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Insurance offered through OnPay Insurance Agency, LLC (CA License #0L29422)
Updated: April 28, 2023
Starting and running a business is no easy task — or hundreds of tasks, really. And once you’ve started hiring employees, the to-do list doesn’t really get any shorter. But one way to hire and retain the best talent is to offer your staffers great benefits, including the big three they want the most: health insurance, paid time off, and a retirement plan. Yes, there can be a lot to consider, but once you start to get a handle on how these benefits work, you’ll have more ideas for staying ahead of your competition.
Let’s dive into the basics of employee benefits so you can get started when you’re ready.
First, keeping your employees satisfied is key to retaining them — something crucial to your success in a tight labor market. It’s expensive to replace a staffer, and It’s hard to catch the eye of a sought-after candidate without the basic benefits and perks.
When employees feel supported in their workplace, they reciprocate with loyalty, higher morale, and a positive can-do attitude. Both health insurance and 401(k) plans top Glassdoor’s predictors of employee satisfaction.
Best of all, you’ll get to enjoy these benefits too. And when it comes to some, like 401(k) plans with employer matching, you’ll find some major business upside to offering a plan.
Also keep in mind that some benefits are required when companies reach a certain size. For example, if your company has more than 50 employees, you must offer health insurance or you’ll be penalized under the Affordable Care Act and pay some hefty fines.
So, where do you start when you decide it’s time to offer benefits to your employees?
First, determine your budget and what types of benefits you want to offer. Medical, retirement, and vacation benefits top your employees’ wishlists, but there’s a huge menu of options out there for you.
Here’s a thorough list of employee benefits (in rough order of employee preference):
At some point, the line between perks and benefits starts to blur, but you can get pretty creative with the benefits you offer your team.
An employee who can go to the doctor when they’re sick, hurt, or in need of preventative care is less likely to miss work. The same goes for caring for a sick family member. Plain and simple: a healthy workforce is more productive and less stressed.
According to the US Census, 56 percent of the country receive employer-sponsored health insurance. And, employer-sponsored benefits plans do still tend to be more affordable than ones purchased on the private market, especially when companies help subsidize the cost.
In addition, there are financial advantages to offering benefits to your employees — like tax credits and deductions. Depending on the size of your company, you may qualify for a plan through the Small Business Help Options Program (SHOP) that allows for tax credits up to 50% of the contributions paid towards your employee premiums. You can also deduct health insurance premiums that you pay as the business owner — but only certain ones, so talk to a tax attorney or financial advisor to be sure yours is included. And, if you withhold insurance premiums as pre-tax deductions, you’re lowering your employees’ taxable income and the related FICA taxes that you both have to pay.
When part-time employees get benefits it can have a positive impact on morale, productivity and keeps your top talent from looking to see if the grass is greener at another business.
Different plans will have different monthly premiums and annual deductibles. The cost of your plan will be determined by:
Generally, premium costs — the monthly expenses for coverage — are shared between the employee and employer, but how you divide it is up to you. More than a third of SMB workers are contributing more than half of the premium costs for family coverage. But you can also choose to 100% cover employee premiums (about 27% of small businesses do this). On average, the annual premium in 2018 for employer-sponsored plans was just under $6,896 for single coverage and $19,616 for family coverage — but this can vary a lot from place to place, so talk to a broker to get a better read on how much it will cost.
You’ll also want to consider administrative time and costs like using an HR software or payroll service provider to handle annual enrollments, new hires, and payroll deductions, or the salary of an HR person or benefits administrator for your team.
Now that you’ve taken care of keeping your employees healthy, it might be nice to give them some vacation time to enjoy. As you consider your vacation or PTO policy, take into account that 86% of employees say paid time off is important to them and 80% said more vacation time was a perk they’d take into consideration as part of weighing job offers. Generous vacation time and paid holiday policies are likely to be an incentive as you hire on new staff in a tight labor market.
But how much is this going to cost you? According to the US Department of Labor, employer costs for employee compensation averaged about $36.61 per hour in 2019 with paid vacations accounting for about $1.30 of that hour. Impact on labor costs is effectively 4 percent for 10 days or 80 hours of vacation time since most full-time employees work about 40 hours per week or 2080 hours in a year. That’s a very small investment in keeping your people rested, recharged, and happy. And, in fact, people who take vacations are have better morale, higher productivity, and are more likely to be recognized for good job performance.
You typically can choose to give any number of vacation or PTO days you wish but consult your state or unions to be sure they don’t have any specific requirements. The majority (76%) of employees working in a private industry have some form of PTO with the average worker getting 10 paid vacation days after one year of service. After five years, that average number bumps up to 13 days at companies sized 1-99 employees. Unlimited PTO policies have been a hot topic in the last couple of years, but they are still pretty rare.
No matter how many hours or days you give your employees, tracking paid time off requests and use can be tedious if you are doing it on a spreadsheet or by hand on a calendar in your office. Especially if your team has to knock on your door every time they want a day off or needs to know if the business is open on the day after Thanksgiving. HR or payroll software providers offer an easy way to keep up with requests, plus your employees can submit days off and check their accruals from their phone or computer without pulling you away from other things.
Retirement benefits are also a great benefit for your business. Employer-sponsored 401(k) plans have become the most mainstream option for employers. These plans offer tax-deferred retirement savings deducted directly from paychecks to help make it easier for employees to save. In addition, they also can make employees feel their company is invested in their future.
Many employers match the employee 401(k) contribution to help build a bigger nest egg. The most common employer match is 50 cents on the dollar — for up to 6% of their salary. While you are not always required to offer matching funds to your company’s 401(k) plan, it is something to consider if it makes financial sense for your business. It can also help you stay compliant.
If you’re recruiting, remember that highly-skilled workers are often more likely to take the position with a more robust benefits package. Adding retirement benefits to yours can give you an edge. Only about half of Americans are confident they’ll be able to retire comfortably, but the number goes way up when their employer offers a plan.
If you decide to offer retirement benefits as part of your employment package, you have a few 401(k) options depending on your business size and other factors. As you’ll see, there can be quite a few ins and outs, but your 401(k) provider will handle most or all of them for you, so there probably won’t be much additional work for you. There are usually setup fees ranging from several hundred to several thousand dollars, and assets under management fees (AUM) that you’ll have the option of paying yourself or passing on to employees.
Traditional 401(k)s allow eligible employees to make pre-tax income deferrals through payroll deductions. You can simply set up a plan and let employees enjoy the tax savings, but you’ll also have the option of making contributions on behalf of all of your team, making matching contributions based on employees’ elective deferrals, or offering year-end “profit-sharing” contributions.
Contributions made under this type of plan must meet so-called nondiscrimination requirements ensuring that low-wage earners have the same opportunity to participate in a plan as business owners and executives — and these must be tested annually.
Simple 401(k)s were created so small businesses could have a cost-effective way to offer retirement benefits. They are available to employers with 100 or fewer employees who received at least $5,000 in compensation last year. These plans are not subject to the annual nondiscrimination tests that apply to traditional 401(k) plans.
Safe Harbor 401(k) plans are also exempt from the nondiscrimination tests, but they require that your plan creates incentives (i.e. making matching or non-matching contributions) to encourage more of your employees to take part. There are some rules to make sure that your plan benefits all your company’s employees. A 401(k) provider can help you understand the costs and make the right choice.
Offering a retirement plan also reduces your gross wages, so it can help you save on employment taxes, and there are also tax credits of several thousand dollars available to help small business owners offset the cost of offering a plan. And don’t forget that you can also add yourself to the company retirement plan, which is an added bonus for your future savings.
Congratulations! You’ve now completed a crash course in getting started with employee benefits. We hope this inspires you to find plans that are right for your company and your employees. After all, health insurance, paid time off, and retirement savings can help you add and keep your great employees to build your business.