The ABCs of Employee Benefits
Employers are required to provide certain benefits to their employees and may choose to provide others in order to attract and retain the best employees. Tax savings and pricing incentives also exist for a business owner when providing certain employee benefits.
Employers must provide monetary compensation to employees but because most benefits are optional, particularly for small businesses, the benefit piece of your compensation package is one shaped by you.
Why offer benefits if they are optional? Providing benefits to your employees also allows you to offer benefits to yourself, and contributions that you make for benefit premiums are often tax-deductible for your business. That's a powerful incentive in and of itself. In addition, if you need to attract employees with a special skill or talent, you're going to have to compete with other employers to get them, and that may mean you'll need to offer some benefits to succeed.
So how do you decide which benefits should be part of your compensation package? Understanding which benefits you are required to offer is the first consideration because of the impact these requirements can have on your ability to offer optional benefits. Then you can contemplate the pros and cons of offering benefits that are optional, both generally and for specific types.
Benefits You Must Offer
The following is a list of the different types of benefits employers are required to offer employees. You must:
On the other hand, contrary to popular belief, generally, employers are not required to provide:
- paid holiday, vacation, or sick leave
- health benefits, except where required by state law
The enactment of the Patient Protection and Affordable Care Act and related legislation requires employers with 50 or more full-time employees (or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) to offer adequate health coverage or be subject to assessment if their employees receive premium tax credits to buy their own insurance. This employer shared responsibility mandate is effective as of 2015.
It's clear that employers have quite a bit of latitude in deciding which benefits should be part of their compensation package.
Pros and Cons of Offering Optional Benefits
As with most business decisions, there are pros and cons to consider when offering benefits. Evaluate these considerations with your particular situation in mind — they can help you determine if offering benefits is something you want to do now.
The pros. There are many advantages to offering benefits, including:
- Tax advantages. You may be able to deduct plan contributions.
- Recruiting advantages. You can use benefits packages to attract good employees and you can structure them in such a way to reward and thus retain your best employees.
- Personal gain. You may be able to get benefits for yourself for less money, if you also offer them to your employees, than you would procuring them privately for yourself.
- Alternatives to pay. Sometimes employees will accept benefits in lieu of higher salaries.
The cons. The biggest disadvantage of offering benefits is the cost. Benefits are costly to large employers and that burden becomes even more significant for the small employer. Specifically, conventional wisdom holds that smaller employers may encounter the following challenges:
- Pay higher rates than larger employers for group health care coverage because there are fewer employees among whom to spread risk.
- Have more difficulty providing life insurance coverage to the employee group.
- Have fewer design choices when offering a retirement plan because of high administrative costs.
- Be less likely to offer fringe benefits due to administrative complexity.
Once you've determined if benefits are something you want to offer, your next step should be deciding which benefits to offer.
Which Benefits Should You Offer?
There are many different types of employee benefits out there. To make matters worse, for each type of benefit, there is a vast array of plans, companies, and administrators that can offer you that benefit in different forms. So how do you decide what to offer?
First, you will want to decide generally which benefits you want to offer. The benefits you decide on should hinge on a the following factors:
- what you can afford
- what other businesses are offering
- how the benefit can help your business
Which Benefits Can You Afford?
There's no point in trying to decide which benefits you want to offer until you figure out what you can afford. In theory, for most benefits, it won't cost you anything out-of-pocket to offer benefits to your employees because you could simply have them pay the entire cost through payroll deductions. If you take this approach, however, your employees may not see your benefits as particularly beneficial since they have to bear the entire cost.
Tax benefits may reduce actual cost. Remember that many benefits are tax-deductible to your business and tax-exempt for the recipient. The result is that Uncle Sam foots part of the bill for these types of benefits. The cost to you will be less than the cost the employee would pay if he or she purchased the benefit on his or her own. Thus, purchasing tax-deductible benefits can be more cost-effective than just giving the employee more pay.
Cost-sharing with employees. If you want to share the cost of benefits with your employees, figure out how much per month per employee you are willing to contribute. You can then be a better benefits shopper because you'll know how much it's going to cost you and how much it's going to cost your employees.
Be realistic when shopping for benefits you can only offer if you share the cost with your employees. If based on their wages you think that their share of the cost of a certain benefit is going to be more than they can afford, there's no point in offering a benefit the employees will not be able to take advantage of.
How do you accurately determine the cost of benefits? The cost of benefits is hard to determine because costs depend on so many factors. For example, in the case of benefits related to insurance (such as health insurance or life insurance), those factors include:
- the number of employees in a group
- the levels of coverage/reimbursement in a plan
- the demographic statistics of your group
- the geographical area
There is strength in numbers, however. The more employees you have, the better off you are when it comes to benefits. Consider your size when contemplating benefits. It's going to be expensive to offer a rich benefits package to your employees if you have only two or three people working for you. In that case, you'll want to focus on the one or two benefits that you and your employees will value most and that are most cost-effective.
If you have only a few employees, your best bet may be to join a consortium of other small businesses or purchasing alliance in purchasing benefits. To get information about such groups, contact your local chamber of commerce or industry group.
The cost of time-off. Determining the cost of benefits that involve time away from work can be even more complex than benefits that involve premiums. While there are no premiums to deduct, obviously there is still a cost involved. The tricky part is measuring that cost. Factors that affect that cost include:
- how much the employee is paid
- how long you can afford to have the employee be away from the job
- how much it would cost to replace the employee temporarily
- how much productivity would suffer
Benefits Others Offer--Staying Competitive
If you want to offer benefits in order to compete with other employers in your area for the best employees, you need to know what you're up against. Find out what other employers are offering in the way of benefits packages.
How do you find this information? Use your networking contacts to conduct an informal survey. Call other businesses and explain that you're trying to get a feel for which benefits to offer and ask them about their benefits packages. Ask your friends and relatives about their benefits. You should be able to get a fair amount of information this way.
When you do your survey, ask which benefits are most popular and get the most usage. This can give you a good idea of which benefits your employees will value most.
When you're doing your survey, ask for the names of the particular insurance companies and agents that provide the benefits. Ask the people you're surveying if they recommend those agents and companies. This will give you a head start on whom to contact once you've made some initial decisions about what to offer.
In doing your research, don't target other small businesses only. Remember that when it comes to attracting good employees, you have to compete with other employers, regardless of size. Call the human resources or personnel department of larger employers, explain that you're doing some research about benefits, and ask them to send you some information about their benefits package. This information may also be available online, especially for larger employers.
The Impact Offering Employee Benefits Has on Your Business
No matter which specific benefits your employees may want, you need to assess how they will positively impact your business. Obviously, if you offer popular benefits, such as generous time-off policies or health insurance, you're going to be able to attract more and better employees. But will it be worth the cost? That's a decision only you can make.
Which employee benefit is the most popular? While each group of employees has different needs, health insurance is consistently singled out as the most important and highly valued benefit for employees.
Health insurance is tax-deductible to the employer and tax-exempt for the employee, and you can often purchase it at a lower cost than the employee would ordinarily pay for an individual policy. Some employers have found a direct increase in productivity when they initiated health benefits, since insured employees are more likely to see a doctor, take medication, and get well rather than to take many days off trying to recover from an illness on their own.
Trends such as wellness programs and recently enacted health care legislation further reflect the integral part health care plays as an employer-provided benefit.
Other benefits that are popular are time-off programs, such as vacation, personal leave, and retirement programs that employers contribute to and that allow employees to save money.
It's important to at least consider offering benefits that are most popular with employees to keep your work force happy and stay competitive with other employers. Keep in mind, the most common benefits offered by employers continue to include health insurance, paid holidays and vacation, and retirement plan benefits, despite the rising costs of doing so.
Employers should ask themselves what their employees want. The key to giving employees what they want and need (and consequently reaping the benefits in productivity, loyalty, and reduced turnover) is communication. The best way to find out what your employees want is to ask them. You might have informal conversations with them or do a quick survey where you ask them to rank a list of benefits from most valuable to least valuable. You may be surprised with the results.
For example, if you employ a lot of part-timers, health benefits may not be that important to them because they are getting health benefits from another source (from another full-time job, through a spouse's employer, or through a parent's health insurance). In that case, you might focus on offering other, less expensive benefits that would still be considered valuable by employees. Or, you may find that employees would prefer more cash compensation rather than any particular benefit.
Once you've determined which benefits you want for yourself and what your employees would prefer, figured out which benefits you can afford, and considered which benefits other employers offer, you're ready to begin the process of examining individual benefits in detail and putting your benefits compensation package in place.
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