Providing employee benefits is a question that small business owners toss around constantly. Do you offer them and bite the bullet on cost in order to retain better talent? And if you are going to offer employee benefits, how do you do that without spending a lot of time or exposing yourself or your business to risk?
This article will help you with setting up your employee benefits, and answer three main questions: 1.What are the typical employee benefits? 2. What are they going to cost your business? 3. Where can you get them?
There are many different types of benefits you can offer, so for the sake of simplicity, we’ve broken up our guide into three categories. Under each category, you will find a description of the specific options, an estimate on how much they will cost your company, and resources for where you can find these benefits and more details on the “nitty-gritty” of them. A great option for employee benefits is Gusto. Their simple platform for HR, payroll, and benefits significantly reduces the time and energy you spend managing your employees. Click here to learn more.
Here’s what we’ll cover in this article:
- 2 Questions to Ask Yourself Prior to Offering Benefits
- Where Should You Go When You’re Ready to Provide Benefits?
- Category 1: Healthcare Benefits
- Category 2: Retirement Benefits
- Category 3: Specialty Benefits
2 Questions to Ask Yourself Prior to Offering Employee Benefits
There are a couple key things you should keep in mind when thinking about offering benefits:
Question 1. What’s your budget?
Most companies share the cost of providing benefits with their employees. You will want to think about how much you are willing to contribute per month per employee towards benefits. While some companies pay a percentage of benefit premiums, we recommend that small businesses offer a flat amount per employee such as $400 per month in order to budget correctly. This also gives your employees more flexibility in choosing their benefits (up to the given allotment).
To help you determine your budget, we go into more detail about the cost of different types of benefits below.
Question 2. What employee benefits do you want to offer and why?
While you might be saying to yourself, “That’s why I am reading this article!,” you should consider that:
Different demographics of employees want different things
Do you have a lot of employees under age 26? They might not need health insurance because they are covered by their parents. Do you have a lot of mid-40’s employees who are concerned about retirement approaching? They might really value a 401(k) over health insurance because their spouse already has health insurance coverage. If you have a lot of employees in their 30s who have young children, then they may really value good health coverage. Ask your employees outright, take a survey, or do your best to think through what your employees need and why.
Health insurance costs vary greatly by city and state
Do you do business in New York? You know how expensive it is then for health insurance, versus, say, New Mexico, that has excellent HMO coverage (which is the cheapest kind of health insurance plan). While you might really want to offer health insurance, the cost will vary greatly by your business’ (and your employees’) exact location(s).
Where Should You Go When You’re Ready to Provide Employee Benefits?
Before getting to different categories of benefits, a word on where to go when you’re ready to offer benefits to your employees. There are three main ways to provide benefits:
1. Work with a broker or directly with the benefits provider
If you want to offer just one or two benefits to your team (e.g. health insurance and payroll), working with a broker or directly with the benefits provider may be the simplest, quickest, and most cost effective option.
2. Work with a Professional Employer Organization (PEO)
If you want to provide multiple employee benefits (e.g. health insurance, retirement plan, and payroll), then you may be able to save time and money by going with a PEO like JustWorks. A PEO can be a great all encompassing solution, typically offering the following types of benefits:
- Benefits (usually in an ala carte fashion too, where you can pick and choose)
- Worker’s compensation
- Unemployment claims
- HR reporting
- Onboarding of new employees
- Paid time off tracking
PEOs typically charge a monthly fee per employee or a small percentage of the employee’s salary. For an additional charge, some offer recruiting, training, and performance management help as well. Check out our buyer’s guide to PEOs to learn more or learn the basics of PEOs here. If you’re ready for a PEO, we highly recommend checking out JustWorks. Click here for a free consultation.
3. Outsourced Human Resources Providers
Compared to PEOs like JustWorks, some outsourced HR providers let you pick and choose services more than you can with a PEO (e.g. perhaps it only does your health benefits).
A couple players in this space are:
- Gusto – The go-to small business payroll provider at one point, Gusto has recently launched into the benefits and HR space as well. Gusto is an all-in-one, economical solution for providing HR services.
- Zenefits – With their new Z2 platform, they can take of everything from payroll to employee benefits in all 50 states.
Now, let’s talk about the 3 categories of benefits and your specific options for each: Healthcare, Retirement, and Specialty Benefits.
Category 1: Healthcare Benefits
Health insurance is the most important, but also the most expensive, benefit that you can offer your employees. While health insurance benefits are not currently mandatory if you have fewer than 50 employees, providing it can help you attract and keep top quality talent.
You can purchase group health insurance directly from a wide range of insurance providers, or you can shop through the healthcare marketplace created by the Affordable Care Act, which is called the SHOP Exchange.
You can also look at alternative options like:
- Becoming a part of a Professional Employer Organization (PEO) like JustWorks
- Transitioning all your HR needs from benefits to payroll to an outsourced provider like Gusto
What will health insurance cost?
There is no simple answer to how much health insurance will cost because this depends largely on where you purchase your company healthcare plan (both your business’s location and your employees’ locations and employee demographics). As the employer, you can choose to pay a flat amount per month or a percentage of the premium. So even if the plan is costly, it doesn’t have to be costly for your business.
While the costs of health insurance usually increase every year, keep in mind that there are a number of tax credits available to businesses with fewer than 25 full-time employees.
Costs can also vary by who provides your insurance, which we are talking about next, as well as by the type(s) of plan you offer. You can read more here about different types of health plans in our HMO versus PPO article.
Where can you get health insurance?
If you decide to purchase a group plan directly from an insurance provider, you can usually get a direct quote through their website or an insurance broker. Some of the top providers are:
You also can get free quotes from a range of providers, which we discuss more thoroughly in our complete health insurance guide. You should get quotes from local private insurance brokers, the SHOP Exchange, from a PEO, and from an outsourced HR provider like Gusto in order to be thorough and to get perspective on what your most cost effective option is going to be.
Employee Benefits Category 2: Retirement Benefits
Offering retirement benefits can help your company attract and retain top talent. In fact, I can tell you that “Do they have a 401(k) and do they match?” is one of the top questions I receive from candidates during recruiting calls.
Retirement benefits are broken down into two categories:
- “Defined contribution plans,” which includes 401(k)s and IRAs, and
- “Defined benefit plans,” which are mostly pensions.
Most small businesses that offer retirement benefits choose defined contribution plans, and we recommend doing the same.
Defined Contribution Plans
Defined contribution plans like a 401(k) plan encourage employees to set aside their own funds for retirement each pay period. In some cases, companies match a certain percentage of what employees contribute. Employees can invest their money in different mutual funds to maximize retirement savings.
The pros of a defined contribution plan for you as the small business owner are:
- Your employees control what they contribute and where the funds are invested (through the products are provided by the partner you chose to work with).
- They can take it with them – your employees can take a defined contribution plan with them when they leave, be it for being fired or quitting.
There aren’t many cons of a defined contribution plan for you as the small business owner; if you choose to provide matching contributions, that will come at a cost to you, and the IRS has rules to make sure that employees are fairly represented in a retirement plan. In addition, some small business owners might find explaining a defined contribution plan to their employees to be a bit of a chore, and if they don’t understand it, they might not participate.
What will a defined contribution plan cost?
The cost of offering a defined contribution plan will depend on the following factors:
- Size of your company
- If you decide to match a percentage of your employees’ contributions (usually 1-5% match or up to a flat monthly amount), how much they end up saving.
For many small businesses, the SIMPLE IRAs and SIMPLE 401(k)s are a good option. These only require two 1-page IRS forms, and cost $350 plus $25 per participant. They both allow total combined contributions (which is employee contribution + employer matching) of up to $11,500 per year.
You can also set up a full 401(k), but this more expensive and complicated. A full 401(k) is only a good idea once your payroll reaches about $500,000, or the combined contributions reach at least $20,000 in salary deferrals and company matching.
Where can you get a defined contribution plan?
Some of the largest administrators of retirement plans are:
These names will most likely be some of the ones you will see regardless of whether you work with a private broker, a PEO like JustWorks, or an HR outsourced service provider like Gusto to provide retirement benefits.
You’ll also want to familiarize yourself with the different types of retirement plans available for small businesses and the features and benefits of each by reading our article on retirement plans for small businesses.
Employee Benefits Category 3: Specialty Benefits
“Specialty benefits” refer to benefits generally considered of secondary importance to healthcare and retirement benefits. Nevertheless, specialty benefits can help your company expand its range of benefit options and really distinguish itself from the competition. Speciality employee benefits include life insurance, disability insurance, and dental & vision insurance.
Generally, life insurance policies should pay out the equivalent of what an employee makes in one year, and at the very least enough to handle funeral expenses. We don’t recommend going below the $20,000 threshold when selecting a plan.
What will life insurance cost?
In general, life insurance policies cost about 5 cents for every $1,000 worth of coverage. The exact rates, however, are based on a number of factors that include the number of employees that are purchasing the benefit, the company claims history, the occupations of the group, the gender and age of employees, and the employees’ salaries.
Where can you get life insurance?
Most insurance companies offer group life insurance, so shop around until you find one that suits your needs and budget. Fidelity, Vanguard, and ADP all offer life insurance services, and here are 3 other top providers:
Disability insurance provides your employees with a source of income in the event that they are unable to work. There are certain states that require employers to provide disability insurance, so check here to determine your obligations. This can also be a great option to provide if you cannot afford to provide paid maternity leave and if that is important to your employee base.
There are two types of disability insurance coverage: short-term disability (STD) and long-term disability (LTD). STD benefits typically have a seven-day “elimination period,” which is the time between the onset of the disability and the beginning of benefits. After those 7 days, STD policies generally cover 60 percent of the employee’s salary. Once full STD benefits begin, they generally last for 13-26 weeks. LTD benefits typically have a longer elimination period, generally 90-180 days, and usually last for up to two years. LTD generally pays a portion of an individual’s salary each month; some policies have a cap of X amount of thousands per month, and others will pay a percentage (which can even be up to 100% for some policies).
As you shop for disability insurance, be conscious of the small print. Plans differ widely on what disabilities are covered. For example, some policies cover “own job” disabilities in which the employee cannot perform their existing job, whereas some will only cover “any job” disabilities in which the employee is unable to perform any job.
What will disability insurance cost?
Regardless of your company’s size, the cost of offering disability insurance is between generally between 0.25 and 0.5 percent of total compensation per year. For 0.5 to 1 percent of compensation, you can generally offer both STD and LTD benefits, which makes this a very affordable benefit for either the employer to provide for their employees or for the employee to pay for out of pocket.
Where can you get disability insurance?
Disability insurance is offered by most large insurance companies like Prudential, Allstate, and New York Life that we already listed. If you are working with a PEO or outsourced provider like Gusto, they will likely already have a partnership in place for disability insurance.
Dental and Vision Coverage
There are three options for offering dental and vision plans: Fully-Funded Employer Plans, in which your company pays all the costs; Partially-Funded Employer Plans, where employers traditionally about 80 percent of the cost; and Fully-Funded Employee Plans, where employees pay the total cost of the plan, but the employer takes over administrative costs and payroll deductions.
Just like health insurance, dental and vision also have HMO and PPO versions which vary in coverage and cost. If you want to get more in depth into dental and vision coverage, our full guide to providing dental and vision is a must-read.
What will dental and vision coverage cost?
The costs of dental and vision employment benefits depend on different factors, including plan design, provider network, healthcare expense trends, group characteristics, funding mechanisms, and administrative expenses. It is best to get a direct quote by contacting your broker or provider directly, or your PEO or HR services provider.
Where can you get dental and vision coverage?
Most health insurance companies, including United Healthcare, Cigna, and Aetna also offer dental and vision coverage. The government-run SHOP Exchange also currently provides dental insurance too, but not vision.
Paid Time Off
Paid time off refers a variety of different kinds of leave, including:
- Vacation time (aka personal time off, not required by any state or federal laws)
- Paid holidays (not required by any state or federal laws)
- Sick leave (which is now required in some cities and states)
- Bereavement leave (not required by any state or federal laws)
- Maternity leave (not required by any state or federal laws to be paid)
- Paternity leave (not required by any state or federal laws to be paid)
General trends for small businesses show that they provide 10 days (2 weeks) of paid vacation leave, sick leave when it’s required by law (location dependent), and the usual big national holidays as paid holidays (i.e. New Year’s Day, Memorial Day, 4th of July, Labor Day, Thanksgiving Day, Christmas Day).
Check out our full guides to providing paid time off, providing maternity leave (both paid and unpaid, as well as what’s required by law), and providing paternity leave (both paid and unpaid, as well as what’s required by law).
What will paid time off cost?
The cost of paid time off will depend on your individual payroll expenses, and the amount of time you decide to offer. Paid time off generally means you will pay someone their full salary during those days, so, if someone makes $50,000 annually, here are some figures:
- $50,000 = $961.54 per week (total salary divided by 52)
- 2 weeks or 10 days vacation leave = estimated $1,923.08
- 6 paid holidays = about 1 week = $961.54
- 1 week sick leave = $961.54
- Total cost = $3,846.15
If you think this is expensive or unreasonable, consider the many studies that have time and again proven that employees who are given paid vacation time and personal time perform better. Check out this Forbes article that discusses productivity in relation to time off.
Tuition assistance programs are a type of benefit in which an employer reimburses the costs of their employees’ continuing education. This may include the costs of tuition, books, and fees. Offering tuition assistance can help your workforce expand its skill set and attract employees interested in personal career development.
Tuition assistance is largely an internal policy, so you can decide how to handle reimbursements. Some businesses I have helped in my HR consulting experience offer tuition reimbursement around the following parameters:
- At least 1 full year of service to the company
- Employee must be in good behavioral and performance standings
- Tuition must be verified to go to an accredited, non-profit university pre-approved by the company
I have also heard of companies requiring employees to stay on for a certain amount of time if using tuition benefits. If you are going to require that, you will want to double check your policy with an HR consultant or lawyer to make sure that the policy is fair and compliant.
What will tuition assistance cost?
Tuition assistance can be costly so be sure to set clear guidelines when developing your benefit package. Despite these costs, adding tuition assistance may help you qualify for certain tax breaks.
The Bottom Line
Providing employee benefits, be it health insurance or paid vacation leave, can entice a higher level of talent to work for you, help you keep the talent you already have, and can really add to your company culture. As the business owner, you simply need to be informed about how to roll out these employee benefits to make sure that they are sustainable for your business and that they make sense for your team.
Feeling overwhelmed at the thought of adding one more thing to keep track of for your employees? JustWorks streamlines your HR process by keeping everything you need to manage your employees in one place. Click here for a free consultation.