minimum hourly pay rate, and then religiously set that amount aside each payday in a separate account for your retirement.
It is a simple matter to create your own severance package. Simply allow for reasonable periods of unemployment when you compute your minimum hourly pay rate. Then set aside enough money in a short term emergency fund to tide yourself over between assignments. If you don't budget for periods of unemployment, you stand the risk of running out of money, and having to settle for less than you are worth on your next assignment.
Pre-Tax vs. After-Tax Dollars
As a contract employee you must buy your benefits on the open market with after-tax dollars, thereby incurring a significant hit to your pocketbook. Professional associations provide access to discounted health benefits, and some contract employment agencies offer pre-tax, employee-paid health benefits. But, no contract employment agency will give you anything close to the benefits and perks provided by larger companies to their permanent employees.
Paid Days Off
Some contract employment agencies advertise paid days off after a qualification period, but they come nowhere close to the number and type of paid days off provided by their client companies. As a contract employee, you must factor in all the days you will not be paid when computing your minimum acceptable hourly pay rate.
Factoring It All In
First, let's revisit the equation for computing your minimum acceptable pay rate from the section called Annual Salary vs Hourly Pay:
(Annual Salary + Additional Compensation) /
Now, let's assume that an equivalent permanent employee is paid $60,000 to do what you do. If you give yourself no benefits, and you take no days off, the equation will look like this:
($60,000) / (2080 Hours)  = $28.85/hour
This illustrates a common mistake make by contract employees when they try to figure out what their hourly pay rate should be. They forget to factor in a typical employee's benefits, perks, and paid days off.
Now let's see what happens when we factor in a reasonable benefits package and paid days off. Assume that the total annualized replacement value of your benefits and perks, including health benefits, professional expenses, bonuses, tools of the trade, training, retirement plan, etc., is $35,000. Assume, also, that you give yourself a reasonable nine weeks off during the year for vacation, national holidays, sick leave, and training. In other words, you only plan to bill 43 weeks, or 1720 hours in a given year.
The corrected equation now looks like this:
($60,000 + $35,000) / (1720 Hours) = $55.23/hour
If you do not allow for reasonable benefits, perks, and paid days off, you will seriously undervalue your worth as a contract employee, possibly by as much as a factor of two!
You may be surprised to learn from this exercise that your agency wants to pay you significantly less than your minimum acceptable hourly pay rate. In other words, if you are to earn at least as much as a permanent employee doing the same job, with the same benefits and perks, and taking the same number of days off, your agency will have to pay you much more than they are offering. The solution, of course, is to practice the methods discussed in the sections called Landing Your Next Assignment and Your Mission as a Contract Employee.
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Copyright © 1997 by
Jerzy Technical Services
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Last Update: 09/17/97