Employee benefits

A Guide to Employee Benefits

Learn what employee benefits you’re required to provide and which can help you attract and retain the best talent.

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Do you want to attract top employees? How about retaining the amazing employees you already have? For both of those goals, you need to offer benefits packages that meet their needs.

Yes, employee benefits can be costly, leading some small business owners to think they can do without them. However, if you want your business to grow, finding a way to manage benefits is key — and some are mandated by law. Take a look at this guide to the types of employee benefits and how they work.

Benefits You’re Required to Offer

Federal and state requirements mandate the following types of employee benefits:

Social Security, Medicare, and FICA (Federal Insurance Contributions Act)

Federal law requires you to pay Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA). You pay 6.2% on the first $137,700 of each employee’s income as a Social Security contribution, plus 1.45% for Medicare. Your employees make the exact same contribution out of their paycheck, as well.

Your business is responsible for withholding each employee’s share from their paycheck. The IRS oversees all withholding and provides information on the details.

Federal Unemployment Tax

Your business also has to pay federal unemployment taxes under the Federal Unemployment Tax Act (FUTA) as well as state unemployment taxes. Some states require you to withhold an employee contribution for unemployment taxes, as well. Check out the details of this requirement from the U.S. Department of Labor.

Workers’ Compensation

Unless your business is headquartered in Texas, your state will require you to pay into its workers’ compensation fund. This fund, which is managed by your state’s Department of Labor, goes to employees who are injured or become ill on the job. The details of the workers’ compensation requirements vary from state to state.

Disability Insurance

If your business is located in California, Hawaii, New Jersey, New York, Rhode Island, or Puerto Rico, you need to provide disability insurance. These plans pay partial wages to employees who are temporarily disabled by injury or sickness for causes not related to work. Long-term or permanent disability plans are overseen by the Social Security Administration.

If you’re in a state that doesn’t mandate disability insurance, you may want to consider offering it as an optional benefit.

Leave benefits under the Family and Medical Leave Act

The Family and Medical Leave Act (FMLA) provides employees with up to 12 weeks of unpaid leave during a 12-month period for any of the following reasons:

  • Caring for a new baby within one year of its birth (adopted and foster children are included)
  • Caring for an ill spouse, child, or parent
  • The employee’s own serious health condition
  • A serious emergency for the employee’s spouse, child, or parent who is a covered military member

Small businesses with fewer than 50 employees don’t have to offer this benefit, but many of them do so, anyway.

Jury Duty Leave

When your employee is called to serve on a jury, your company must allow them to do so. In most cases, this leave is unpaid, but you must hold their job for them until they return. If your company is located in Alabama, Colorado, Connecticut, Louisiana, Massachusetts, Nebraska, New York, Tennessee, or Washington, D.C., you must pay part of their salary for at least a few days. The requirements for the specific amounts paid and the duration of pay vary by state.

Optional Benefits for Employees

Most employers go beyond the basic federal and state requirements when offering employee benefits. By offering strong benefit packages, you send a message that you care about your employees’ well-being. That helps employees feel that they’re working for a company that appreciates them, making them more likely to stay.

Companies with good benefits packages often see higher productivity, better morale, and less turnaround. In addition, when you make it possible for employees to take paid sick leave, contagious employees are more likely to actually stay home. That means they don’t bring germs into the workplace to make other employees sick, adding another boost in productivity.

Offering benefits also helps your company remain competitive when you want to hire new employees. Job seekers often compare the benefits packages offered when they’re choosing between multiple job offers. The better benefits you offer, the more likely you are to attract the top-notch employees you want.

Take a look at some of the key voluntary benefits you can offer employees.

Health Insurance

If your company has 50 or more full-time employees, you’re required to provide them with health insurance under the Affordable Care Act (ACA). Even if your business is smaller, you may want to provide health insurance. Medical insurance, including dental and prescription insurance, is one of the most important benefits to most employees. In fact, half of all small businesses provide health insurance to their employees.

If you’re concerned that you can’t afford it, don’t worry. In most cases, the employer only pays part of the actual premium cost for health insurance. You can pass on the employees’ share of the costs through deductions from their paychecks.

Once you offer health insurance, you may be obligated to also offer COBRA, an extension of health insurance to employees who have lost their jobs. This provision, under the Consolidated Omnibus Budget Reconciliation Act, applies to employers who have at least 20 employees in health plans.

Health Insurance Options

You have a lot of health insurance options available, depending on your location and the number of employees your business has. Most businesses offer either Preferred Provider Organization (PPO) or Health Maintenance Organization (HMO) health care plans. Many companies offer employees a choice.

Another option under the ACA is Flexible Spending Accounts or FSAs. With this option, employees contribute pre-tax dollars into a plan that can be used to pay for medical expenses that their health insurance doesn’t cover, including co-pays.

You can also set up a Health Premium FSA if you choose not to offer health care coverage. That way your employees can contribute toward health insurance premiums through withholding from their paychecks, without your company making any contributions. FSAs can also be used for dependent care and adoption expenses.

Health insurance is complicated, so you may want to seek guidance before making any final decisions. The Department of Labor offers some helpful guidance for employers.

Paid Leave

You’re not required to provide paid holidays or other paid leave; however, these benefits are among the most highly coveted by employees. You can choose to offer paid leave for a variety of reasons.

Paid Holidays

Paid holidays aren’t required, though about 70% of small businesses offer them. It can be a severe drain on employee morale if you don’t offer, say, Christmas off when other companies in your industry are doing so.

Paid Vacation Time

Most small businesses also offer paid vacation time to their employees. Typically, employees accrue vacation days based on the number of days or hours they’ve worked. You can offer as little as a week of vacation time, though the average for small businesses is 10 days.

Paid Personal Days

In addition to vacation time, you may be want to offer floating personal days that employees can set in advance (so they can take their birthday off, for instance). Some employers also let employees take off religious holidays such as Good Friday or Yom Kippur.

It’s also a good idea to set policies in advance for bereavement or funeral leave. Many employers offer two to four days for employees after the death or funeral of a close family member.

Paid Sick Leave

Offering paid sick leave is a definite plus for the health of everyone in your company. Most small businesses offer paid sick days — and in some cases, they’re required.

If your business is in Arizona, California, Colorado, Connecticut, Maine, Maryland, Massachusetts, Michigan, Nevada, New Jersey, New York, Oregon, Rhode Island, Vermont, Washington, or Washington, D.C., you’re mandated to provide some sort of sick leave. In addition, some cities also mandate paid sick leave.

Check your local and state requirements to be sure you’re providing what’s required in your location.

Unpaid Leave

You’re not required to offer unpaid leave under the FMLA unless you have 50 employees or more. But 80% of small businesses offer it, anyway. Employees can feel secure knowing they have an employer who will let them take time off to care for a sick family member or a new baby.

Retirement Plans

Many employees like the idea that their employer is willing to invest in their future. About half of all small businesses provide retirement benefits to their employees. The Department of Labor offers resources to help small businesses make smart decisions about retirement plans. Among the options available are:

401(k)s

With a 401(k) retirement plan, employees contribute part of their salary into this type of retirement savings plan. To set up 401(k)s for your employees, you need to work with a third-party investment company. Many employers match at least part of their employees’ contributions to the plans.

Pension Plans

Far fewer small businesses establish traditional pension plans for their employees. In a pension plan, the employer makes regular contributions to an investment fund. When an employee retires, they receive regular payments from the pension plan.

Other Optional Benefits

Depending on your employees, you may want to offer a mix of the following benefits:

  • Mental health services (if not covered by your health insurance plan)
  • Vision care plans (if not covered by your health insurance plan)
  • Life insurance
  • Stock options
  • Tuition assistance or reimbursement
  • Day care for children of employees
  • Employee discounts on your company’s products or services
  • Transportation benefits, including free parking or financial incentives to use public transportation
  • Food at the workplace, including a company kitchen or catered lunches

How to get benefits for your employees

The first step to creating a smart employee benefits plan is to survey your employees and ask what matters to them. Employees are likely to want health insurance, paid leave, and retirement benefits, but you might be surprised at what other perks matter to them. Giving them options sends a message that you care.

Next, consider your budget. You might want to hand out every benefit, but your bottom line may not allow it. It’s possible that some benefits that your employees care about strongly aren’t that costly (unpaid leave, paid parking, or flexible scheduling, for instance).

Remember that your share of some benefits, including retirement and health insurance, can be minimized when your employees share the burden.

Working with a benefits broker can be highly beneficial as well. Your benefits broker should be able to find you cost-effective vendors and options while providing the benefits that lead to employee satisfaction. For health insurance, in particular, you can also take advantage of the resources provided through the federal government’s Small Business Health Options Program (SHOP).

Conclusion

When you offer a strong employee benefits package, you attract strong employees. You burnish your company’s reputation and keep your current employees happy, and you set yourself up for growth.

FAQs

  1. 1. What employee benefits are required by law?

    You must provide FICA benefits for Social Security and Medicare, federal and state unemployment taxes, workers’ compensation insurance, and unpaid jury leave. In some states, you may also have to pay for disability insurance. If your company has 50 or more employees, you also have to provide FMLA family leave.

  2. 2. Does an employer have to offer health insurance to all employees?

    If you offer health insurance for any employees, you must offer it to all full-time employees.

  3. 3. How many hours does an employee have to work to get benefits?

    According to the IRS and the ACA, an employee who works 30 hours a week or 130 hours a month is full-time. You must provide federally mandated benefits to full-time employees.

  4. 4. Do employers have to give vacation time?

    No laws require employers to give employees vacation time.

  5. 5. What is the penalty for not offering health insurance to employees?

    Employers who don’t offer health insurance face a penalty of $2,570 per full-time employee after the first 30 employees.

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