How to Create a Solid Employee Benefits Package
In their book Start Your Own Business, the Staff of Entrepreneur Media Inc. guides you through the critical steps to starting your business, then supports you in surviving the first three years as a business owner. In this edited excerpt, the authors provide a general overview to help you create a benefits package that attracts great employees.
Once you have great employees on board, how do you keep them from jumping ship? One way is by offering a good benefits package. Heading the list of must-have benefits is medical insurance. But many job applicants also demand a retirement plan, disability insurance, and more. Tell these applicants no benefits are offered, and top-flight candidates will often head for the door.
The positive side to this coin: Offer the right benefits, and your business may just jump-start its growth. Give employees the benefits they value, and they’ll be more satisfied, miss fewer workdays, be less likely to quit, and have a higher commitment to meeting the company’s goals. Research shows that when employees feel their benefits needs are satisfied, they’re more productive.
The law requires employers to provide employees with certain benefits. You must:
- Give employees time off to vote, serve on a jury, and perform military service
- Comply with all workers’ compensation requirements
- Withhold FICA taxes from employees’ paychecks and pay your own portion of FICA taxes, providing employees with retirement and disability benefits
- Pay state and federal unemployment taxes, thus providing benefits for unemployed workers
- Contribute to state short-term disability programs in states where such programs exist
- Comply with the federal Family and Medical Leave Act
You aren't required to provide:
- Retirement plans
- Health plans (except in some states)
- Dental or vision plans
- Life insurance plans
- Paid vacations, holidays, or sick leave (except in some localities)
In reality, however, most companies offer some or all of these benefits to stay competitive.
Most employers provide paid holidays for Christmas Day, New Year’s Day, Memorial Day, Independence Day, Labor Day, and Thanksgiving Day. Many employers also either allow their employees to take time off without pay or let them use vacation days for religious holidays.
Most full-time employees will expect one to two weeks’ paid vacation time per year. In explaining your vacation policy to employees, specify how far in advance requests for vacation time should be made, and whether in writing or verbally.
Complications quickly arise as soon as a business begins offering benefits, however. That’s because key benefits such as health insurance and retirement plans fall under government scrutiny, and it is very easy to make mistakes in setting up a benefits plan.
And don’t think nobody will notice. The IRS can discover in an audit that what you are doing does not comply with regulations. So can the U.S. Department of Labor, which has been beefing up its audit activities of late. Either way, a goof can be very expensive. You can lose any tax benefits you have enjoyed, retroactively, and penalties can also be imposed.
The biggest mistake? Leaving employees out of the plan. Examples range from exclusions of part-timers to failing to extend benefits to clerical and custodial staff. A rule of thumb is that if one employee gets a tax-advantaged benefit—meaning one paid for with pretax dollars—the same benefit must be extended to everyone. There are loopholes that may allow you to exclude some workers, but don’t even think about trying this without expert advice.
Such complexities mean it’s good advice never to go this route alone. You can cut costs by doing preliminary research yourself, but before setting up any benefits plan, consult a lawyer or a benefits consultant. An upfront investment of perhaps $1,000 could save you far more money down the road by helping you sidestep potholes.
Providing benefits that meet employee needs and mesh with all the laws isn’t cheap—benefits probably add 30 to 40 percent to base pay for most employees. That makes it crucial to get the most from these dollars. But this is exactly where many small businesses fall short, because often their approach to benefits is riddled with costly errors that can get them in financial trouble with their insurers or even with their own employees. The most common mistakes:
Absorbing the entire cost of employee benefits. Few companies are footing the whole benefits bill these days. The size of employee contributions varies from a few dollars per pay period to several hundred dollars monthly, but one plus of any co-payment plan is that it eliminates employees who don’t need coverage. Many employees are covered under other policies—a parent’s or spouse’s, for instance—and if you offer insurance for free, they’ll take it. But even small co-pay requirements will persuade many to skip it, saving you money. These days, many companies charge a much higher rate to cover spouses who could otherwise get coverage from their own employer.
Covering nonemployees. Who would do this? Lots of business owners want to buy group-rate coverage for their relatives or friends. The trouble: If there is a large claim, the insurer may want to investigate. And that investigation could result in disallowance of the claims, even cancellation of the whole policy. Whenever you want to cover somebody who might not qualify for the plan, tell the insurer or your benefits consultant the truth.
Sloppy paperwork. In small businesses, administering benefits is often assigned to an employee who wears 12 other hats. This employee really isn’t familiar with the technicalities and misses a lot of important details. A common goof: not enrolling new employees in plans during the open enrollment period. Most plans provide a fixed time period for open enrollment. Bringing an employee in later requires proof of insurability. Expensive litigation is sometimes the result. Make sure the employee overseeing this task stays current with the paperwork and knows that doing so is a top priority.
Not telling employees what their benefits cost. “Most employees don’t appreciate their benefits, but that’s because nobody ever tells them what the costs are,” says PRO’s Silverstein. Many experts suggest you annually provide employees with a benefits statement that spells out what they are getting and at what cost. A simple rundown of the employee’s individual benefits and what they cost the business is very powerful.
Giving unwanted benefits. A work force composed largely of young, single people doesn’t need life insurance. How to know what benefits employees value? You can survey employees and have them rank benefits in terms of desirability. Typically, medical and financial benefits, such as retirement plans, appeal to the broadest cross-section of workers.
If workers’ needs vary widely, consider the increasingly popular “cafeteria plans,” which give workers lengthy lists of possible benefits plus a fixed amount to spend.