Wide-ranging benefit packages provide a competitive advantage in the quest to attract and retain talent. That’s why it’s never too early for small business owners and startups to explore employee benefits, especially if they plan on growing their team in the near future. This guide serves to help employers better understand the options available to them, as well as some of the requirements.

Small business benefits

What are employee benefits?

Benefits are perks or compensation beyond what employees earn in basic wages. Some organizations view them as an intangible business asset, much like a company’s reputation or industry expertise, that can define an entire corporate culture, impact employer brand and drive overall business success. Others find benefits to be an HR and administrative challenge, but with the right strategy, they can be turned into a powerful recruitment and engagement tool.

Types of employee benefits

Health insurance is the most basic type of employee benefit, but it has largely become table stakes by today’s standards. Employers that want to appeal to generational workforces, may need to offer a broad range of perks, such as:

Financial benefits

Employees who are worried about their finances tend to be less engaged at work. Employers can help alleviate their stress and improve their productivity by considering these financial benefits:

  • Pay raises
    When wages become stagnant, workers may start to look elsewhere for employment. Employers can help prevent this turnover by increasing salaries and hourly pay by a fixed percentage each year. Another option is to reward employees based on their performance with cash bonuses and non-monetary incentives, like more vacation days or flexible work schedules.
  • Employee stock options (ESOs)
    Allowing employees to purchase a portion of company shares at a discounted rate within a specific time frame is often win-win. Employees get to enjoy financial gains when profit margins improve, while employers may experience greater loyalty from workers who have some ownership in the company. This benefit was once reserved for executives at large organizations, but it has since become available to a wider pool of employees at small businesses that are publicly traded.
  • Financial wellness programs
    Workers that live paycheck to paycheck usually have real concerns about covering their monthly expenses. By the time they pay their bills, there’s little left to put aside for a child’s education or retirement. Financial education and counseling services can help employees make better decisions about how they spend their money, reduce their debt and save for the future.
  • Loan repayment plans
    Student loans are one of the most common sources of employee debt. Employers can differentiate themselves from competitors by offering student loan repayment programs and loan consolidation opportunities. Some businesses also provide tuition reimbursement programs for employees who want to pursue a degree in a related field while on the job.

Fringe benefits

Fringe or ancillary benefits that supplement traditional health insurance might seem like an added expense, but proactively improving employee wellness may actually lower health care costs in the long term. Some examples include:

  • Dental care
    Routine dental exams can help spot not only periodontal disease, but also chronic health issues, like heart disease. Employers typically can choose from traditional plans where employees can see any dentist who accepts insurance or a preferred provider plan with in-network and out-of-network coverage.
  • Eye care
    Uncorrected eyesight problems can lead to lost productivity at work, so it often pays to provide a vision plan that includes comprehensive eye exams. Package plans or discount programs help make this insurance coverage more affordable.
  • Prescription drug coverage
    Another way to maintain a healthy workforce is to offer prescription drug coverage. Plans with tiered pricing are often more advantageous for employees because they can purchase various prescriptions with a co-pay. Employers may also want to provide a list of the covered drugs so that those who are managing chronic conditions can easily review their available options.
  • Life insurance
    Many people worry about the financial well-being of their dependents if they were no longer there to provide for them. Group life insurance, in which the employer owns a single policy that covers all workers, can provide much peace of mind. Another option is to offer term life or yearly renewable coverage. To keep administration simple, life insurance can be set up as a one-time payment.

Additional insurance options

In a world where most employers provide health benefits, employers can stand out by offering additional plans, such as these, for employees to save on their insurance premiums:

  • Flexible spending accounts (FSA)
    With an FSA, employees withhold money from their pay on a pre-tax basis up to a limit preset by the IRS. They can then use these funds to cover eligible out-of-pocket health expenses, such as insurance copayments, deductibles, some prescription drugs and medical devices. If any money remains in the FSA at year’s end, employees may sometimes have an additional two-and-a-half months to spend the balance, otherwise the funds are lost.
  • Health reimbursement arrangement (HRA)
    Businesses that offer group health insurance and participate in HRAs reimburse employees tax free for qualified medical expenses up to a limit they determine each year. If employers don’t offer group health insurance, they may choose to partake in an individual coverage HRA, which helps employees offset some of the costs of plans they purchase themselves through the marketplace or elsewhere.
  • Health savings account (HSA)
    HSAs allow employees enrolled in high deductible plans (HDHPs) to set aside their own money on a pre-tax basis to cover qualified medical expenses. Unused funds carry over to subsequent years and any individuals that leave to pursue another opportunity, can take their HSA with them to their new employer.
  • Premium only plans (POP)
    Employees in these plans pay their share of insurance premiums – including health, dental, vision, disability and life insurance – with pre-tax dollars. Because a POP reduces employees’ taxable income, employer contributions to payroll taxes and unemployment insurance may also be lower.

Unique employee benefits

Providing more than the traditional medical benefits that employees have come to expect from their employers can help attract and retain talented individuals. The key, however, is to pay close attention to workplace trends and anticipate changing needs as much as possible. Some examples of unique benefits in demand with employees today are:

  • Backup care
    Employees caring for young children or older family members appreciate having reliable alternatives when their regular arrangements break down. With some backup care plans, individuals have 24/7 access to live representatives who can help them secure the childcare or senior care most suitable to their unique needs. This benefit can help employers reduce absenteeism, boost productivity and improve employee loyalty.
  • Employee assistance programs (EAP)
    EAPs help employees and their immediate family members deal with a host of personal issues, including mental health, substance abuse, work-life balance, identify theft and more. Due to the sensitive nature of this subject matter, employees are sometimes hesitant to use the services available to them. Employers may have to communicate the benefits of EAPs and explain that they are confidential to encourage participation.
  • Pet insurance
    Chances are at least some of employees at any business are pet lovers and know the financial and emotional toll of caring for a furry friend. Providing pet insurance as a voluntary benefit can help manage the costs of vaccinations and wellness care, as well as chronic conditions, injuries and surgeries.
  • Other unique benefits

    These perks may further increase your employee engagement:

    • Yoga classes
    • Free books
    • Pet-friendly environments
    • Onsite health care
    • Wedding reimbursement

Flex benefits

The “one-size-fits-all” benefits model is a thing of the past. Employees today want a broad range of self-service options that can be mixed, matched or adjusted to suit individual preferences as they evolve. Some benefits carriers even allow employees to make changes online, virtually at any time, as opposed to only during an open enrollment period. This type of empowerment sends the message to employees that they’re a valued partner and frees HR departments from the burden of complex administration.

Benefits required for small business

Not all employer-sponsored benefits are optional. Some, such as the following, are required by law and tightly regulated by government agencies:

Workers’ compensation

Workers’ compensation is insurance that protects employers and employees if a workplace accident or illness occurs. It covers the cost of medical care and rehabilitation, as well as a partial replacement of lost income due to disability. The spouse and minor children of employees who die in work-related accidents may also receive a monetary benefit.

Most states require employers to purchase workers’ compensation before hiring their first employee. Failing to do so can result in disciplinary actions, including civil fines and criminal penalties. Some authorities may even prevent a business from bidding on future contracts or shut a job site down entirely. To prevent a lapse in coverage that puts employers at risk, carriers typically renew their insurance policies automatically.

Unemployment insurance

Unemployment programs provide financial assistance to workers who temporarily lose their job because of eligible reasons, such as downsizing, that would not be considered their fault. This benefit is mandated by federal and state governments and typically funded only by employers. The specific tax rates and regulations vary by state, so it helps for employers to familiarize themselves with the laws everywhere they do business.

In most cases, when a former employee files an unemployment claim with a government agency, a representative will contact the business to verify the eligibility of the request. Employers must respond within a certain amount of time or their ability to appeal wrongful claims may be limited.

Challenging an unemployment claim typically requires evidence of worker misconduct, such as prior warnings, witness statements and records of workplace incidents. Even if an employee leaves on good terms, employers usually conduct an exit interview or ask for a formal resignation letter to help safeguard against fraudulent claims.

Disability insurance

Disability isn’t covered by basic health insurance, so if an employee suffers a long-term illness or injury, they will be forced to use sick days or take a leave of absence. Individuals who find themselves in these situations may feel stressed and their job performance can suffer. In some cases, they may never return to work.

Employers can retain valued employees and give them peace of mind by offering disability insurance, of which there are two options:

  1. Short-term disability typically provides coverage for two to six months and comes close to matching the employee’s current income. In a state where short-term disability is required, employers must abide by the specific regulations governing eligibility, payments and length of time.
  2. Long-term disability generally pays about 50 to 70 percent of monthly income and can last for years or decades. Only full-time employees are usually eligible for this benefit.

For optimal coverage, employers can choose to offer their employees a combination of short-term and long-term disability.

Health insurance

Employee wellness is essential to business productivity and a great way to maintain that is through a health insurance plan. If that’s not enough of a reason to offer medical benefits, employers may be required to do so by the Affordable Care Act. It states that businesses with 50 or more full-time or full-time-equivalent (FTE) employees must provide ACA-approved health insurance or face penalties. An FTE is someone who works 30 hours per week or 130 hours per month.

Types of health insurance plans:

  • Fully insured plans
    Employers pay the insurance carrier a fixed premium rate based on the number of employees enrolled in the plan.
  • Partially self-funded plans
    Businesses share the financial risk of paying claims with an insurance carrier. This type of plan offers more control and flexibility than a fully insured option.
  • High deductible plans
    As the name implies, these plans have higher deductibles than traditional options, but generally have lower premiums. They are advantageous for employees who don’t anticipate many medical expenses and can be combined with HSAs and HRAs.
  • Physician-hospital organization
    A PHO is an alliance of physicians and hospitals who sell their services directly to managed care companies or to employers.
  • Managed care
    Preferred provider organizations (PPO) and health maintenance organizations (HMO) provide incentives for employees to use in-network physicians and hospitals.

What is open enrollment?

Open enrollment is when employees who are benefits-eligible choose the plans that best meet their needs for the upcoming year. It usually takes place 30 to 60 days before the current year’s benefits are scheduled to renew. Prior to open enrollment, employers customarily notify their workforce about any new features or plan changes.

How do businesses purchase health coverage?

Employers shop around for group health coverage just as they would for any other business purchase by asking questions and comparing pricing. Plans can generally be purchased from one of three places:

  • Brokers and agents
    Licensed representatives sell insurance products from a variety of insurance carriers.
  • Insurance carriers
    The companies that issue the policies and underwrite the coverage often sell their insurance directly to businesses.
  • Health insurance marketplace or exchange
    The federal government operates a website where employers can shop for medical plans approved by the ACA. Part of this marketplace is the Small Business Health Options Program, which offers flexible, affordable plans designed for organizations with one to 50 employees. By purchasing through SHOP, employers may also be eligible for a health care tax credit.

How to choose the right coverage

Finding the right health insurance coverage typically requires careful consideration of the cost of the product vs. the needs of the workforce. When evaluating plans, employers may follow these general steps:

  1. Determine the types of coverage preferred by employees
  2. Estimate premium costs for both the organization and individuals enrolled in the plan
  3. Find out if the plan includes medical providers and hospitals that employees would use
  4. Assess the level of support that can be expected from the carrier
  5. Make sure coverage meets ACA standards

Cobra benefits

The Consolidated Omnibus Budget Reconciliation Act (COBRA) provides continued health coverage to individuals after employment ends or a qualified event occurs, such as death or divorce. Those eligible under the plan include covered employees, former employees, spouses, former spouses and dependent children. COBRA benefits are usually identical to the health insurance that the beneficiary had previously, but they are not provided indefinitely. Coverage can last between 18 to 36 months, depending on the qualifying event.

Employers that have 20 or more employees are required to comply with COBRA. Some states also have their own health coverage continuation laws, which may apply to businesses with less than 20 workers, so it’s important to check with local authorities to ensure compliance.

Family and medical leave

Under the Family and Medical Leave Act (FMLA), employees may be entitled to 12 weeks of unpaid, job-protected leave if they:

  • Give birth to a newborn
  • Adopt or foster a child
  • Are caring for an immediate family member with a serious health condition
  • Have a serious medical condition of their own that limits their ability to work

To be eligible for one of these qualifying events, employees generally must work for an employer for at least 12 months and at least 1,250 hours in the previous 12 months. Additionally, the place where they work must employ 50 or more individuals within 75 miles.

Some states also have paid leave programs with different rules and requirements. In some places, benefits are paid for with an employee payroll tax, and in others, they’re funded by both the employer and the employee.

These variations make it important for employers to understand not just the requirements of the FMLA and all state and local laws that apply, but also their HR responsibilities. To help manage compliance, they typically need to track the total hours worked and the amount of paid leave accrued and taken for every employee, among other records.

Taxable benefits

Any fringe benefits that businesses offer to employees could be considered a source of income and thus, may be taxable, unless they meet certain exclusion criteria. Examples include:

  • Moving expenses
  • Business-related driving reimbursements that exceed the IRS mileage limits
  • Reimbursement for education that’s not job-related or is more than IRS tuition limits
  • Personal use of working condition benefits, such as cell phones and company cars

To calculate the tax on these benefits, the IRS uses the general valuation rule or fair market value (FMV), which is the amount a third party vendor would have charged the employee for the particular benefit. FMVs generally must be reported on Form W-2.

Benefits of retirement savings for employees and employers

Many workers today are extending employment into their senior years, largely for two reasons. Either they’ve been unable to meet their savings goals or they don’t fully understand their expenses to decide when it’s a good time to retire. This is a risky strategy because leaves of absence, layoffs or caregiver issues can arise unexpectedly and limit income.

Employers can help their workforce members avoid such a scenario by offering a retirement savings plan. In addition to improving financial security for employees and alleviating their stress, retirement plans can help businesses reduce health care costs, improve workplace productivity and retain talent.

Retirement plan options for small businesses

While providing retirement plans to employees has its benefits, it also requires serious planning. Employers may need to consider the size of their workforce, their type of work, an employee’s years until retirement and whether to offer a company match. With those key points in mind, small businesses have three common plan options1 available to them:

  • Simplified employee pension plan (SEP-IRA)
    Employer contribution limits are high, but you can deduct your payments as a business expense.
  • Simple IRA
    Employer contribution limits are lower than those of a SEP-IRA, but employee limits are higher.
  • 401(k)
    This plan offers all the tax and retirement benefits of a typical 401(k) with high contribution limits for both the employer and employees.

The Department of Labor’s Employee Benefits Security Administration and the IRS provide a list of benefits and eligibilities that can help employers make an informed choice or they can speak with a small business banker or financial advisor.

Importance of employee benefits

Benefits are a vital strategic tool that small businesses can’t afford to ignore, particularly as their operation expands and they try to compete for top talent. Many workers today are looking for flexible rewards and if an employer doesn’t offer options that meets their needs, they run the risk of them leaving for a company that does. In addition to recruitment and retention, competitive benefits packages can help improve employee productivity, engagement and financial security, as well as the public image of the business.

Yet, simply offering great benefits isn’t enough for businesses to reap the advantages. Employers have to make sure their workforce understands what services are available and how to use them. Only through consistent communication and support can they help employees make the most of their benefits plans. Short messages that highlight key action items and use more visuals than text tend to be most effective.

Cost of employee benefits

The cost of benefits has been rising in recent years, but employers can take steps, such as the following, to manage their expenses:

  • Maximize unused benefits
    Businesses may already be paying for benefits that they’re not aware of or that their employees aren’t using. Some life insurance plans, for instance, include mental health services. Before purchasing additional benefits, carefully read the details of current plans or ask an insurance agent to identify any underutilized services.
  • Combine lines of insurance
    Employers who purchase multiple lines of coverage from a single carrier may be eligible for discounts. A health and dental insurance bundle, for example, may save enough money to pay for other benefits.
  • Leverage voluntary wellness benefits
    Many voluntary benefits, like employee assistance programs, empower people to stay well, which can help save on health insurance claims in the long term.
  • Offer employee-funded premiums
    Having employees partially or fully pay for some ancillary benefits can help businesses offer a wider range of benefits that otherwise would be unaffordable. And because insurance companies charge lower rates to groups than individuals, employees will still save money compared to what it would cost them to buy the service on their own.
  • Purchase only what is needed
    Before buying any plans, survey employees to find out what they expect from their benefits and tailor packages accordingly.
  • Work with an insurance professional
    Licensed insurance brokers or agents can help employers find the benefits that will best suit their workforce, while staying within your budget.

Frequently asked questions about small business employee benefits

Do employers have to offer health insurance?

Employers that have 50 or more full-time or full-time equivalent (FTE) employees are required to provide health insurance under the Affordable Care Act. Plans must offer minimal essential coverage that meets ACA standards and pay at least 60% of a participant’s medical expenses. Non-compliance with this law results in expensive penalties that are not tax deductible.

Do part-time employees get benefits?

Depending on their length of service and total hours worked, part-time employees may be entitled to retirement savings plans in accordance with federal laws. They are also generally eligible for unemployment insurance, workers’ compensation and other benefits mandated by individual state governments. If employers choose to offer part-time workers benefits beyond what is required, it’s usually best practice to establish eligibility criteria in an employee handbook or official company policy.

What benefits should a small business offer?

While many benefits are not required, small businesses should consider offering the strongest packages possible. Doing so can mean the difference between attracting and retaining top employees or losing them to competitors. Every business, however, is unique, which is why employers who need help deciding which benefits are right for them should consult a licensed insurance professional or broker.

What are standard employee benefits?

Standard benefits consist of health, dental, vision and retirement plans. In order to appeal to a generational workforce, however, employers may need to also offer voluntary benefits that can be customized to meet employee needs at different life stages. Examples include flexible work schedules, financial wellness counseling and student loan assistance.

What percentage of an employee’s salary is benefits?

As of September 2020, benefits accounted for nearly 30% of an employer’s costs for individuals working in the private sector.2 This is a national average and benefit costs tend to vary by the size of the business, its location and its specific industry.

This guide is intended to be used as a starting point in analyzing employer benefits and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal, retirement, tax advice or other professional services. Should you have questions regarding your particular situation, consult a professional advisor.

All insurance products will be offered and sold only through Automatic Data Processing Insurance Agency, Inc., (ADPIA) or its licensed insurance partners, 1 ADP Blvd. Roseland, NJ 07068. CA license #0D04044. Licensed in 50 states. All services may not be available in all states. ADPIA is an affiliate of ADP,Inc.

1SIMPLE IRA and SEP are offered through ADP Broker-Dealer, Inc. (ADPBD), Member FINRA, an affiliate of ADP, Inc., One ADP Blvd, Roseland, NJ 07068. Only registered representatives of ADPBD may offer and sell such retirement products and services or speak to retirement plan features and/or investment options available in any ADP retirement product. American Century Investments Inc. (ACI), ADP, Inc. and ADP Broker-Dealer, Inc. (ADP) have a distribution and administration agreement with ACI to maintain a program under which ACI provides investment options to participants in adopting employers’ SEP and SIMPLE IRAs marketed by ADP (for which ADP receives reasonable fees); and ADP and ACI share administrative responsibilities to support the best interests of SEP and SIMPLE IRA plan participants in adopting such plans. Unless otherwise agreed in writing with a client, ADP, Inc. and its affiliates (ADP) do not endorse or recommend specific investment companies or products, financial advisors or service providers; engage or compensate any financial advisor or firm for the provision of advice; offer financial, investment, tax or legal advice or management services; or serve in a fiduciary capacity with respect to retirement plans. All ADP companies identified are affiliated companies.

2Bureau of Labor Statistics