State Employee Benefit Plans

Most people don’t see state employment as a pathway to financial richness, but state jobs do come with their own allure: security. Public sector jobs are well known for their unparalleled job security, steady raises, and robust state employee benefits.

Common state employee benefits

State employee benefit offerings vary significantly from state to state. The depth and breadth of benefits available to state employees depends on the state’s wealth, tax structure, budget priorities, and union relationships. But health insurance, retirement plans, and other postemployment benefits (OPEBs) are commonly available to eligible state employees in all 50 states.

The depth and breadth of benefits available to state employees depends on the state’s wealth, tax structure, budget priorities, and union relationships.

Health insurance benefits

Health insurance is one of the most significant state employee benefits offered. Contributions to employee health insurance plans represent the second largest health-related cost — only after Medicaid — for state governments, according to a report by the Pew Charitable Trust.

While eligibility varies state by state, most full-time workers and eligible dependents (spouses and children under 26), have access to state-provided health care. Like most health insurance plans available in the United States, state employee health benefits differ in the levels of care they provide, the hospitals and doctors available, and the out-of-pocket costs to the employee. In general, states make health insurance plans available to employees as Health Maintenance Organizations (HMO), Preferred Provider Organizations (PPO), or Open Access Plans (OAP).

Retirement plans

Federal, state, and local employees receive public sector retirement programs as pensions. In most states, people refer to pension plans as a public employee retirement system, or PERS. Employees typically vest after 5 years of service, and pension plans are usually available as either defined benefit or defined contribution, the former being more common in the public sector.

Defined benefit plans

• Provide retirees a lump sum amount every month.
• States use formulas based on the former employee’s length of service, earnings history, and age to determine the dollar amount they’ll earn in retirement.
• With a defined benefit plan, the employer bears the investment risk.

This is in contrast to defined contribution plans, in which the employee is primarily responsible for funding their pension plan and bears the investment risk.

Direct contribution plans

• Less common in the public sector than in the private, where 401(k)s are the most prominent example of this type of retirement plan.
• The federal government offers employees a retirement plan similar to a 401(k) called a Thrift Savings Plan (TSP).
• While TSPs are only available to federal employees, some states — like Florida — offer a state version of the TSP, which is a direct contribution pension plan.
• Employees receive a fluctuating dollar amount per month because the investment on their returns vary.

Other postemployment benefits

In addition to pensions, former state government employees have access to a range of benefits in retirement known as OPEBs. State-subsidized retiree medical insurance is usually the most significant offering, but OPEBs can also include subsidized life insurance premiums, and deferred compensation, too. Unsurprisingly, states vary considerably on the level of care and comprehensiveness of their OPEBs, as well as whether the benefits are pay-as-you-go or if the state prefunds the subsidy by earmarking money throughout the year for future retiree contributions.

Healthcare

Only 28% of private sector employees extend health care benefits to retired employees, while 49 states offer these benefits as part of their compensation plans.

According to the Pew Charitable Trust, only 28% of private sector employees extend health care benefits to retired employees, while 49 states offer these benefits as part of their compensation plans. Health insurance as an OPEB usually falls into one of the 3 following categories. State governments pay:

• A percentage of the health insurance premium depending on the length of the employee’s civil service
• A fixed-dollar amount
• An “implied subsidy,” where retired employees — who are more likely to use a higher degree of health insurance benefits — pay the same premium as current employees, who are presumably younger and healthier.

Life insurance

Some states offer state or local workers a continuation of life insurance premium subsidies as part of their state employee benefit plan. In this case, the premiums are almost always taxable and therefore increase the retiree’s taxable income.

Deferred compensation

Some states, like New York and Illinois, offer deferred compensation as part of their OPEB to state employees. This type of compensation involves withholding a percentage of employee pay and setting it aside each pay period to distribute after retirement. Deferred compensation is a reliable source of income former state employees can use to supplement their pension benefits.