Setting up employee benefits doesn’t have to be a headache for small business owners. Learning what benefits a small business owner can offer, the costs behind each benefit and who can provide them will all be covered in this bookmark-worthy employee benefits guide.
In order to set up employee benefits, you need two things: A benefits provider, and a list of benefits you want to offer. We’ll start by walking you through the different providers, including the range of benefits they can offer you. Then we’ll explore each type of benefit — from health insurance to 401ks— and the costs/administrative effort associated with each.
While there are many options to choose from when looking at benefits providers, we highly recommend you check out Gusto. Gusto is continually evolving and is now in the benefits space, and they are incredibly easy to use, reasonably priced, and have excellent customer service. Click here for a free demo.
Employee Benefits & Benefit Provider Types Summary Table
|Provider Type/ Benefit||PEO||HR Software||Payroll Software||SHOP Exchange||Insurance company/ broker||Alternative providers*|
|Dental & vision insurance||Yes||Maybe||Maybe||Dental only||Yes||No|
|Life & disability insurance||Yes||Maybe||Unlikely||No||Yes||No|
|401K & retirement plans||Yes||Maybe||Unlikely||No||Yes||No|
|Time off (all kinds)||Yes||Yes||Yes||No||No||No|
Types of Benefit Providers
The companies that administer employee benefits on behalf of your business are known as benefits providers. Benefits providers connect your business with types of insurance and other benefits, making them the link between you and large companies like Blue Cross, Anthem or Vanguard. This is, in part, because they can get you better rate than if you went to a big insurance/benefits company on your own.
Other benefit providers go even further, offering payroll, tax services, and HR services with compliance guaranteed. When picking a provider, it’s not only important to consider the benefits you’ll offer to your employees, but these additional services you need to run your business.
Most small business owners will want to use one of the six kinds of providers we have outlined here to ensure compliance and eliminate administration hassles and time.
The six kinds are:
|Type of Benefit||Who is it Best for?|
|Professional Employer Organizations (PEOs)||Small businesses with 5-80 employees|
|HR Software||Small businesses with 10+ employees|
|Payroll Software||Small businesses with 1+ employees|
|SHOP Exchange||Small businesses who want to provide health insurance and have 5+ employees|
|Insurance Companies or Brokers||Small businesses with 50+ employees|
|Alternative Benefits Providers||Small businesses with 10+ employees|
Professional Employer Organizations
A PEO like Justworks is a co-employer that can be a great option for small businesses, especially for those that want to provide employee benefits, ensure they are in compliance with all tax, state, and federal laws, and have a “big company” feel to their employees. It’s generally good for businesses of 10-80 employees. Below 10 employees doesn’t make as much sense for the price, and around 50-80 employees, a PEO also starts to get really pricey compared to in-house solutions.
If you are wondering what co-employment is, we discuss it in detail here, but basically you share your employees with the PEO. You have the same day to day with your employees, but their paycheck, for example, will come from the PEO.
The most important things to look out for when choosing a PEO like Justworks is that it has the right “feel” you are looking for, like their level of customer service (Do you want employees to be able to call them for assistance? Or are your employees comfortable managing everything online?) They also vary greatly in price. We cover all of this in our PEO guide.
Full disclosure: Fit Small Business uses a PEO for our benefit needs. With many remote people and a home office in NYC, being a part of PEO made financial sense for us. Don’t let the term co-employment scare you; it’s more in name that anything else. PEOs can can provide nearly any benefit you want, from commuter benefits all the way to medical insurance and back again, which is why they can be a top choice for small businesses.
A PEO can provide health insurance, dental & vision insurance, life & disability insurance, 401K & retirement planning, alternative benefits options like FSAs and cafeteria plans, and commuter benefits. They also can track PTO and holidays for you, and they can link fringe benefits to employees’ pay information if necessary (i.e. like for a company car).
Our Recommended Provider(s):
We recommend working with Justworks because of their reasonable, transparent prices and their excellent customer service.
HR software is a new player to the benefits provider field. In general, nearly any small business could benefit from HR software, but it seems to make more sense once you get to 10 employees or more and managing all things HR like employee onboarding and personnel files gets to be time consuming. These software systems are a near all-in-one solution and feature payroll, benefits, performance management, recruiting, and more.
HR software can provide health insurance, dental & vision insurance, life & disability insurance, 401K & retirement planning, alternative benefits options like FSAs and cafeteria plans, and commuter benefits, depending on their setup. They also can track PTO and holidays for you, and they can link fringe benefits to employees’ pay information if necessary (i.e. like for a company car). Some might also integrate with a separate benefits provider, like Zenefits.
Our Recommended Provider(s):
Payroll software is an evolving field but, at it’s core, it runs payroll and ensures compliance with federal, state, and other payroll related laws. They also usually can provide workers compensation insurance. Using payroll software is recommended for businesses who even have 1 employee in order to keep things compliant and payroll reliable.
Payroll software companies are entering the benefits space at a rapid rate. Gusto, Paychex, and ADP all have benefit platforms available with their services. Housing your employee benefits and payroll together makes for a seamless integration when your employees enroll.
Depending on your provider, payroll software can provide health insurance, dental & vision insurance, life & disability insurance, 401K & retirement planning, alternative benefits options like FSAs and cafeteria plans, and commuter benefits. They also might instead integrate with a benefits provider, like Zenefits. They also can track PTO and holidays for you, and they can link fringe benefits to employees’ pay information if necessary (i.e. like for a company car).
Our Recommended Provider(s):
We recommend working with Gusto as a payroll provider. Gusto is continually evolving and is now in the benefits space, and they are incredibly easy to use, reasonably priced, and have excellent customer service. You can read our full review of payroll software here.
The SHOP Exchange was founded by the Affordable Care Act as a way for small business owners to provide their employees with medical and dental insurance. Some states run their own SHOPs and others use the federal government website. Individuals can also use SHOP for their own medical insurance purchase if they want to in some states.
Using the SHOP Exchange is ideal for businesses who are under 50 employees, and even under 25 employees, and want to provide health insurance to their team. If your business is under 25 employees and you also are on the same health insurance SHOP plan as your employees, you get a bunch of tax credit, which is a perk. We talk extensively about the SHOP Exchange in this guide, and it is worth it to get a quote from your state’s or the federal government’s SHOP Exchange.
The SHOP Exchange offers only medical and dental insurance at this time.
Our Recommended Provider(s):
There isn’t really a recommended provider for the SHOP, but you can learn about if your state has their own website for SHOP here.
Insurance Companies or Brokers
Insurance companies and private brokers are, in general, more expensive for small businesses as an insurance provider. Their power is with companies with large numbers; however, if you become a part of a PEO or use HR software or payroll software that have benefits available, you then get the power of those numbers through them, and get access to the large insurance companies.
If your business is rapidly growing, or if you have relationship with a large insurance company, you could try to deal with them directly as a benefits provider. However, you would want to also look into other options in order to have better perspective on costs and what prices HR software or a PEO could give you.
Insurance brokers and companies can provide health insurance, dental & vision insurance, life & disability insurance, 401K & retirement planning, alternative benefits options like FSAs and cafeteria plans, and commuter benefits. They also can help you to track fringe benefits for your payroll and tax records.
Our Recommended Provider(s):
Fit Small Business doesn’t have a recommended large insurance company provider at this time.
Alternative Benefits Providers
You might be wondering if there are alternatives to the more classic options above for your small business and, good news, there are! If your business just doesn’t feel like it fits into one of our above categories, or if you have a certain specific type of budget or benefit you want to provide, you would be best to also look at alternative benefits providers like credit unions, HRA providers, and local insurance companies to you.
Some alternative styles of benefits arrangements include things like section 125 cafeteria plans, Health Reimbursement Accounts (HRA), Flexible Spending Accounts (FSA), or Health Savings Accounts (HSA). These benefits can be provided by large insurance companies, PEOs, credit unions, companies that specialize in only a certain kind of benefit plan, or insurance brokers.
Our Recommended Provider(s):
Now, let’s look at each type of employee benefit in more detail.
Types of Employee Benefits
Employee benefits can range from the typical health insurance provision all the way to the newly popular commuter benefits. We will provide an overview on each kind of benefit in this section, in the following order:
- Health Insurance
- Dental & Vision Insurance
- Life & Disability Insurance
- Retirement Planning: 401K, SIMPLE IRA, and More
- Alternative Benefits Options
- Paid Time Off
- Paid Holidays
- Commuter Benefits
- Fringe Benefits
Also, if you are wondering where your employee benefits policies should be outlined, an employee handbook can be a good place to store them.
When most business owners think of employee benefits, health or medical insurance comes to mind first. Remember, if you have less than 50 full time (or equivalent) employees, you do NOT need to provide health insurance (as of the time of print).
If you do want to provide health insurance, you have to consider the following points:
- How many employees want to sign up?
- Do employees prefer a high or low deductible?
- Do you want to provide a more expensive plan with better coverage, but have employees pay a chunk of the premium, or do you want to provide a cheaper plan where you can cover the whole premium?
- Do you live in a city where HMOs are prevalent? (Those are naturally cheaper.)
We answer all the above questions in our entire health insurance guide. You’ll also want to understand the alphabet soup that makes up insurance plans, from HMO to PPO and HDHP, and what they mean, what they cover, and what they cost.
How Much Does 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.
Dental & Vision Insurance
Most employers might assume that, if you aren’t going to offer medical insurance, why offer dental and vision? Well, dental and vision be very valuable to your employees and at low-cost monthly premiums. If you aren’t able to afford health insurance, you might look at offering dental & vision insurance to retain and attract employees.
How Much Does Dental & Vision Insurance 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.
Life & disability insurance
Another low cost benefit with high value for employees, life, short term disability, and long term disability insurance can be great value adds for your employee base. While many employers offer these as a voluntary benefit (meaning, paid for by the employee only), if you are looking for a way to keep your team happy, you might consider offering them as an employer-paid benefits. Employers with employee bases that have children/families especially should consider these as a great option for providing a low cost but highly valued benefit to their team.
Things you’ll want to consider regarding life and disability insurance include:
- The age of your workforce (i.e. young employees might not care)
- If your workforce has families (i.e. those with children might value this more)
- If there is another benefit of similar value that they would use more (like dental insurance)
How Much Does 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.
How Much Does 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.
Retirement Planning: 401K, SIMPLE IRA, and More
Another attractive benefit for many employees is a 401K or some form of retirement plan.
To choose the right kind of plan, you’ll want to consider some of the following points:
- Do you want to contribute, or have your employees contribute? Or both?
- How much will your employees want to contribute per year?
- What is the purpose of the retirement planning- are you looking for a low-cost benefit that is tax-advantaged, do you want use it as a recruitment tool, or are there some other reasons?
Depending on your answers, you’ll want to decide between the 4 usual types of retirement plans, which include a SIMPLE IRA, SEP IRA, 401K, and Traditional or Roth IRA.
How Much Do Retirement Plans Cost?
The cost of offering a retirement 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.
401Ks and other retirement plans can be provided by can be provided by PEOs, HR software, and insurance companies or brokers. There are also other providers like credit unions, banks, and other financial service institutions.
Alternative Benefits Options
There are other types of health benefits that can be provided alongside, or instead of, traditional health insurance. This includes things like a Flexible Spending Account (FSA), Health Reimbursement Account (HRA), or section 125 cafeteria benefit plans. We place them into the “alternative benefits” category because of their unique laws and requirements for small businesses.
You may want to consider offering these in the following circumstances:
- You don’t want to deal with offering actual health insurance and the headaches that can go with it, like constantly changing premiums, compliance issues, and medical privacy laws
- You want to provide some sort of health benefit in order to keep your employees happy and for recruitment purposes
- You want to offer a health benefit that can be a set amount per employee
We have resources on the following specific alternative benefits/ benefit plans:
How Much Do Alternative Benefits Cost?
Most alternative benefits options have some sort of setup fee, like $1,000, and then a monthly administrative cost that is usually per employee. Then, the cost on top of it would be what you are contributing or paying for as the employer per employee.
Alternative employee benefits plans can be provided by can be provided by PEOs, HR software, and insurance companies or brokers. There are also other providers like credit unions, banks, and other financial service institutions.
Paid Time Off (sick, vacation, bereavement, personal holidays)
There are several different kinds of paid time off (PTO). We have a resource that explains PTO from soup to nuts, including sick leave, vacation time, bereavement leave, and personal. Maternity leave and paternity leave also fall into this category, and we have a guide on each them including the laws and the best advice for a small business owner.
How Much Does 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
- 1 week sick leave = $961.54
- Total cost = $2,884.61
PTO is usually determined and run by the business itself. However, it is best tracked through either HR software or payroll software, where employees can use the self service portal to request time and have it automatically tracked in the system.
Paid holidays are another form of an employee benefit since, by federal law, you don’t need to provide any. However, having paid holidays can be an important part of your overall compensation plan for employees. We go over the “typical” paid holidays, and what to do if you have a business that usually works on holidays like a restaurant in our holiday pay policy article.
How Much Do Paid Holidays Cost?
Similar to our previous example, if we go with a person who makes $50,000 annually and give them 6 paid holidays, the cost will be:
- 6 paid holidays = about 1 week = $961.54
Basically, you’re giving every employee one week’s salary without them working. However, remember how much you might save in employee turnover if they move to another job that does have paid holidays.
Commuter benefits, also known as transit benefits, are popping up all over the country as a required benefit platform. They are also attractive to small business owners because they can provide some nice tax breaks for you.
Overall, here’s some of the reasons to offer commuter benefits:
- If you have a business in NYC, Washington, D.C., or San Francisco and have 20 employees or more, then you have to provide commuter benefits anyway.
- If you are looking for a simple benefit plan to offer, commuter benefits can be highly valued by your employees since they help them on expenses they have anyway and lower their taxable income.
- It can make your business eligible for a federal tax break and, depending on what state you are in, you might receive a state tax break.
How Much Do Commuter Benefits Cost?
Commuter benefits are subject to limits, so they cost whatever you want to pay for them up to those limits. At the time of press, the following limits were placed on pre-tax commuter benefits:
- For Parking: $255/month
- For Transportation like a Car or Vanpooling: $255/month
- For Bicycling: $20/month
- For Transit Passes: $255/month
Commuter benefits actually can be done on your own by creating a company account for the different transit providers you want to cover. However, we recommend using a third party provider, like a PEO, HR software, or an independent transit benefit provider in order to keep the admin time to a minimum and to make sure you get your tax credits!
Nearly everything you give your employees is considered a fringe benefit— from the company water cooler to the holiday party. Most traditional benefits are tax-free, but there are some that you might be underreporting, such as use of a company car or computer that you also allow employees to use on their personal time. Get a hold on your fringe benefits by learning the rules and then speak to your accountant if necessary.
7 common examples of fringe benefits are:
- Health insurance (and health-related insurance like dental and vision)
- Education tuition assistance
- Achievement awards up to $1,600 (like a performance bonus)
- Employee discounts on your company’s products or services (up to 20%)
- Birthday gifts for employees
- Complimentary coffee and sodas in the office for your employees
- Employer-provider meals (that are less than $75/person)
How Much Do Fringe Benefits Cost?
Since fringe benefits can range from health insurance to a birthday coffee, the costs vary widely as well.
The Bottom Line
Setting up employee benefits doesn’t have to be complicated or even expensive. Using our guide to help you determine what you want to provide and through what kind of provider can help your small business have a solid benefits offering.