Jennifer Hartman is an HR Specialist and staff writer for Fit Small Business, with over 15 years of experience in accounting , payroll, and human resources .
Charlette has over 10 years of experience in accounting and finance and 2 years of partnering with HR leaders on freelance projects. She uses this extensive experience to answer your questions about payroll.
Employee benefits, some of which are required by law, are an essential part of your personnel budget and can have a direct impact on hiring and retaining top talent. Knowing what the four major types of employee benefits are can help you choose the right ones for your company, depending on your industry, employee needs, and budget.
If you already know the benefits you want to provide but need help creating a detailed program, then check out our guide on How to Set Up an Employee Benefits Program.
Medical benefits are those directly related to an employee’s health. These can include things like insurance coverage for medical expenses, reimbursement for expenses incurred, and flexible spending accounts (FSAs) that allow employees to set aside pretax money to cover healthcare costs. Some companies also offer wellness programs that promote healthy living and preventative care. Employees who participate in these programs may also be eligible for discounts on their medical bills.
Most Common Medical Benefits
What is it?
(Required for 50+ employees) Medical, dental, and vision insurance
Health Savings Account (HSA)
Pretax accounts for health expenses (does not expire)
Flexible Spending Account (FSA)
Pretax accounts for health, child care, commuting, or other expenses (expires annually)
Consolidated Omnibus Budget Reconciliation Act (COBRA)
(Required) Extends health benefits to workers who have lost their jobs
The Affordable Care Act (ACA) requires that companies with more than 50 employees provide healthcare coverage. That health insurance must pay for at least 60% of covered services. Employers can have employees contribute toward their insurance coverage, but they can’t force them to pay more than 9.83% of their household income toward the coverage.
If you are a business with fewer than 50 employees, then you don’t have to provide small business healthcare insurance. However, you will get a tax credit if you do. To be eligible, you must have fewer than 25 full-time equivalent employees, your employees’ average annual wages must be under $50,000, and you must pay at least 50% of the premium cost.
As the world moves toward gender equality, so should your company’s benefits options. An excellent way to achieve this equality is to offer domestic partnership options (e.g., same-sex spouse or same- or opposite-sex live-in partner) within your healthcare benefits.
This add-on to healthcare lets employees put money into dedicated savings accounts specifically for healthcare issues. It’s only available for people enrolling in high-deductible health insurance plans.
For 2022, the maximum annual contribution allowed in an HSA is $3,650 for an individual and $7,300 for a family. Employees aged 55 or older can also add $1,000 a year as catch-up contributions. Savings in an HSA are allowed to grow without expiring at the end of the year. Participants may opt for pretax payroll deductions or make tax-deductible contributions independently. HSA contributions are never taxed, and the government doesn’t tax the interest earned in these.
Health FSAs are also pretax savings accounts that do not incur taxes on the distribution. Any employee can set one up, but again, they must cover health expenses. Such expenses can include eyeglasses, alternative healthcare like acupuncture, and even over-the-counter medicines.
FSAs have a limit of $2,850 per year, and the accounts expire at the end of the year, meaning the money must be spent or lost. Additionally, you can set up FSAs for dependent care or commuting expenses. These, too, are tax-advantaged benefits.
Employers are required under COBRA to offer a continuation of an employee’s healthcare coverage for up to 18 months (36 months with specific qualifying events) after the employee’s enrollment ends. It’s meant to protect the enrollee and their family while they look for alternate coverage. COBRA applies in the following circumstances:
- A covered employee’s death
- A covered employee’s job loss or reduction in hours for reasons other than gross misconduct
- A covered employee’s becoming entitled to Medicare
- A covered employee’s divorce or legal separation
- A child’s loss of dependent status (and therefore coverage) under the plan
While COBRA is a requirement for any small business that offers healthcare coverage, the premiums are typically 100% paid by the covered employee, plus a 2% administrative fee. Companies can, however, elect to contribute to some or all of the premium costs of the coverage for up to 18 months.
Using a full-service HR provider, like Gusto, can help small businesses with all their employee needs, including medical benefits processing.
An employee’s benefits may vary depending on their job and company, but many employers offer some form of insurance to their employees. This type of insurance can protect employees from a variety of risks, including medical expenses, loss of wages due to injury, and death. Some company benefits may be mandatory for all employees, while others may be specific to certain positions or companies.
Most Common Insurance Benefits
What is it?
Generally, group term life insurance
Replaces salary for time lost due to injury; good for construction or agriculture
(Required) Provides temporary financial assistance to employees who lose their job through no fault of their own
Life insurance is a popular benefit choice because companies harness the power of groups to secure lower rates for their employees. In some cases, employers will provide small policies ($2,500) for free. Of course, companies with more dangerous jobs, like construction, security, or law enforcement, will want to look at higher value policies. One nice aspect for employers is that you can sign up for up to $50,000 tax-free coverage for your employees.
Companies wanting group life insurance must show it benefits at least 70% of their employees and meet other specifications. It may cover spouses and children as well. Different types of group insurance you may want to consider include:
- Group accidental death and dismemberment
- Business travel accident insurance
- Split-dollar life insurance; both employers and employees pay into this insurance, making it an investment, as well as an insurance policy
Disability insurance provides compensation for salary lost during short- or long-term leaves of absence due to injury or illness. It does not have to be because of a job-related incident. However, it can cover the workers’ compensation requirements, as long as it meets your state’s standards. It’s a good idea for businesses in industries with high injury rates, like roofing, agriculture, or logging, to offer this benefit to employees.
Workers’ compensation replaces salary lost due to accident or injury on the job. Each state has requirements concerning which employees must be covered, the types of eligible injuries, the length of time employees have to file a claim, and the defenses employers can use against claims (such as self-inflicted injuries, willful misconduct, or injuries related to substance abuse on the job).
Many short-term disabilities last less than 13 weeks, but 26 weeks is the usual plan purchased. It replaces up to 67% of a worker’s lost pay. Long-term disability takes up where short-term leaves off and runs for an average of six months. It covers 50% to 60% of lost income and can continue up to retirement. Long-term disability may mean the inability to perform the tasks of the occupation on hand when injured, or it may mean the inability to perform work at all.
Companies are required by law to pay unemployment insurance. This insurance provides cash stipends to people who lose their jobs through no fault of their own, such as a layoff. They must be actively seeking new employment to qualify for unemployment.
Whether or not you must pay unemployment insurance depends on how much you compensated an employee, for how long, and what industry you’re in. Some state regulations may apply.
Paid Time Off Benefits
Paid time off (PTO) benefits can take many different forms, but all of them offer employees a break from work. They can be used for things like taking care of a sick family member, visiting a loved one in the hospital, or just taking a much-needed vacation. Some employers also provide special paid time off benefits for parents with young children, employees who have to take care of an elderly parent, or those who are required to work during national holidays.
Most Common PTO Benefits
What is it?
Paid time off given to employees to use how they wish; typically a certain number of days per year
Leave provided to employees when they, or their loved ones, are ill
Time off provided for observed holidays throughout the year, generally decided by each individual employer
Family and Medical Leave
(Required) Up to 12 weeks of unpaid, job-protected leave for births, injury, illness, and caregiving
Paid time off given to employees upon the death of an immediate family member
Paid or non-paid time off given to employees to complete their civic duty in court
Vacation time can be given all at once at the beginning of the year (typical amounts are 10–15 days). It can also be accrued on a monthly or quarterly basis, capping out at the total amount of vacation days available. Other considerations include adding a PTO day for volunteer work or offering your employees unlimited PTO.
Work-life balance ranks among the top considerations applicants have when deciding on a company, even above pay. Having a clear, flexible, and generous PTO package helps your company stand out and shows employees that you value them as people.
Paid sick leaves are a specific number of days given to employees outside their regular vacation PTO and are used either when the employee is ill or to care for a sick loved one. While there are no federal laws that require a company to provide sick leave for its employees, there are some state sick leave laws in place that you should be aware of.
Some companies combine vacation and sick leave into one policy, while others separate the two. The typical amount of sick leaves that employers provide (barring state laws) is five days.
For standard paid holidays, most companies start with specific days off, noting particular major holidays, like New Year’s Day, Memorial Day, Fourth of July, Labor Day, Thanksgiving, and Christmas. Some add a “floating holiday,” such as a birthday or religious holiday, that the employee can choose themselves. Others give their employees all federal holidays off.
Ultimately, the number of days and types of holidays offered are up to the employer. There is no set amount of paid holidays required by law.
Family and medical leave is required by law, and it’s an essential benefit for those who want the ability to help family members or recover from injuries or illness without worrying about losing their jobs. Thus, you may want to consider providing a company benefit that’s beyond the legal requirements.
By Family and Medical Leave Act (FMLA) rules, employees are entitled to up to 12 workweeks of leave in 12 months for:
- Birthing a child and caring for the newborn child within one year of birth
- Foster parenting, including the fostering and care up to one year of the child being placed with the employee’s family
- Caring for the employee’s spouse, child, or parent who has a severe health condition
- Attending to a serious health condition that makes the employee unable to perform the essential functions of their job (including mental illness)
- Any qualifying circumstance arising out of the fact that the employee’s spouse, son, daughter, or parent is a covered military member on covered active duty. FMLA leave is extended to 26 workweeks of leave in 12 months if your employee is the spouse, son, daughter, parent, or next of kin of a military service member with a severe injury or illness.
This type of leave is a specific number of days (usually up to five working days) to grieve and attend the funeral of an immediate family member. It is up to the company to decide if this leave is paid or unpaid; however, companies will typically offer this as a paid leave.
While there are no federal or state laws that require companies to provide bereavement leave to their employees, it is generally a benefit offered in good faith. One exception is Oregon, under the Oregon Family Leave Act, which by law allows for up to two weeks of leave after the death of a family member.
At some point in an employee’s career, they may be called to serve on jury duty. This is a required civic duty that employees must attend, and employers must provide time off for them to serve. While there are no federal laws that require jury service to be paid, some state laws do require payment.
If your company policy states jury duty is paid, then it must be offered to every employee regardless of state laws.
A professional employer organization (PEO), like Rippling, can help small businesses with all their HR needs, from managing PTO to payroll processing to retirement benefits management.
Retirement benefits are offered by employers to employees to make retirement more financially secure. They can come in different forms, such as traditional pensions, 401(k)s, 403(b)s, or individual retirement accounts (IRAs). Each has its own benefits and drawbacks. Knowing which type of retirement benefit is best depends on many factors, including your employees’ age, career path, and income.
Most Common Retirement Benefits
What is it?
Retirement funds provided by an employer to employees; received at the time of retirement
401(k) and IRA
Individual retirement accounts; generally contributed by both the employee and employer
Tax-deferred annuity plans used by nonprofits to help employees save through a combination of pretax and post-tax contributions.
Stocks and stock options; great for startups and fast-growing businesses
Pensions are typically retirement plans offered by employers to their employees. It is a specified sum of money that an employee can expect to receive upon retirement, usually in the form of periodic payments. The amount of pension received will depend on the employee’s age, length of service, and salary at the time of retirement.
Although no longer commonly offered by private and small businesses, some companies may still offer pension plans to employees who have tenure (or a predetermined length of service with the company). It is a way of thanking employees for their loyalty and continued service to the company, and a way to assist with retirement.
The average worker changes companies five to seven times in their career, so most companies offer flexible plans like an IRA or 401(k). These tax-deferred savings plans let employees invest part of their salary.
Many employers match and contribute up to 5% of their employees’ contributions. When an employee leaves a company for another company, they can roll over their contributions to their new retirement plan.
Used solely by nonprofit organizations, a 403(b) is a retirement savings plan that allows employees to save through pre- and post-tax contributions. It is similar to the 401(k) in that both employees and employers can contribute funds.
A 403(b) plan is available only to certain employees of public schools, those of tax exempt organizations, and ministers.
A great way to get your employees invested in your company for the long run is to provide equity benefits in the form of stock or stock options. Typically, options are issued by the company, cannot be resold, and may be exercised only after the stock has been vested. Startup companies often use these to reward early employees, especially those who persevere through a rough beginning stage. Fast-growing companies can use them as an incentive for employees to push the company to succeed.
Another type of equity in the company is in the form of incentive bonuses. These are paid out to succeeding employees, usually every quarter, based on how well the company is performing. The company will take a portion of the quarterly profits (e.g., 20%) and split it between eligible employees.
Traditional & Nontraditional Benefits
Traditional employee benefits typically include things like insurance, leave time, and pretax programs workers can pay into and sometimes get matching funds for. Nontraditional benefits, on the other hand, include everything from a company car to free lunch on Fridays.
Companies often use nontraditional benefits to define and reinforce their company culture. Businesses that promote the idea of fun and camaraderie at work may have an in-house arcade or planned events on company time. Those promoting teamwork might sponsor peer-reward programs like Kazoo, which combines employee recognition, performance management, and surveys into one platform. Health-conscious companies might have fresh fruit, a juice bar, or treadmill desks.
Nontraditional benefits can be fluid and are limited only by your imagination, so you can try anything. If it’s not a good fit, then change it. Traditional benefits, however, are generally static and built into job agreements.
Common Examples of Nontraditional Benefits
What is it?
Flexible Work Options
Employees can choose their work hours (typically a 40-hour workweek)
Employees work from home (or other location with suitable Wi-Fi)
Company provides reimbursement of tuition for eligible courses (can be a write-off to deduct up to $5,250 per employee
A compensation package paid by the company to assist employees in relocating to a different job site (typically another city, state, or country)
Company provides free or discounted products to employees
Company reimburses employees for items such as Wi-Fi, computers, office equipment, etc.
Employee Referral Bonus
Payments for the referral of an employee (typically after 90 days)
In-house gym, gym memberships, etc.
Reimbursement of commuter items (e.g., train passes, rideshare, parking, etc.)
Company pays up to a certain amount (e.g., $1,000 after five years of employment) for an employee to take a vacation
Importance of Offering Employee Benefits
A competitive benefits package tops the list of things high-quality applicants look for in an organization—and not providing one can take you out of the race. For instance, older generations, like Boomers and Gen X, are attracted by FSAs that let them plan for medical expenses, as well as retirement benefits that recognize that they don’t have 30 years to save.
Click through the tabs below for advantages of providing employee benefits for the employer and the employee.
- A comprehensive benefits package can increase high-quality candidates and assist in employee satisfaction and retention.
- Premiums on company benefits are tax-deductible, which translates to savings for small businesses.
- Offering employee benefits can result in increased productivity as employees feel a sense of job security.
- A high-quality benefits package can decrease salary expectations.
- Employees exhibit increased overall satisfaction with their jobs when they know they have good benefits.
- An employee’s total compensation is increased over salary alone when comprehensive benefits are included.
- Companies that provide benefits, such as quality healthcare and 401(k), can help remove financial burdens for many employees.
- Benefits create a better work-life balance atmosphere for employees.
Employee benefits can also determine the kind of people you eventually hire. For example, by providing relocation assistance, you can cast a wider net. Tuition assistance will attract millennials and Gen Z, who value the opportunity to learn and grow. And, young families will look for flexible PTO, which includes generous maternity and paternity leave.
Employee benefits are an essential part of your personnel budget and can have a direct impact on hiring top talent and employee retention. You should consider which benefits to include, as these can reflect your company values, promote loyalty, and help your employees with work-life balance.
We recommend Gusto for small businesses that need payroll services as well as HR options and benefits. If you are interested in a PEO option with strong benefits management, then consider Rippling, which brings all HR and payroll functions into one automated platform.