Employee Benefits and Equity Compensation
Retirement and Health Benefits
Employee benefits are a major planning lever. Candidates must understand defined benefit versus defined contribution plans, vesting schedules, employer match mechanics, and the tax treatment of contributions and distributions. Know health savings accounts and their triple tax advantage, flexible spending accounts and their use-it-or-lose-it risk, and the role of group life and disability coverage as supplements to personal coverage.
Equity Compensation
Know the main forms: restricted stock units, incentive stock options, nonqualified stock options, and employee stock purchase plans. Understand the tax timing: RSUs are generally taxed as ordinary income at vesting, while options are taxed at exercise or sale depending on type. Know the difference between the exercise price and fair market value, and the concept of concentration risk when employer stock dominates the portfolio.
Traps in Exam Questions
A frequent trap is ignoring the employer match as an immediate return; not contributing enough to capture the full match is usually a costly error. Another trap is treating vested employer stock as diversified when it is concentrated. Watch for questions on the alternative minimum tax with incentive stock options, and on the holding period needed for favorable treatment. Also watch for health savings account eligibility requiring a qualifying high-deductible plan.
Worked Example
A client earns $120,000 and the employer matches 50% of contributions up to 6% of salary. Contributing 6% ($7,200) captures a $3,600 match, an immediate 50% return on the contribution. The planner recommends contributing at least to the match before funding other goals, then evaluating whether equity awards should be sold to reduce concentration after vesting.
Rule of Thumb
Capture the full employer match first; it is the highest guaranteed return available.