Benefits Toolkit: Understanding Employee Benefits

Employee benefits are perks that workers receive in addition to their normal wages and salaries. They can contribute significantly to employees’ overall well-being, job satisfaction and productivity, all of which ultimately affect an employer’s bottom line. They also play a crucial role in attracting and retaining talented workers.

Although creating a benefits package may seem daunting for small businesses competing with larger organizations, these employers can remain competitive by understanding employee wants and needs and tailoring benefits plans to meet employee desires.

Importance of employee benefits in retaining talent

This blog is the first in a series of articles that will serve as a guide to employee benefits for small businesses. These articles outline benefits requirements for smaller organizations and optional benefits programs that these businesses can use to attract talent. Furthermore, they summarize the different strategies employers can use to select, implement, and evaluate their benefits packages.

The Importance of Employee Benefits  

A comprehensive, impactful benefits package shows employees that their employer values them, which can help increase motivation and job satisfaction. Depending on the benefits offered, such as health insurance and wellness programs, employees may also experience improved health, translating to fewer missed workdays, increased productivity and reduced stress. These benefits may contribute to a positive company culture and happier, more focused workers.

Workers who are satisfied with their benefits packages are less likely to search for positions at other companies. This improves employee retention and reduces turnover costs. In fact, a recent Forbes survey found that 40% of employers say employees leave their jobs to find better benefits. Thus, a robust benefits package may also help employers attract new job candidates.

It’s important to be aware that certain employee benefits are required at the local, state and federal levels. Small businesses should consult a legal professional to ensure compliance with benefits regulations.

Why Employee Benefits Are Crucial for Businesses 

Small businesses often have limited resources and budgets compared to large enterprises. For this reason, small businesses may struggle to compete for talent with larger organizations that can offer higher salaries and wages. Fortunately for employers of small organizations, many Americans consider benefits as important as total financial compensation. A study by the Association of International Certified Professional Accountants found that 80% of Americans would choose a job with benefits over a job that offered 30% more salary with no benefits.

Additionally, having fewer employees enables small businesses to tailor their benefits directly to the needs of their employees, a strategy larger organizations may not be able to implement. This presents a unique opportunity for small businesses looking to stand out in the job market.

Employee benefits come in the form of insurance offerings, retirement plans, paid time off and other programs. In certain circumstances, state and federal law requires small businesses to provide certain benefits to employees, although these requirements vary. Other benefits are not required but are often offered to improve employee recruitment and retention.

Mandatory Employee Benefits for Small Businesses

Federal and local governments require organizations to provide certain benefits to employees. Benefits requirements may vary by state, employer industry and size. Failing to provide mandatory employee benefits could result in costly fines and penalties. Employers should review local, state and federal benefits requirements to ensure compliance. Small businesses should consult a legal professional if they believe they do not comply with benefits regulations.

For additional information on mandatory benefits offerings, explore the U.S. Department of Labor (DOL) resource, “Summary of the Major Laws of the Department of Labor.”


Workers’ Compensation
Most small businesses with employees must provide workers’ compensation insurance. This coverage can protect both employers and employees from costs, fees and litigation resulting from work-related accidents or injuries. It may help cover lost wages, disability costs, rehabilitation costs, medical treatment and funeral benefits for qualifying injuries or illnesses.

Workers’ compensation requirements for small businesses vary by state, business size, industry and other factors. Small businesses should consult the National Federation of Independent Business’s website for state-by-state workers’ compensation requirements.


Unemployment Insurance
Unemployment insurance is a joint state-federal program that may provide cash benefits to eligible workers. Each state administers a separate unemployment insurance program, but all states follow the same guidelines established by federal law. Unemployment insurance payments (referred to as “benefits”) are intended to provide temporary financial assistance to unemployed workers who are unemployed through no fault of their own. Each state sets additional requirements for eligibility, benefit amounts and the length of time benefits can be paid.


Social Security and Medicare
Employers are required to withhold Federal Insurance Contributions Act taxes from all employees. These taxes are composed of Social Security taxes, which provide insurance for those who are elderly or disabled or are survivors, and Medicare taxes, also known as the hospital insurance tax.


Family and Medical Leave
Businesses with 50 or more employees must provide unpaid family and medical leave under the Family and Medical Leave Act (FMLA). Enforced by the DOL, the FMLA mandates that all eligible employees must be allowed to take leave for serious health conditions experienced by them or their family members, to bond with newborns or newly adopted children, and for specific military family reasons.

To be eligible for family and medical leave, employees must work for a covered employer and have worked for that employer for at least 12 months and completed at least 1,250 hours of service . In addition, they must work at a location where the employer has at least 50 employees within a 75-mile radius.

Some states and jurisdictions have more restrictive requirements. Employers should familiarize themselves with their obligations under all applicable laws.


Disability Insurance
Disability insurance provides financial assistance or job protection to workers who become unable to work due to a serious illness or injury. There are two common types of disability protection:

  1. Short term-disability benefits generally last between 10 and 26 weeks and typically begin between one and 15 days of a qualifying injury or illness. This benefit provides guaranteed income for workers, often ranging from 40% to 75% of their original base pay.
  2. Long-term disability benefits may provide guaranteed income for more extended periods, ranging from two years to retirement age, depending on the policy. Although individual plans may vary, workers typically receive 60% to 80% of their base pay.

Currently, disability benefits aren’t required at the federal level, but small businesses in certain states may be required to provide coverage.


Health Insurance
Under the Affordable Care Act (ACA), small businesses with 50 or more employees must offer health insurance. Additionally, employer-sponsored plans must meet minimum essential care requirements laid out by the ACA.

Businesses with fewer than 50 employees aren’t legally required to provide health insurance; however, since a healthy workforce is essential for the success of any business, many small businesses choose to provide health care coverage even when it’s not required.

Voluntary Employee Benefits for Small Businesses

As the name suggests, voluntary employee benefits are not required by law. Employers may use voluntary benefits as an opportunity to strengthen their offerings and customize perks to meet employee needs. Although there is an additional cost to offering optional benefits, numerous advantages exist. Small businesses that provide voluntary benefits may experience greater employee retention, attraction, productivity and satisfaction.


Paid Time Off
Paid time off (PTO) refers to any paid absence, ranging from vacation and holidays to parental leave and sick days. A strong PTO policy enables employees to maintain a healthy work/life balance. In recent years, employers have increasingly offered unlimited PTO options for employees if time off doesn’t interfere with job performance.


Retirement Plans
Retirement plans allow employees to invest in their future financial security. They are also one of the most sought-after benefits. A 2023 Retirement Trends Report by digital recordkeeping platform Vestwell found that 98% of employees said it’s important that their employer provides a retirement plan. These plans are crucial to ensure workers feel confident about supporting themselves financially in retirement. Additionally, many retirement plans come with tax savings for both employers and employees. A strong retirement plan can boost employee well-being and increase loyalty. In the United States, 401(k)s are the most popular type of employer-sponsored plan, but there are many options available.


Life Insurance Benefits
Life insurance coverage is an optional benefit that can provide financial assistance to a worker’s family if they die unexpectedly. Many employers offer life insurance to provide peace of mind to employees whose families depend on them financially. Small businesses can also offer separate voluntary plans for workers’ spouses and dependents, increasing employees’ satisfaction with their benefits package.


Dental and Vision Insurance Benefits
Traditional health insurance plans don’t offer dental and vision benefits. However, these plans are crucial to catch early signs of disease and chronic health conditions before they become more serious, resulting in lost productivity and missed work. Dental and vision insurance plans are generally less expensive than standard health insurance and can significantly improve employee health and satisfaction.

Other Benefits
Small businesses that get creative with benefits offerings may be able to compete with the comprehensive offerings of larger corporations. Many talented employees may prefer tailored benefits plans to higher salaries. Here are some additional benefits for small businesses to consider:

  • Offering flexible work hours
  • Encouraging work/life balance
  • Providing the opportunity for remote work
  • Offering tuition reimbursement plans
  • Creating wellness programs
  • Providing mental health support
  • Offering discounted gym memberships

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