This article goes over the basics of employee benefit plans. It outlines what benefits are legally mandated, what benefits are desired by employees, and what benefits businesses can offer that have low or no costs.
Introduction
Whether you own a small business or a large business, the pay and benefit package that you offer your employees will greatly impact the kinds of employees that you will be able to attract to your business, and it will greatly impact your ability to keep good employees. In order to put together the best benefit plan that your company can afford, you need to know the basics of benefit plan planning, and you also need to know what benefit options are available to you and your employees.
Why offer benefits to your employees?
Offering benefits to your employees can be done for a number of reasons. First there are several employee benefits that you are required by law to offer such as: Social Security, Medicare, unemployment insurance, and workers’ compensation insurance.
Social Security is a federally mandated retirement program that requires matching contributions from employees and employers equal to about 6.2% from each person or 12.4% total. Medicare is a health care program that is also funded by matching contributions based on an employee’s wages.
For Medicare employees are required to contribute 1.45% of their wages earned, and the employer is required to match this amount.
Unemployment insurance benefits are another required by law benefit that all employees are entitled to. However, unlike Medicare and Social Security, the employer is required to front the entire cost of this insurance with the amount being based upon the amount of wages that the employee earns and state specific rates. The FUTA rate is currently about 6.2%. In addition to federal unemployment insurance, you will probably also have to make contributions to your state’s unemployment insurance program, also known as the SUTA tax.
Worker’s compensation is the final required employee benefit. It protects the employee if they get injured on the job and are either temporarily or permanently unable to work. Like unemployment insurance, employers are required to cover the entire cost of this benefit as well.
Another reason why a company offers benefits to its employees is to attract and retain qualified employees. In order to entice qualified people to apply for positions within your company, or to encourage loyalty from your current employees, you may offer such benefits as health insurance, disability insurance, life insurance, paid vacations, and a retirement plan. These benefits may be offered either as entirely employer funded, or you may offer these benefits as partially employer funded benefits. You can also grade the amount funded by the company based on performance, seniority, or employment status.
Employee benefits can also be used as a morale builder, as an incentive to increase productivity, or even as an incentive to increase your company’s customer base. Goals can be set and any employee that meets the goal receives the selected employee benefit. For example a sales goal can be set at $10,000 for a specific week. Any salesperson that is able to meet this sales quota gets a cash bonus of $500. Bonuses based on employee performance are yet one other per diem benefit that you can offer your employees.
The final reason companies offer employee benefits, is to distinguish between levels of employees. Employee benefits are graded based on position within the company, level of responsibility, or difficulty of the job. For example an entry-level position may only offer the legally required benefits like Social Security, Medicare, unemployment insurance, and workers’ compensation. However, senior executives may be offered these required benefits as well as a retirement plan, profit sharing, health insurance, and dependent care assistance.
Common Employee Benefits
When we think about employee benefits there are several benefits that come to mind: health insurance, life insurance, retirement plans, paid leave for vacation or illness, and possibly disability insurance. All of these benefits are common to most companies that offer an extended benefit plan to its employees. Employers often select this particular combination of benefits because they feel that they cover the basic concerns and needs of their employees.
Health Insurance
Health insurance is perhaps the most sought after employee benefit in the nation today. This is mostly due to the ever-increasing price of private health care in the United States. Getting individual health insurance is very expensive and beyond what most workers can afford, especially if they have a family or have a preexisting medical condition. To help reduce the cost of purchasing health insurance, employers can buy into a group health care plan that offers the employer a sizable discount if they are able to enroll a large number of employees in the program. Employers can offer to pay all or part of the monthly insurance premium allowing even entry-level employees the opportunity to be covered.
The benefits that health insurance creates for the employer is that is (1) attracts qualified employees, (2) it encourages employee loyalty, (3) it provides employees with a piece of mind that they have coverage in case of a medical emergency, (4) it provides employees with the resources needed for preventative medicine, and (5) it reduces absenteeism due to untreated illnesses or medical conditions.
Optional medical coverage plans like dental and vision can also be added to the standard medical program, or it can be offered as an optional or supplemental option for every employee that qualifies for health insurance.
Life Insurance
Life insurance is an employee benefit that many people want. It provides the employee’s loved ones with money in case of the employee’s death, to cover final expenses, medical bills, or to pay for their living expenses. It is an especially important benefit for those employees that have families with young children.
The two main types of life insurance are survivor income plans and group life insurance plans. The survivor income plan pays the beneficiaries of the insurance regular monthly payments to help cover their living expenses after the employee dies. The second life insurance type, the group life insurance plan pays out the benefit in a lump sum to the beneficiary. This amount is based on how much coverage the employee selected during their coverage, and it is usually purchased in $10,000-$25,000 increments.
Retirement Plans
With the uncertainty of whether or not Social Security will still be available in the future, planning for retirement is especially important for employees. Employers need to address this concern by offering their employees a way to protect themselves and provide for their retirement years. To do this there are several options that an employer can offer.
First a ROTH or regular IRA savings program can be offered to employees. Contributions to these programs are voluntary, employers can contribute to employee programs, and employees can determine how much they want to contribute to their IRA program each month. The benefit of a ROTH IRA is that a person can withdraw money from their account to buy a house without penalties. However, contributions to this type of IRA are not tax free, but when the employee starts making withdrawals during their retirement they don’t have to pay taxes on the money. This plan is appropriate for employees that will be in a higher tax bracket when they retire. Regular IRA contributions are tax free, however, money withdrawn at retirement is taxable.
Participants can contribute up to $2000 per year, as long as it does not exceed what they actually earned.
Participants can only make contributions to their account until they are 70 years old.
Deposits have to be made prior to filing personal income tax returns. (April 15).
The benefit of pre-tax dollar contributions may be limited or even eliminated if the contributor makes more than $25,000 for a single person or $40,000 for a married couple.
Simplified Employee Pension (SEP) is another retirement benefit option that is suited for small businesses. The benefits of this plan are that it doesn’t require IRS approval, more money can be deposited each year (up to $30,000 or 15% of annual earnings), the amount of money contributed can vary year to year based on the employee’s preferences, contributions in most cases are pre-tax dollars, and planning materials are provided free of cost on the IRS’s website. (IRS Form 5305). The requirements for this retirement plan is that: (1) the employee is 21 years old, (2) the program must be offered to all employees who have worked 3 of the last 5 years, and that (3) the employee has to have earned at least $374 (1992).
The 401(k)/profit sharing retirement plans are also a common retirement benefit plan that can be offered to employees. Here contributions are made with pre-tax dollars, which reduces the employee’s tax liability for the year. It is a flexible plan with low account maintenance costs. The benefit of this program is that the contributions made by the employee are pre-tax dollars, and the contributions made by the employer are tax deductible as a business expense. Anther benefit of this program is that employees can get loans against their 401(k) if they need money for a vacation, to make home improvements, or to pay medical bills. Employers find this retirement option appealing because it is the most inexpensive type of retirement plan to operate. While there are many benefits to this program there are limitations and tests that can be applied to the program that limits the amount of deferrals that can be made, and that also set minimum contribution limits.
Other retirement planning programs that can be offered to employees include stock ownership plans and money purchase plans. In the stock ownership plan employees are given stocks as a bonus each year they work. When they retire they can sell the stocks to get money to live on. In the money purchase plan, employers simply make annual monetary contributions to an employee account that is to be used as a retirement tool.
Paid Leave
Paid time off is another popular employee benefit that most employers offer their employees. Here the amount of paid time varies based on the amount of hours an employee works, how long they have worked for the company, and what their job is. Some employers base the amount earned on a standard lump sum number of paid hours that an employee accumulates during a year. Others base the amount on a formula that bases the amount of time off earned on the number of hours worked. Employees can use their accumulated paid time off for personal days, vacation, or sick leave.
Disability Insurance
Disability insurance is not the most common of employee benefits, and in most cases is probably offered as an option insurance that employees can purchase. There are two types of disability insurance available, short-term disability and long-term disability insurance.
Short-term disability insurance is intended to cover employees who are temporarily unable to perform the tasks associated with their job. Benefits begin on the first or eighth day of inability to work and are paid for a maximum of 26 weeks. The amount paid to the employee is based on their salary and the number of normal hours worked in a week and usually range between 60 and 80% of the employee’s salary.
Long-term disability insurance is intended to cover employees who are incapacitated for longer than 26 weeks. Benefits offered by this insurance begin paying out after short-term disability insurance ceases at 26 weeks and continues as long as the person is unable to work, or until they reach a normal retirement age. The amount of money paid out is based, like short-term disability insurance, on the amount of money the employee received in wages while they were working, and is usually between 60 and 80% of their normal salary. In cases that long-term disability is needed, Social Security disability is also often implemented as a device to offset employer provided long-term disability benefits.
Low or No Cost Benefits You Can Offer Your Employees
The cost of benefits is often the factor that determines whether or not a company can offer them to their employees. While some of the flashier benefits can be well beyond what some small businesses can afford, there are benefits available that you can offer that won’t cost you an arm and a leg.
Discounts – Talk with companies that are in your company’s neighborhood and see if you can arrange to get discount coupons or discounted rates for your employees. This will help increase patronage to local businesses, and it will save your employees money on food, beverages, and services that they want or need.
Pick-up/Drop-off Service – Another service that you can negotiate with local businesses is pick-up and drop-off services. Talk to dry cleaners, restaurants, copy centers, etc. to see if you can arrange free pick-up and drop-off services for your employees. Again this would increase patronage for the local businesses and it would save your employees time and money.
Free In-House Education Programs – Offer your employees lunchtime seminars, classes, lecture series on industry issues. This benefit will not only create employees that are better trained and better qualified to perform their jobs, it can give lower level employees a chance to add skills to their repertoire and allow them to qualify for higher level positions within your company.
Group Insurance Rates – Even if your company cannot afford to fully fund employee benefits like health insurance, life insurance, and retirement options, you can enroll your company in these types of programs, administer them through payroll, and gain group discounts for your employees. While you are not paying for employees to participate in these programs, you are getting them a sizable discount on the products that are offered through these programs.
Professional Services – Another great benefit that you can offer your employee are free professional services. What professional services that are available will greatly depend on your business, but if you are a CPA you can offer your employees free advice on tax issues or financial planning, and if you are a lawyer then you can offer your employees free legal advice and assistance. Other types of businesses can also offer their employees similar professional services by allowing employees to talk with company lawyers, accountants, business managers, or other professional staff members that can act as a mentor in helping the employee develop their career.
Interest Free Employee Loans – Offer your employees advances against their paychecks or personal loans. This may be a little tricky to set up, but those employees that have been with the company for a set number of years may qualify to borrow money and pay it back through payroll deductions. Payroll advances can also be handled rather simply by advancing the employee what they have already earned but have not yet been paid for. A check can be cut for the amount needed and then deducted from payroll when pay day rolls around. This is an especially valuable benefit for companies that pay once a month.
Enroll in a Credit Union Program – This option will provide your employees with an increased savings interest rate, the benefits of direct deposit, and access to quality banking services.
Direct Deposit – Convenience is the key to pleasing most business people. Offer your employees direct deposit for their paychecks and save them a trip to the bank.
Wellness Programs – Offer your employees health seminars, programs, and activities that promote good health. For example have a quit smoking seminar or workshop, install gym equipment like a treadmill in the lunchroom, or organize a daily walk around the block club. These efforts will not only reduce absenteeism due to health issues, it will motivate your employees to better their lives.
Free Parking – Negotiate with the parking commission or designate free employee parking near your company, or on your company’s property. Saves time and money for employees.
Business Cards – Provide your employees with free business cards and a title. Professional looking business cards can now be formatted and printed right from your computer in smaller quantities, making them more affordable than they have been in the past. Utilize your desktop publishing skills to give your employees a way to promote your company and their career.
Flexible Work Schedule – While not appropriate for every company, allowing your employees to flex their work schedule around their family and personal responsibilities. This helps to promote loyalty and retention of good employees.
Telecommute – If practical you can also allow your employees to telecommute a couple days a week from their homes. This allows parents to spend more time at home, and it allows employees with elderly parents at home to take care of them while still getting their work done for you. This helps to reduce the amount of money you have to spend on temporary employee services and overtime.
Comforts – Provide your employees with a comfortable work space. Add comfortable chairs and couches to the break room, hang pictures on the walls, infuse the air with gentle air freshener, and purchase comfortable work chairs and desks.
Free Food and Drink – Provided your employees with free coffee and snacks.