Pharma employees typically have robust compensation packages above and beyond their salary. Understanding what you have is the first step to being able to take full advantage of stock options, health benefits, and retirement plans so you can maximize their value—and save on taxes—over time.
Though your benefits package may be complex and nuanced, it’s never too late to learn what you can do to support its continued growth. Working with a financial advisor who is well-versed in pharmaceutical industry benefits is also recommended, as it will provide you with insights and strategies to help you boost long-term wealth and well-being long after the job is in your rearview.
Stock Options: Turning Shares into Long-Term Gains
There are several different types of stock options, each with unique attributes and considerations. Understanding the ins and outs of each kind of stock and ideal timing is the key to maximizing gains and minimizing taxes.
Employee stock options (ESOs) are a type of equity provided to employees as part of their compensation package. With stock options, you don’t own the stock but have the right to purchase it at a preferred rate, which is often much less than the value of the stock.
Since the company sets the terms, the stock can’t be traded or sold like other stocks you would purchase on an exchange. They may also be subject to a vesting schedule that dictates when you can exercise your option. You won’t pay taxes on your ESOs until you sell them, so planning is essential.
There are two main types of ESO: ISOs and NSOs.
Incentive stock options (ISOs) are generally only offered to the top brass. When cashing out an ISO, the IRS will tax you at the lower capital gains tax rate. ISOs typically require a minimum vesting period of two years with a holding period of one additional year before you can sell.
Non-qualified stock options (NSOs) allow companies to compensate employees, service providers, vendors, board members, and other stakeholders with stock at a pre-determined price. Like ISOs, they are a form of equity compensation, but unlike ISOs, they can be granted to people outside the company. NSOs vest over time, allowing the holder to exercise their option in increments. Gains from NSOs are taxed as regular income.
Strategies to maximize gains and minimize taxes on ESOs
Exercising your ESOs can potentially have a significant impact on your taxes, so timing is essential: ignore the vesting schedule at your peril!
Sell too soon and you may miss out on significant wealth later on. If you wait until you leave the company to exercise (purchase), you may be liable for capital gains, depending on the value of the stock.
Exercising your NSOs early starts your hold time sooner and may result in lower taxes. However, if you do exercise early, you may have to use your own money to purchase the shares, as you won’t be able to sell any stock to offset the cost.
If you have ISOs, you’ll need to hold them for two years after the option grant date and one year after exercising to be eligible for the lower capital gains tax.
Health Benefits: Getting the Most from Your Coverage
Understanding the specifics of your health benefits package is the key to unlocking long-term value. Ultimately, you’ll want to work with the benefits coordinator to help you choose the best options based on your healthcare needs and family situation.
Health savings accounts (HSAs) and flexible spending accounts (FSAs) often come with significant employer contributions for pharma employees. Each can be used to cover qualified out-of-pocket medical and healthcare expenses, like co-pays, medical bills, prescriptions, and even gym memberships.
There are a few key differences between HSAs and FSAs.
HSAs:
- Travel with you—meaning you own it and can carry it over to a new job or keep the fund when you retire
- Unused funds roll over to the next year
- Your savings are tax-free
- The fund is interest-accruing
- When funds are used for medical expenses, you’ll pay no tax on what you withdraw
FSAs:
- Are employer-controlled
- Can be used for qualified medical and health expenses
- You do not pay tax on money you put into the fund
- Do not accrue interest
- Unused funds do not roll over
- End when you leave the job (unless you exercise a COBRA extension)
You may also have access to wellness programs, preventive care, and pharma-specific perks in addition to your health savings plans, helping you maximize the wellness benefits while preserving your savings.
Retirement Plans: Building a Secure Future
Your employee benefits likely include retirement savings plans like 401(k)s, pension contributions, and matching contributions. The IRS limits how much you can contribute to each fund, so we typically advise maxing it out and, if you can afford it, putting money into a traditional or Roth IRA.
High earners may be ineligible for a Roth account, but there is a strategy called mega backdoor Roth that allows you to transfer some after-tax 401(k) contributions into a Roth account. Set up a call to discuss your options!
You may also consider asset allocation, which allows you to spread your retirement investments across multiple asset classes to diversify. Discuss the options with your financial advisor through the lens of your short and long-term goals. Your career stage, income, and life goals should be considered in setting up a strategy to minimize the tax burden later on.
Revisit Your Benefit Strategy Annually
Many pharma employees don’t think too much about their benefits and stock options, but really, it’s an opportunity to build wealth and secure a future for you and your family.
We recommend reviewing your benefits yearly to ensure your strategy is still aligned with your plans and that the choices you’ve made are bearing fruit.
Taking an active role in managing your benefits is the best avenue to better gains and more tax advantages. Granted, your benefit landscape may be complex. Just know that you have an advocate in your corner who understands how to navigate the journey and can get you where you want to be.
Remember: small optimizations now can compound into significant advantages later.
And if you’d like to get the most out of your situation?
Schedule a call with me.
It is only 30 minutes, doesn't cost anything, and there are no obligations to do anything after you call.
