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Don't forget your benefits
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May 25, 2000: 12:28 p.m. ET
Before jumping from 'old economy' to 'new,' consider what you leave behind
By Staff Writer Mark Gongloff
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NEW YORK (CNNfn) - If an MTV Spring Break office environment and the seduction of stock options are calling you away from your existence at Old Economy Inc., it might do you well to evaluate exactly what you'd be giving up. Maybe that dinosaur is really looking out for you, after all, and its gift to you is a little something called benefits.
The Financial Planning Association, in the May 2000 issue of the Journal of Financial Planning, said employers spend, on average, almost 30 percent of each employee's salary on benefits. For those who make  $30,000 a year, for instance, that's $9,000 a year.
Yet many employees just can't seem to resist the siren song of dot.coms -- which, sexy as they may be, don't always come through with the benefits.
"As more professionals leave the comforts of working for a large corporation, the issue of benefits becomes increasingly important," said Lisa Kirchenbauer, a certified financial planner and president of Kirchenbauer Financial Management & Consulting, which advises technology professionals.
The startups they join, she said, may not even have basic benefits such as health insurance, disability insurance or a retirement plan, much less bigger perks such as life insurance, flexible-spending accounts or education reimbursement.
"Dot.coms rarely have their human resources (HR) departments together and haven't always dealt with basic benefits," said Marilyn Falls, a certified financial planner (CFP) with Merrill Lynch's Private Client Group.
She suggested employees, whether they're changing jobs or renegotiating a contract, need to understand the value of benefits before they agree to give them up.
The siren call of stock options
In the dot.com era, stock options have taken on the quality of myth. Many people will, starry-eyed, forego other valuable benefits to get them. The truth is, stock options can make you rich, or they can be worth nothing more than the paper they're printed on, depending on the stock's value and the way you handle the options.
"In general, people aren't as familiar with stock option programs as they want to be," Falls said. "Often, when I ask them what kind they have, they're clueless."
For the record, there are two basic kinds of options: incentive stock options (ISOs) and nonqualified stock options (NQSOs).
Your employer decides what kind of options to give. Each has different tax consequences. Both are nothing more than options to buy stock at a set price; they are not gifts of stock.
When you get stock options, read all the paperwork that comes with them. Keep track of important dates, such as the date you got the options, the earliest dates on which you can exercise the options or sell the stock and the expiration date -- options don't last forever. Be aware of what the options are worth. What was the stock price when you got the options? What was the price when you exercised the options?
The dates and prices will help you determine the tax consequences of cashing in the options at various times. It seems complicated, and it is. If you can't get all the answers from your HR department, you might need to splurge on the services of a financial planner or accountant to help you sort it all out and make the most money.
And don't be surprised if you fall victim to the dreaded stock-option "lock-up."
As Falls explained it, a lock-up is when the brokerage house that takes a company public gets the company's employees to agree not to sell their stock for a certain period of time. "You could have a really hot dot.com fly to the moon" during the lock-out period, Falls said, "and get caught short because you couldn't sell when rest of world was buying."
In any event, don't bet your financial future on becoming rich when your dot.com goes public. As CFP John Gin of American Express Financial Advisors pointed out, "80 percent of initial public offerings trade at or below their offering price a year later."
Health insurance
"Many people think that, if they have health insurance, they're all set," Kirchenbauer said. "But even if you do have health insurance, you have to ask, what kind of health insurance is it? Is it a PPO (preferred provider organization) or HMO (health maintenance organization)? Who pays the premium? Younger employees don't always ask these questions."
While larger companies offer the ability to choose from among HMOs, PPOs or other alternatives, Falls warned that smaller companies -- such as Internet start-ups -- often give an employee only one option.
If you are able to choose from among various plans, you should determine how different plan types suit your and your family's needs. Do your homework -- read the materials you get from human resources and study the health-care organizations to find the right match.
Also, find out whether or not the insurance you have at your current job is "portable." A COBRA program will keep you covered for some time after you leave a job, but not all companies participate in or are eligible for COBRA. Obviously, you'll be in hot water if you have a medical emergency during a lapse in insurance coverage.
Disability insurance
"Health insurance and retirement plans may seem like the only real benefits that you need, but think again," Kirchenbauer said. "With statistics that say that if  you're age 35, the odds of being disabled before age 50 are one in five or one in two by age 65, you can't afford to overlook some kind of disability income insurance."
Ask your potential employer what kind of disability insurance it offers -- long-term or short-term. Long-term disability insurance is usually for three months or more. Short-term disability insurance is for the first three months.
Kirchenbauer said most employers sign up for long-term, not short-term disability, because it's cheaper. She also warned that maternity leave is usually covered only by short-term disability insurance.
Retirement
You also need to know if your potential employer has a retirement plan, what kind of plan it is, and when you can start participating. Kirchenbauer said many start-ups don't let employees participate in their first year, though that trend is changing in a tight labor market.
Other questions you need to ask about the retirement plan: Does the company match your contributions? How long does it take for the money in the plan to be vested -- when all the contributed money available to you to withdraw if you need to?
You should also avoid throwing money away by carelessly handling the retirement account at the job you're leaving. "I see a lot of situations where people take receipt of their pension money and take the 20 percent (tax) penalty instead of rolling it over," Falls said.
Life insurance
Kirchenbauer warned that often, if a company sets up a group program for life insurance to save on the cost of the insurance, the total face value of the policy will be only $50,000 per person -- a lot less than most established companies can offer.
Flex accounts
A flexible spending account is pretax money taken out of your check that can be used to spend on health-care expenses not covered by insurance, such as eye care and over-the-counter drugs. Make sure you understand how the system works and how to use it.
Usually human resources will ask an employee to pick an amount to be withheld from each paycheck, and that money will go into the employee's flexible spending account. When the employee pays a health expense that's not covered by insurance, he or she turns in a receipt to get reimbursed for the expense. Often you can use the entire amount of your account for the year, even if you haven't paid the full year yet.
In fact, Falls pointed out, you can clean out your account even if you leave the job before the year is up.
Other perks
Other perks a larger company can offer that a smaller company generally can't provide are education reimbursement, transit expense, housing or moving expense, and child care. While these might not be as vital as health or retirement benefits, they could be part of the total package you're giving up when you sign on with a start-up.
 If you insist on leaving these perks behind for the growth opportunity of a small company, you should make sure you are compensated for them or at least have a back-up plan. "Don't bet the ranch on something that doesn't have a guarantee attached to it," Falls said. "Above all, make sure you have a basic plan in place to protect yourself in the event of a disaster."
John Gin agreed. "In case the new venture doesn't work out as well as expected, leave some kind of back door," he said. He advised keeping good relations with your prior company, maybe even forming some kind of consulting arrangement with them.
When negotiating benefits with a small company, it might help to diplomatically remind them that cheap benefit alternatives -- such as having employees pay their own insurance premiums or contribute to retirement plans -- are available for companies without deep pockets.
Kirchenbauer said employers -- especially small companies -- are sometimes just as misinformed about benefits as employees. "Some companies think 'benefits' means they have to spend a lot of money," she said.
Offering basic benefits can only help a company attract more talent and be more profitable.
"Everything is negotiable," Gin said. "You'd be surprised what a company is willing to do if they want somebody." 
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