Amazon (AMZN) provides generous company benefits which can help employees build wealth, manage risk, and secure their future. It’s important to consider how to best integrate the additional compensation, retirement, and health benefits into your financial plan.
EQUITY AWARDS (AMZN):
Your grants of Amazon restricted stock units (RSUs) can help you increase cash flow or meet long-term goals, such as saving for college or retirement. However you choose to use the proceeds, you will need to pay income taxes as your shares vest. Amazon will withhold 22% of the value of your shares before they post to your account with your selected broker, either Morgan Stanley or Fidelity. As your compensation increases, you may find yourself in a higher tax bracket, requiring greater withholding. If your income is growing, or if your vested share amount is increasing, see if you need to make estimated tax payments to avoid underpayment penalties. Vesting schedules vary, but are often a four – year period and may be weighted more heavily to the last half of the vesting period. If you are subject to trading windows, a 10b5-1 trading plan can automatically sell shares upon vest, simplifying the process and ensuring you comply with insider trading guidelines. Note that any unvested Amazon RSUs are terminated and forfeited upon voluntary or involuntary termination of your employment for any reason (including as a result of death or disability).
Your 401(k) plan allows you to choose either pre-tax contributions, which are taxed at withdrawal, or Roth contributions, which are funded with after-tax dollars and then withdrawn tax-free. You can also contribute an additional 10% of your salary each year to the after-tax 401k and then convert that amount to a Roth inside the 401k plan (with little to no tax impact), where it will grow tax-free.
Each option offers financial benefits that impact your current and expected future tax situation in different ways. The Roth option reduces your taxes at withdrawal, while the traditional 401(k) reduces your current taxable income. In general, if you expect your tax rate to be higher in retirement, it may be best to choose the Roth now, or fund both types of 401(k) plan to provide tax diversification. Whichever plan (or combination) that you choose, we recommend that you make the maximum annual contribution of $19,500. Amazon matches up to 4% of your eligible pay at the rate of 50%. Think of this as a 2% annual raise. (Based on typical salaries and other eligible compensation, most Amazon employees can receive an annual match of about $3,200). Employer matching contributions become 100% vested after three years of service. Employees over age 50 can also make annual catch-up contributions to their retirement accounts (up to $6,500 of additional contributions). If you are a highly compensated employee, your contributions to the plan may be limited. The Amazon 401(k) plan is administered by Fidelity, which provides a selection of investments with low fees, as well as self-directed investment options. The default investment is the Vanguard Target Retirement Fund nearest the year you would reach age 65. You may want to select a different target date fund depending on your goals and risk tolerance.
You may choose from five comprehensive plans, including a Shared Deductible Plan, Standard Plan, Health Savings Account (HSA), HMO, and In-Network Only Plan. These options include a variety of deductibles, out-of-pocket maximum costs, and prescription costs. The HSA has the highest deductible, but it features a medical savings account, which you can fund with pre-tax income plus contributions from Amazon. HSA funds grow tax-free, and withdrawals to pay for qualified expenses are also tax-free. The money is yours to keep, even if you leave Amazon. Given their unique tax treatment, and the option to invest contributions, HSAs can also be used to supplement your retirement savings.
FLEXIBLE SPENDING ACCOUNT (FSA):
An FSA allows you to save for health and dependent care costs using pre-tax income. If you do not have an HSA, you may contribute up to $2,750 per year to a general purpose Health Care FSA in 2020. You may also contribute up to $5,000 a year to a Dependent Care FSA, which can be used for certain child care expenses, or to care for senior citizens who live with you and are claimed as a dependent on your federal tax return. Unlike an HSA, FSA funds must be spent by March 31st for the Dependent Care FSA or May 31st for the Healthcare FSA following the calendar year in which you contributed to the plan to avoid forfeiting any of the savings. You may submit claims for reimbursement until June 30th. An FSA is best used for large pre-planned medical or dental expenses, such as orthodontics.
Amazon offers a life insurance benefit of twice an employee’s annual base salary at no cost. Employees may purchase additional coverage for up to 10 times their salary, with a maximum of $2 million. Premiums are age-based. Typically, health exams are not required for basic coverage, but the insurance company may require an exam for higher levels of coverage. The coverage is not portable, so you might consider buying a separate policy if you think you may leave the company. Additional coverage is available for purchase for spouses (up to $250k) and children (up to $20k).
Amazon provides coverage for 60% of an employee’s salary (up to certain limits) in the event of a disability. Short-term benefits have a seven-day waiting period, and cover the first 26 weeks. Long-term benefits begin after 26 weeks. Disability benefits paid under this plan are considered taxable income to the employee. Benefits may be paid up until age 65 (possibly longer, if the disability occurs after age 60). Note that the disability plan covers salary, but not RSUs and bonus payments. Employees might consider purchasing a supplemental disability policy to cover a higher percentage of their income.
As you can see, Amazon provides a wide range of financial benefits, including some which require careful consideration. If you have questions about which options are right for you, or how they best fit with your tax and financial planning, your Paracle advisor can help.