The American Payroll Association founded National Payroll Week in 1996.

You: There’s a week for everything.  What about National Paid-Off Week?

Looking forward to that one, eh?

You: Who isn’t?

Easy: those who are already living Beyond Paycheck to Paycheck.  To that end, I had the opportunity to chat with Robert Wagner, Direct of Communication for the American Payroll Association about the importance of our paychecks.

You: The importance of our paychecks?  That would seem kind of obvious. Hello? Paychecks are how we get paid.

Thanks, but I went for something deeper:

Beyond Paycheck to Paycheck:  A big part of National Payroll Week is emphasizing better ways for employees to manage their paychecks. Can you give me an example?

Robert Wagner: I’ll give you three.

Beyond Paycheck to Paycheck: Even better.

Robert Wagner: The first opportunity for many people is to adjust their W-4 to ensure they have proper withholding.  By doing so, they may be able to get an instant raise. Otherwise, those who are getting large income tax refunds are giving the government interest-free loans.  For those who receive a refund of more than $1,000 a year, we suggest that they adjust their W4 to give themselves a raise the very next payday. You can adjust their W4 at anytime, you don’t have to wait for annual enrollment.

[Beyond Paycheck to Paycheck note: You can visit our Can I change my tax withholdings into retirement plan contributions? calculator which helps you with the withholding allowance calculation and may assist you in increasing your retirement contributions in the most pain free manner imaginable.]

Robert Wagner: The second way to manage your paycheck is to take advantage of pre-tax programs like your flexible spending account (FSA).  Using the dependent care FSA is a compelling case if you have dependent care expenses, which could include child care (even summer camp if you go to work while the children are at camp) or even expenses related to caring for elderly parents (if you claim them as dependents.)  Not only could you save up to 35% of the cost (depending on your tax bracket), but participating in an FSA might also bring down your total taxable income into a different, lower, tax bracket.

If your company has such a program, you can sign up for a FSA through payroll or HR. At most companies, open enrollment is November and December.

Beyond Paycheck to Paycheck: What’s behind door number three?

Robert Wagner: The third key is to take advantage of any retirement savings accounts offered to you.  You have to take advantage of your match. Every dollar you don’t contribute that would be matched is like throwing money away. Einstein said “compound interest is man’s greatest invention.”

Beyond Paycheck to Paycheck:  What do you recommend to the average paycheck-to-paycheck worker who doesn’t have these programs? You’ve indicated that many of these programs can be offered at little or no cost to the employer, so how does one get this to be something that their small business owner/employer cares enough to do something about?

Robert Wagner: Emphasize that it costs very little, a truly negligible amount to run these kind of programs.  Plus, it will help their employees to save money on very important expenses. Many people can’t not do child care if they want to work. Child care expenses have increased faster than inflation and employees need help dealing with it.  Providing a child-care flexible spending account is a way to offer an effective raise to their employees without it actually costing the employer any more money.

Plus, employers know they need to be competitive in order to attract and retain the best employees.  Our survey results show about 60% of employers are no offering such programs.

Beyond Paycheck to Paycheck:  What do you think about the communication of these benefits from employers to employees?

Robert Wagner: We find the best way to communicate is for the employer to tell the employees how much they could save by giving examples.  In New Jersey, where I live, may people spend between $3,000 and $5,000 per year on child care, meaning they you can save $2,000 per year by simply signing up for the flexible spending program.  When an employer points out how much an employee can save, then the employees will stand up, take notice, and begin participating.

Beyond Paycheck to Paycheck: Of course, people are still concerned about the possibility of over-estimating their expenses and, therefore, the risk of forfeiting some of their money.

Robert Wagner: Forfeiture is a consideration. You have to estimate pretty carefully. But child care costs are pretty similar year to year.  A few years ago, the government extended the date by which you have to file and spend all your money to March 15.  An employer would have to have changed its plan to make that an allowable deadline for its employees to make the extended deadline effective (or employees might otherwise lose those funds.)  In my family, if we haven’t spent all the medical money by the end of November, we’ll buy contact lenses for the next year, aspirin, band-aids, the everyday items, even a new pair of glasses so that nothing is actually wasted.

Also, employers can take any money left in the plan and distribute it to the plan members.

Beyond Paycheck to Paycheck: Really?

Robert Wagner: Yes.

Beyond Paycheck to Paycheck: How do they decide who gets what?

Robert Wagner: An employer has three options:

  1. They can split it evenly between all of that year’s FSA plan participants
  2. They can split it evenly between all of the following year’s FSA plan participants
  3. They can spend the money on the employer’s administrative costs for maintaining the FSA. This provides another incentive for employers, and can make such plans virtually free for an employer.

Beyond Paycheck to Paycheck: Thanks, Robert. This was great.

Robert Wagner: Thank you.

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To me, this kind of thing is a good reminder to take advantage of the benefits your employer is already providing you (or you’re being kind of dumb.) In tough economic times like these, many of the raises out there aren’t as good as what we feel we’ve earned.  Bummer.  But be careful to ensure that you get the maximum from what your total compensation package already provides. Too many people focus exclusively on gross salary and don’t spend the time necessary to ensure that they get the most from their benefits.  And it’s maximizing your total compensation that helps you to create wealth for your long-term financial future.

You: And that’s the reason I’m here.

Me too.

Let me know what else you think.

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