Nowadays, offering employee benefits is pivotal to your company’s overall success. A robust benefits program improves retention and recruitment efforts, boosts employee morale, and increases job satisfaction. But some employers may not know that benefits fall into two categories: those required by law and those that are voluntary.
Knowing which benefits are mandatory under federal and state law will ensure you aren’t penalized for not providing them. Additionally, understanding that offering voluntary benefits is important even though it isn’t required will help you stand out and remain competitive in a tough labor market.
In this article, we’ll compare mandatory and voluntary benefits, list common types of each, and explain why adding a wide variety of voluntary benefits to your compensation package is important.
Check out how fringe benefits can help you recruit and retain employees in our guide
What are mandatory benefits?
Mandatory benefits, sometimes called required benefits, are benefits or perks required by federal, state, or local law.
The U.S. Bureau of Labor Statistics1 states that "legally required benefits provide workers and their families with retirement income and medical care, mitigate economic hardship resulting from the loss of work and disability, and cover liabilities resulting from workplace injuries and illnesses."
While federally mandated benefits are the same for everyone, state regulations can vary. For example, offering disability insurance is required in California, Hawaii, Rhode Island, New Jersey, New York, and Puerto Rico. Therefore, it’s crucial to know which benefits are required by state and local entities in addition to federal guidelines.
Common types of mandatory benefits
There are a few traditional benefits that employers have the legal obligation to offer their employees. We’ll review the common ones below so you can check if you comply with federal regulations.
Workers' compensation is the first benefit you’re required to offer your employees. This form of coverage reimburses your employees for medical care, treatment, rehabilitation, leave, or missed income if they miss work due to a critical illness or injury they experience while at work or performing their job duties.
While government-mandated, workers' compensation is handled mainly on a state-by-state basis, meaning additional coverage requirements will vary based on location. Texas is the only state that doesn’t require employers to offer workers' compensation insurance.
Unemployment insurance provides cash benefits to eligible workers who become unemployed through no fault of their own. Employers and employees contribute to unemployment coverage, but only individuals who meet eligibility requirements can receive income for up to 26 weeks.
The type of insurance you’ll need will vary by state, but employees are generally eligible for unemployment if they:
- Are unemployed through no fault of their own (i.e., laid off, downsizing, etc.)
- Meet their state’s requirements for wages earned time worked during an established period referred to as a "base period."
- Meet any additional state requirements.
Social Security and Medicare contributions
Social Security and Medicare are federally-mandated benefits that all U.S. employees pay into during employment to use later in life.
Social Security ensures employees will have an income when they reach retirement age or if they become permanently disabled. Medicare, not to be confused with Medicaid, provides medical coverage for individuals 65 or older or those with certain disabilities or chronic illnesses.
Employees and employers pay Medicare and Social Security taxes as payroll deductions. Your employees’ paychecks and Form W-2s will show the contribution amounts.
Whether health insurance is mandated or not depends on your company’s size. The Affordable Care Act (ACA) only requires applicable large employers (ALEs) with 50 or more full-time equivalent employees (FTEs) to offer affordable health insurance that provides minimum value.
If an ALE doesn’t offer sufficient or affordable access to medical coverage to at least 95% of their FTEs, they could be subject to costly penalties. However, organizations with fewer than 50 FTEs don’t need to offer health insurance and aren’t at risk of a fine for not doing so.
Family and Medical Leave Act (FMLA)
Like with health insurance, only companies with 50 or more employees are required to follow the Family and Medical Leave Act2 (FMLA). This act requires these companies to provide workers with up to 12 weeks of job-protected, unpaid leave for specific medical and family issues.
To qualify for family and medical leave, employees must:
- Work at your company for at least 12 months.
- Have previously worked a minimum of 1,250 hours before the start of the leave.
- Work within a 75-mile radius of your company’s location.
Some medical and family reasons to apply for leave include the birth of a child, caring for a spouse or family member with a severe medical condition, adopting or fostering a new child, and tending to their own serious health condition.
What are voluntary benefits?
Voluntary benefits, also known as fringe benefits or perks, are other forms of indirect compensation offered to employees, typically at no cost or at reduced, affordable rates, in addition to their regular salary and mandatory benefits.
Organizations of any size can provide voluntary benefits to their employees. The employer decides which ones and how many to offer, and participation is often optional. Typically, employees who participate in a benefit share a reduced cost with their employer through regular payroll deductions.
The IRS considers voluntary benefits a form of payment for services, even to non-employees, like 1099 contractors and international workers. This makes voluntary perks a good way to increase your employees’ total compensation packages.
Common types of voluntary benefits
You can offer your employees a large variety of supplemental benefits, including in-office perks, accident insurance, legal services, student loan repayment programs, and more. Let’s look at a few additional benefit options in the sections below.
Health benefit plans
If you’re not an ALE and therefore not required to offer medical insurance to your employees, that doesn’t mean you shouldn’t offer a health benefit. Small group health insurance is available to organizations with fewer than 50 employees in most states through the Small Business Health Options Program3 (SHOP) exchange or directly from an insurance company.
If you don’t want or can’t afford group health insurance, there’s a cost-effective way to support your workers. A health reimbursement arrangement (HRA) provides employees with tax-free reimbursements for their individual health insurance premiums and qualified out-of-pocket medical expenses. They’re also tax deductible and payroll tax-free for employers.
Health stipends are a taxable, voluntary insurance benefit similar to HRAs but with fewer compliance regulations. There are no eligibility requirements or minimum allowance amounts, so you can offer your employees as little or as much money as you like to help them pay for their healthcare costs.
Other than health stipends, there is a wide range of other stipends you can offer your employees. For example, with a wellness stipend, you can reimburse your staff for wellness services and other out-of-pocket expenses, like gym memberships, fitness classes, exercise equipment, and meditation apps.
If you have workers with families (or even pets), you can provide child care, daycare, or pet insurance stipends to help offset the cost of childcare and pet-sitting services when your employees need to come into the office.
You can even offer remote work stipends if you’re a remote or hybrid company looking to reimburse employees for their in-home office equipment.
Flexible work schedules
A flexible work schedule, or flex schedule, allows employees to begin and end their work hours in a way that best fits their personal lives. With flexible work hours, you can offer options like a 9/80 schedule, allowing employees to work 80 hours over nine days instead of the usual 80 hours over ten days.
Flex schedules also allow for flexibility in terms of location. For example, flexible work arrangements can include remote work and hybrid work, which is a mix of time working in the office and at home.
Dental and vision insurance
Improper dental care can lead to severe health issues like diabetes, cardiovascular disease, and cancer caused by gum disease. Similarly, proper vision care helps employees maintain healthy eyesight while they’re at work so they can get tasks done—and improve their daily lives. This makes dental and vision coverage just as important as regular health insurance.
Adult vision and dental insurance are generally not included in group health plans, so they’re considered supplemental insurance. You can add supplemental benefits to your compensation package in addition to a group health insurance plan, or simply reimburse your employees for dental and vision expenses with an HRA or stipend.
Paid time off (PTO)
According to a PeopleKeep survey, 93% of employees say that paid time off (PTO) is a vital voluntary benefits option, yet only 79% of employers offer it. So if you’re not currently offering PTO, now is an excellent time to add it to your compensation package.
PTO combines vacation, sick time, and personal time into one bucket that employees can use for taking paid time off work. Some organizations accrue their PTO based on how many hours employees work per year or how long they’ve been at the company, while others offer unlimited PTO.
Either way, having a robust PTO policy ensures your employees don’t come to work when they’re sick. It also ensures employees won’t come to work when they feel ill, have time to recharge when they need a mental break, and can make time for vacations and trips with loved ones.
Commuter benefits, or transportation perks, are especially handy if your employees work primarily in the office or are hybrid. These benefits help cover all or part of your workers’ commute-related out-of-pocket costs, like gas, transit passes, parking passes, and more.
The IRS allows employers to provide certain commuter benefits with pre-tax dollars for qualified expenses. However, you can make the benefit taxable to your employees if you want to reimburse employees for more types of transportation expenses than the IRS allows.
Why you should offer voluntary benefits at your organization
While they are mandatory, there are several advantages to providing your employees with voluntary benefits.
The biggest advantage to voluntary benefits is to attract and retain top talent. With a combination of mandatory and voluntary benefits, employees can tell you care about them and their wellbeing. This increases employee satisfaction, improves company loyalty, and makes it more likely to attract candidates from your competitors and retain them for the long haul.
Voluntary benefits are also an excellent way for your employees to save money, especially in an emergency. For example, short-term disability insurance provides income for employees recovering from a critical illness or injury. With an HRA or health stipend, workers can pay for medical expenses if they don’t have the savings to cover the cost themselves.
Also, some voluntary benefits, like certain types of life insurance, have a guarantee issue option. This means coverage isn’t dependent on health status, so more individuals can enroll at discounted group rates. Offering benefits that provide financial safety is always a great way to win over employees, especially with rising healthcare costs.
Your benefits package directly reflects your company’s beliefs and values—and your employees recognize that. When you offer a variety of voluntary perks, you show your employees they're appreciated, and their happiness is important to you. Simply put, it’s a great start to becoming an employer of choice and an organization that puts employees first.
If your current benefits plan only includes mandatory benefits, you’re missing out. Employees today consider a well-rounded benefits package as essential as salary when considering to work to remain at your company. To make the most impact, you should offer a mix of required and non-required benefits to better support your employees in and out of the workplace.
If you’re new to providing a voluntary benefits plan, we can help. At PeopleKeep, we offer organizations of all sizes benefits administration software so employers can offer a variety of reimbursable benefits and perks. Simply contact us, and we’ll get you set up with an HRA or stipend that your employees will love.