Amazon 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.
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 over 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contributions, which are taxed at withdrawal, or Roth contributions, which are funded with after-tax dollars and then withdrawn tax-free.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 401(k) and then convert that amount to a Roth inside the 401(k) 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) plans 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. For 2021 you can contribute up to $3,600 for yourself and $7,200 for a family. The annual limit is inclusive of the employer contribution made on your behalf, which is currently $500 for employee-only health coverage, $1,000 for employee plus spouse/domestic partner or employee plus children, and $1,500 for an employee plus spouse/domestic partner with children. 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 2021. You may also contribute up to $5,000 a year to a Dependent Care FSA (subject to income limitations), which can be used for certain childcare 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 up to $500k. Another $500k of AD&D coverage applies for death or injuries resulting from a covered accident. 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 benefit levels. The policy is not portable, so you might consider buying separate life insurance 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. After this, long-term benefits begin.
Disability insurance 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.
Reviewing Your Amazon Benefits
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.
Paracle Personal Financial Management is an independent financial planning firm founded in 2004 with an honest desire to help people optimize their finances by providing unbiased financial planning and investment advice that puts their clients first. Paracle specializes in delivering expert, comprehensive wealth management services to busy families. Their expertise integrates financial planning with investment management to ensure their clients experience confidence in every aspect of their plan so they can focus on what matters most. To learn more about Paracle, connect with them on LinkedIn.