When employers think of offering benefits, health insurance is typically at the top of the list. Next in line are insurance policies and retirement, but there are many other potential benefits. They generally fall into four categories, some of which are required by law; others provide you a tax credit. The ones you choose should depend on your company, employee needs, and budget.
The main types of employee benefits can be broken down into these four major categories:
12 Most Commonly Offered Employee Benefits
There are many types of employee benefits that small businesses should acknowledge. These range from benefits that are considered an industry standard to those required by law to added perks (fringe benefits). Some are inexpensive ways to promote employee well-being and support a company culture of caring. It’s a good idea to consider all benefits, adding a combination of commonly offered benefits and less-seen perks, if you want to attract quality employees and retain them.
What Is It?
Medical, dental, and vision insurance; required for 50+ employees
Health Savings Accounts (HSA)
Pretax accounts for health expenses (does not expire)
Flexible Spending Accounts (FSAs)
Pretax accounts for health, child care, commuting, or other expenses (expires annually)
Generally, group term life insurance
Replaces salary for time lost due to injury; good for construction or agriculture
Paid Time Off (PTO)
Vacation time, observed holidays, sick time, as well as bereavement leave, jury duty, and FMLA
Pensions, IRAs, 401(k)s; usually with some matching funds from the employer
Stocks and stock options; great for startups and fast-growing businesses
(Required) Insurance providing wage replacement and medical benefits to employees injured on the job
(Required) Provides temporary financial assistance to employees who lose their job through no fault of their own
Family and Medical Leave (FMLA)
(Required) up to 12 weeks of unpaid, job-protected leave for births, injury, illness, and caregiving
Consolidated Omnibus Budget Reconciliation Act (COBRA)
(Required) Extends health benefits to workers who have lost their jobs
1. Health Insurance
The Affordable Care Act (ACA) requires that companies with more than 50 employees provide healthcare coverage. That health insurance must pay for at least 60% of covered services. Employers can have employees contribute toward their insurance coverage, but they can’t force them to pay more than 9.83% of their household income toward the coverage.
If you are a business with fewer than 50 employees, then you don’t have to provide small business healthcare insurance. However, you will get a tax credit if you do. To be eligible, you must have fewer than 25 full-time equivalent employees, and your employees’ average annual wages must be under $50,000. You must also contribute a certain percentage toward their premiums, like 50%.
As the world moves toward gender equality, so should your benefits options. An excellent way to achieve this equality is to offer domestic partnership options (e.g., same-sex spouse or same or opposite sex live-in partner) within your healthcare benefits.
A fast-emerging type of gender equality benefit is those for transgender employees. According to a survey by The International Foundation of Employee Benefits Plans, 90% of transgender employees request mental health benefits, 86% request gender reassignment/affirmation surgery benefits, and 14% request cosmetic surgery benefits.
2. Health Savings Accounts (HSAs)
This add-on to healthcare lets employees put money into a dedicated savings account specifically for healthcare issues. It’s only available for people enrolling in high-deductible health insurance plans.
For 2021, the maximum annual contribution allowed in an HSA is $3,600 for an individual and $7,200 for a family. Employees over 54-years-old can also add $1,000 a year as catch-up contributions. Savings in an HSA are allowed to grow without expiring at the end of the year. Participants may opt for pretax payroll deductions or make tax-deductible contributions independently. HSA contributions are never taxed, and the government doesn’t tax the interest earned in these.
3. Flexible Spending Accounts (FSAs)
Health FSAs are also pretax savings accounts that do not incur taxes on the distribution. Any employee can set one up, but again, they must cover health expenses. Such expenses can include eyeglasses, alternative healthcare like acupuncture, or even over-the-counter medicines. FSAs have a limit of $2,750 per year, and the accounts expire at the end of the year, meaning the money must be spent or lost.
You can set up FSAs for dependent care or commuting expenses. These, too, are tax-advantage benefits.
4. Life Insurance
Life insurance is a popular benefit choice because companies harness the power of groups to secure lower rates for their employees. In some cases, employers will provide small policies ($2,500) for free. Of course, companies with more dangerous jobs, like construction, security, or law enforcement, will want to look at higher value policies. One nice aspect for employers is that you can sign up for up to $50,000 tax-free coverage for your employees.
Companies wanting group life insurance must show it benefits at least 70% of their employees and meet other specifications. It may cover spouses and children as well. Different types of group insurance you may want to consider include:
- Group accidental death and dismemberment
- Business travel accident insurance
- Split-dollar life insurance; both employers and employees pay into this insurance, making it an investment as well as an insurance policy
5. Disability Insurance
Disability insurance provides compensation for salary lost during short- or long-term leaves of absence due to injury or illness. It does not have to be because of a job-related incident. However, it can cover the workers’ compensation requirements as long as it meets your state’s standards. It’s a good idea for businesses in industries with high injury rates, like roofing, agriculture, or logging, to offer this benefit to employees.
Many short-term disabilities last less than 13 weeks, but 26 weeks is the usual plan purchased. It replaces up to 67% of a worker’s lost pay.
Long-term disability takes up where short-term leaves off and runs an average of six months. It covers 50% to 60% of lost income and can continue up to retirement. Long-term disability may mean the inability to perform the tasks of the occupation on hand when injured, or it may mean the inability to perform work at all.
6. Paid Time Off (PTO)
For standard PTO, most companies start with specific days off, such as major holidays. Some add a “floating holiday,” such as a birthday or religious holiday, that the employee can choose themselves.
From there, you need to determine how many days per year you wish to give for vacation time, how they are earned, and whether they include sick days or mental health days. Vacation time can be given all at once at the beginning of the year (typical amounts are 10–15 days). It can be accrued on a monthly or quarterly basis, capping out at the total amount of vacation days available. Other considerations include adding a PTO day for volunteer work or offering your employees unlimited PTO.
Work-life balance ranks among the top considerations applicants have when deciding on a company, even above pay. Having a clear, flexible, and generous PTO package helps your company stand out and shows employees that you value them as people.
While employers are required by law to pay into Social Security, few people count on it alone to support them in retirement. Therefore, applicants, especially older ones, are looking for retirement benefits.
The average worker changes companies five to seven times in their career, so while some companies may offer a pension, most offer more flexible plans like IRAs or 401(k)s. These tax-deferred savings plans let employees invest part of their salary. Many employers contribute close to 3% to 4% of their employees’ salaries; they usually match at least 50 cents on every dollar of the employee’s contribution, up to a limit. When an employee leaves a company for another company, they can roll over their contributions to the new retirement plan.
A great way to get your employees invested in your company for the long run is to provide equity benefits in the form of stock or stock options. Typically, options are issued by the company, cannot be resold, and may be exercised only after the stock has been vested. Startup companies often use these to reward early employees, especially those who persevere through a rough beginning stage. Fast-growing companies can use them as an incentive for employees to push the company to succeed.
Another type of equity in the company is in the form of incentive bonuses. These are paid out to succeeding employees, usually every quarter, based on how well the company is performing. The company will take a portion of the quarterly profits (e.g., 20%) and split it between eligible employees.
9. Workers’ Compensation (Required)
Workers’ compensation replaces salary lost due to accident or injury on the job. Each state has its requirements concerning which employees must be covered, the types of eligible injuries, length of time employees have to file a claim, and the defenses employers can use against claims (such as self-inflicted injuries, willful misconduct, or injuries related to substance abuse on the job).
Workers’ compensation programs are administered by the states, while the federal government administers separate workers’ compensation programs for specific groups—such as federal employees, longshore workers, and coal miners. Employers may self-insure for workers’ compensation; however, their policy must meet state regulation minimums.
10. Unemployment Insurance (Required)
Companies are required by law to pay unemployment insurance. This insurance provides cash stipends to people who lose their jobs through “no fault of their own,” such as a layoff. They must be actively seeking new employment to qualify for unemployment.
Whether or not you must pay unemployment insurance depends on how much you compensated an employee, for how long, and what industry you’re in. Some state regulations may apply.
11. Family & Medical Leave (Required)
While family and medical leave is required by law, it’s nonetheless an essential benefit for today’s workforce who want the ability to help family members or recover from injuries or illness without worrying about losing their jobs. Thus, you may want to consider benefits beyond the legal requirements.
By Family and Medical Leave Act (FMLA) rules, employees are entitled to up to 12 workweeks of leave in a 12-month period for:
- Birthing a child and caring for the newborn child within one year of birth
- Foster parenting, including the fostering and care up to one year of the child being placed with the employee’s family
- Caring for the employee’s spouse, child, or parent who has a severe health condition
- Attending to a serious health condition that makes the employee unable to perform the essential functions of their job (including mental illness)
- Any qualifying circumstance arising out of the fact that the employee’s spouse, son, daughter, or parent is a covered military member on covered active duty. FMLA leave is extended to 26 workweeks of leave in a 12-month period if your employee is the spouse, son, daughter, parent, or next of kin of a military service member with a severe injury or illness.
12. COBRA (Required)
Employers are required under the Consolidated Omnibus Budget Reconciliation Act (COBRA) to offer a continuation of an employee’s healthcare coverage for up to 18 months after the employee’s enrollment ends. It’s meant to protect the enrollee and their family while they look for alternate coverage. COBRA applies in the following circumstances:
- A covered employee’s death
- A covered employee’s job loss or reduction in hours for reasons other than gross misconduct
- A covered employee’s becoming entitled to Medicare
- A covered employee’s divorce or legal separation
- A child’s loss of dependent status (and therefore coverage) under the plan
While COBRA is a requirement for any small business that offers healthcare coverage, the premiums are typically 100% paid by the covered employee, plus a 2% administrative fee. Companies can, however, elect to contribute to some or all of the premium costs of the coverage for up to 18 months.
Difference Between Employee Benefits and Perks
A good guideline is that benefits affect a paycheck, while perks should help you do your job better or create work-life balance. So, employee benefits include things like insurance, leave time, and pretax programs workers can pay into and sometimes get matching funds for. Work perks, on the other hand, include everything from a company car to free lunch Fridays.
Companies often use perks to define and reinforce their company culture. Businesses that promote the idea of fun and camaraderie at work may have an in-house arcade or planned events on company time. Those promoting teamwork might sponsor peer-reward programs like Kazoo, which combines employee recognition, performance management, and surveys into one platform. Health-conscious companies might have fresh fruit, a juice bar, or treadmill desks.
Perks can be fluid and are limited only by your imagination, so you can try anything. If it’s not a good fit, then change it. Benefits, however, are static and built into job agreements.
Often Overlooked Perks That Can Enhance a Benefits Package
Type of Perk
What Is It?
Flexible Work Options
Employees can choose their work hours (typically a 40-hour workweek)
Remote Work Options
Employees work from home (or other location with suitable Wi-Fi)
Company provides reimbursement of tuition for eligible courses (can be a write off to deduct up to $5,250 per employee)
A compensation package paid by the company to assist employees in relocating to a different job site (typically another city, state, or country)
Company provides free or discounted products to employees
Company reimburses employees for items such as Wi-Fi, computers, office equipment, etc.
Employee Referral Bonus
Payments of $50–$1,000 for the referral of an employee (typically after 90 days)
In-house gym, gym memberships, etc.
Reimbursement of commuter items (e.g., train passes, rideshare, parking, etc.)
Company pays up to a certain amount (e.g., $1,000 after five years of employment) for an employee to take a vacation
Importance of Offering Employee Benefits
A competitive benefits package tops the list of things high-quality applicants look for in an organization, and not providing one can take you out of the race. Older generations, like Boomers and Gen X, are attracted by FSAs that let them plan for medical expenses, as well as retirement benefits that recognize that they don’t have 30 years to save.
Employee benefits can also determine the kind of people you eventually hire. For example, by providing relocation assistance, you can cast a wider net. Tuition assistance will attract millennials and Gen Z, who value the opportunity to learn and grow. Young families will look for flexible PTO, which includes generous maternity and paternity leave.
Advantages of Employee Benefits to the Employer
- A comprehensive benefits package can increase high-quality candidates and assist in employee satisfaction and retention.
- Premiums on benefits are tax-deductible, which translates to savings for small businesses.
- Offering employee benefits can result in increased productivity as employees feel a sense of job security.
- A high-quality benefits package can decrease salary expectations.
Advantages of Employee Benefits to the Employee
- Employees exhibit increased overall satisfaction with their jobs when they know they have good benefits.
- An employee’s total compensation is increased over salary alone when comprehensive benefits are included.
- Companies that provide benefits, such as quality healthcare and 401(k), can help remove financial burdens for many employees.
- Benefits create a better work-life balance atmosphere for employees.
Employee benefits are an essential part of your personnel budget and you need to budget for the cost per employee. You should consider which benefits to include as some are required by law, regulation, or union rules. However, others can reflect company values, promote loyalty, and help your employees with work-life balance. With the right package, you can attract highly qualified applicants and keep the ones you have today. We recommend Gusto for small businesses that need payroll services as well as HR options and benefits. If you are interested in a PEO option consider Rippling, which brings all HR and payroll into one automated platform.