Small business employee benefits
As a small employer, designing an affordable and competitive benefits package can be challenging. But taking the time to investigate your options and pick the right benefits and perks can help you attract and retain talented workers.
Looking to offer better employee benefits? Talk to our team to find out how we can help.
Are you a small employer ready to offer employee benefits?
In today’s tough labor market, small businesses often struggle to offer affordable employee benefits that can compete with those offered by larger employers. Providing your employees with standout benefits and perks keeps employees satisfied, increases your company’s productivity, and makes you an employer of choice. But if you have a smaller budget, you must consider the cost and the value that each perk brings.
In this complete guide, we’ll explain what employee benefits are, why small employers should offer them, and how much they cost. We’ll also review popular types of employee benefits and explain how benefits administration software can help you manage them effectively.
Topics covered in this guide include:
What are employee benefits?
Employee benefits are any form of perks or indirect compensation that employers provide to their workers in addition to their regular salary or wages. This includes mandatory benefits that local, state, or federal governments require and voluntary benefits, also known as fringe benefits.
Employee benefits can also have no direct monetary value. Non-monetary perks include reward and recognition programs, paid time off (PTO), and flexible schedules. For small employers with limited budgets, offering a combination of monetary and non-monetary employee benefits is essential.
You can structure your employee benefits in two ways:
- Organizational-oriented: Employers select and own organizational-oriented benefits. Instead of allowing employees to choose the benefits or plans you offer, you decide what perks you want to provide, and employees choose whether or not to participate in each one.
- Consumer-oriented: Employees choose consumer-oriented benefits. However, the employer funds them through contributions—a dollar amount given to employees that they can use to spend on the benefits that are right for them.
Why should small businesses provide employee benefits?
Many small employers believe a large salary is all they need to entice employees to their organization. But if you want to stay competitive in today’s job market, having a comprehensive benefits package is a must.
Let’s dive deeper into three reasons small employers should offer employee benefits.
They help you attract and retain workers
A robust employee benefits package is vital to recruiting and retaining talented workers. Our 2022 Benefits Survey Report found that 83% of employees say an employer’s compensation package is essential to whether or not they accept a job. This means that providing benefits is an essential step in your hiring process.
In addition to helping you bring new talent in the door, your benefits package will help keep your workers around long-term. A recent study found that 80% of current employees want benefits and perks more than a salary increase. Therefore, if you want a high employee retention rate, your benefits package must keep your employees satisfied so they don’t look for new opportunities.
They highlight your company values
Today’s employees want to work for a company that shares the same values as them. A Qualtrics survey found that 56% of workers wouldn’t even consider working at a company that doesn’t share their values. You can use your benefits package to reflect your company culture and attract candidates with the same values and beliefs as you.
For example, suppose your company is committed to a healthy work-life balance. In that case, you can offer a generous PTO policy and a travel stipend so employees can take time off to explore new places and take in new experiences. Your benefits package can be an effective tool to show your employees how you can support them both in and out of the workplace.
They improve your employees’ well-being
Offering a variety of employee benefits not only shows your staff you care about them but also improves their overall health and well-being. For example, a flexible work schedule, like a hybrid or 9/80 schedule, can reduce stress and employee burnout, leading to higher productivity. Tuition reimbursement is another benefit that can improve your employees' financial and educational well-being.
By giving your employees multiple benefits to choose from, they can participate in benefits that work best for their individual needs.
What benefits must small businesses offer to employees?
Many benefits are voluntary for small employers, meaning you can choose whether or not you want to offer them at your organization. However, some employee benefits are mandatory under federal law, like health insurance coverage or contributing toward your employees’ Social Security and Medicare benefits.
Benefit requirements vary by state or city, so it’s important to look up the employee benefits laws in your location (and the locations of any remote workers) before designing your compensation package to ensure you remain compliant.
The following are employee benefits that federal or state governments often require:
- Health insurance: The Affordable Care Act (ACA) requires all organizations with 50 or more full-time equivalent employees (FTEs) to provide affordable health insurance that meets minimum essential coverage (MEC) to at least 95% of their full-time employees and their dependents or pay a tax penalty.
- The ACA doesn’t require employers with fewer than 50 FTEs to provide health insurance plans.
- Unemployment insurance: All U.S. employers must pay a federal unemployment tax to support unemployed individuals. To receive unemployment benefits, individuals out of work must meet specific criteria. The tax rates and regulations for unemployment insurance vary by state.
- Workers’ compensation insurance: Every state except for Texas requires employers to offer their employees workers’ compensation insurance if they have an accident, injury, or illness in the workplace. This insurance covers medical and rehabilitation costs and provides partial wages due to disability or time off work for recovery.
- Disability insurance: While not a federal requirement, many employers provide disability insurance if an employee must take a short or long-term leave of absence due to an illness or injury.
- Only California, Hawaii, New Jersey, New York, and Rhode Island currently require employers to provide their employees with short-term disability insurance.
- Family and Medical Leave Act (FMLA): Under the FMLA, all organizations with 50 or more employees must provide unpaid family and medical leave to employees employed for at least a year.
- Some states require paid family and medical leave. This includes California, Colorado, Connecticut, Delaware, Hawaii, Maryland, New Jersey, New York, Oregon, Rhode Island, Washington, and the District of Columbia.
- Time off for specific situations: In most states, employers must provide employees time off to vote, serve on jury duty, and perform military service. Most states don’t require employers to pay their employees for this time off.
- Retirement benefits: Many states require employers with a specific number of employees to offer retirement benefits, such as a 401(k).
Many states and cities also require employers to provide paid sick leave, pay out vacation days, and reimburse remote employees for work-related expenses.
What are examples of small business employee benefits?
In the following sections, we’ll cover some of the most popular fringe benefits and explain how you can offer them.
Health benefits are the most sought-after employee benefits an employer can offer. While traditional health insurance can be too costly for small organizations, there are alternative options you can consider.
How it works
As the traditional health insurance method, group health plans cover employees and, potentially, employees’ spouses and dependents.
Most small employers purchase group health insurance from private companies or on the Small Business Health Options (SHOP) marketplace. If you have fewer than 25 employees and have a SHOP plan, you may qualify for the Small Business Health Care Tax Credit.
There are several types of health plans available, including:
An HRA is an IRS-approved health benefit used to reimburse employees, tax-free, for out-of-pocket medical expenses and, in some cases, individual health insurance premiums.
The federal government designed some HRAs specifically for small employers, which have annual maximum contribution limits. In contrast, others are for organizations of all sizes with no contribution limits.
An HRA is an excellent way to provide a quality health benefit to your employees without the cost or complexity of group plans.
The four most popular types of HRAs are:
Health stipends are a fixed amount of money employers offer employees to pay for health insurance premiums and out-of-pocket medical costs.
Employers typically add stipends to an employee’s paycheck as extra wages, so the IRS considers them taxable income.
Health savings accounts (HSAs)
HSAs allow employers and employees to contribute money on a pre-tax basis that employees can withdraw and spend on qualifying out-of-pocket expenses.
Flexible spending accounts (FSAs)
An FSA is a spending arrangement that allows employees to use pre-tax money for various eligible expenses. Both employers and employees can contribute to an FSA up to a set annual limit.
The most popular form of FSA is a healthcare FSA, but other types cover expenses outside medical care.
The most common types of FSAs are:
With a self-insured health plan, employers run and assume the risk of providing health benefits to their employees.
Many employers get stop-loss insurance with their self-insured plan to alleviate some risk.
Supplemental insurance plans help employees pay for services and out-of-pocket expenses their major medical insurance policy doesn’t cover.
Supplemental insurance policies include the following:
- Dental and vision plans
- Life insurance plans
- Critical illness insurance
- Accidental death and dismemberment insurance
- Accident insurance
- Disability insurance
- Hospital indemnity insurance
- Short- and long-term care insurance plans
- Medicare supplement plan or a Medigap plan
- Prescription drug coverage
Employees can purchase supplement insurance on their own. But if you want to boost your benefits package by providing your employees with greater coverage for more than just healthcare items, offering a variety of supplemental policies is effective.
You can also use a GCHRA to supplement your group health insurance plan. Also known as an integrated HRA, this health benefit allows you to reimburse employees for out-of-pocket expenses the group plan doesn’t cover, such as costs before your employees reach their deductibles.
Stipends allow you to provide your employees with a set amount of money to pay for various expenses, like remote work, travel, and education costs. There are no limits to what your employees can use a stipend on, so you can be as creative as you like when designing your stipend benefit program.
You can offer your stipend as a spot bonus, on a regular basis, like quarterly or annually, or using a reimbursement model. Using the reimbursement model, you only pay your employees when they submit proof of an eligible expense, giving you more control over how your staff can use the benefit.
With PeopleKeep, you can create custom perks for any expense categories you'd like, such as the following:
- Technology stipends
- Childcare stipends
- Family stipends
- Meal stipends
- Wellness stipend
- Professional development stipend
- Housing or cost of living stipend
- Leisure stipend
Some stipends are tax-free, like mileage reimbursements, but most are taxable income to the employee. While some tax-free stipends have minimum or maximum contribution limits, there’s no limit for taxable benefits. So, you can offer as much money as your budget allows so your employees can get the most out of the benefit.
Flexible work arrangements
Flexible working arrangements are becoming increasingly popular with employers. A recent survey found that 73% of managers believe flexible working options have increased productivity. While many employers are choosing to return to the office, allowing your employees to control their schedules and create a better work-life balance for themselves can keep them happier and better engaged.
Flexible work arrangements include remote, hybrid, and flexible hours or schedules. If you allow flexible work arrangements, consider adding a remote work stipend. These stipends will enable you to reimburse your employees for their home office equipment, cell phones, internet bills, and other expenses that help them stay successful when they work from home.
Paid time off (PTO)
In contrast to separate paid sick time, vacation time, and holiday time perks, PTO combines all time off categories into one system that employees can use to take time off work. You can use an accrual system based on hours worked or tenure, allow annual rollovers, or offer unlimited PTO.
Drafting a robust PTO policy has many advantages. It helps employees rest and relax so they can return to work recharged and prevents the spread of illness in the workplace by allowing workers to take time off to tend to illnesses. Most importantly, offering PTO shows your employees that you encourage them to spend time with family and friends outside of work.
Financial insecurities are a significant problem for employees at work. According to a recent survey, one in three employees say money troubles have negatively impacted their productivity, and 56% of employees spend more than three hours each week thinking about their finances.
The following are a few financial benefits and programs that employers can offer to support their employees' monetary concerns:
- Salary increases: Annual raises are always an excellent way to keep up with inflation and the cost of living. Employees like to feel appreciated for a job well done through a raise. But keep in mind that more employees nowadays are looking for added benefits over salary increases, so don’t rely solely on raises.
- Stock options: Employee stock options not only offer potential extra income and financial security, but they also give your staff a sense of ownership in your company and encourage them to work toward the business’s overall success.
- Financial literacy programs: As known as financial wellness programs, these courses teach your employees to make better financial decisions to help them reduce debt, save money, and feel more financially secure in their future.
- Monetary rewards: As part of a rewards or recognition program, cash rewards, gift cards, retention bonuses, or job performance bonuses are all ways to motivate your employees and reduce their financial woes.
One of the best benefits you can offer your employees is a retirement benefit. There are many types of retirement plans to choose from, but all go a long way toward guaranteeing your employees financial security and peace of mind as they prepare for retirement.
The following are three common benefits that employers can offer for retirement:
- Simplified employee pension plan (SEP): Employers can make direct tax-deductible contributions to their employees' retirement with a SEP. Only employers may contribute to a SEP, and all contributions made to SEP IRAs are 100% vested to the employee.
- Simple IRA: A Simple IRA is a great benefit for small employers offering a retirement plan for the first time. They don’t have start-up and operating costs, and both employers and employees can contribute to the account. Employee contribution limits are higher, whereas employer contribution limits are lower than other retirement plans.
- 401(k): These plans are employer-sponsored with high contribution limits for the employer and employees. Employers typically match the employee’s contribution up to a certain amount. The most common types of 401(k)s are traditional and Roth plans.
Choosing the proper retirement benefit for your organization takes planning. You’ll need to consider your company size, preferred contribution match, tax reporting requirements, and more. The Department of Labor can help small businesses learn more about their options.
Family benefits are a broad range of perks you can offer your employees to cover various services, items, and circumstances. For instance, family benefits can include family planning perks like fertility benefits and access to time off via paid parental leave.
A family stipend is your best bet if you want to cover family-related expenses. This stipend can cover childcare, elder care, pet care, adoption expenses, funeral and burial costs, injury expenses, and more. Offering your employees more ways to provide for their families will improve company loyalty, reduce financial stress, and help your staff stay focused at work.
Education benefits help employees with all aspects of their education. This includes offering them financial assistance with their tuition costs, implementing a student loan repayment program, or providing access to continuing education classes so they can earn their GED or college degrees.
Another form of education benefits is professional development opportunities. These opportunities help employees to learn new skills that they can use to further their careers, including offering or providing the funds for workers to attend webinars, conferences, trainings, and other classes.
In either case, you can support your employees’ educational endeavors with a professional development stipend that they can use to pay education-related expenses, like books, online course fees, and more.
Wellness benefits and programs help employees achieve all aspects of a healthy lifestyle. Unlike health benefits, wellness benefits include other services and programs outside traditional health coverage, like on-site access to employee health screenings, nutrition classes, weight loss programs, stress management programs, and other benefits.
Outside of workplace wellness programs, you can empower your employees to live a healthy lifestyle with wellness stipends. You can reimburse your employees for their wellness expenses with a wellness stipend, such as fitness trackers, yoga classes, exercise equipment, meditation apps, gym memberships, and more.
Wellness stipends allow your remote workers to participate in your employee wellness benefits by not having to be on-site to attend the classes and programs that are best for them.
Commuter or transportation benefits help your employees pay for daily commuting costs to and from work. Transportation benefits include providing mileage reimbursement, gas cards, transit or parking passes, and more. In addition to relieving financial burdens, commuter benefits can reduce your carbon footprint.
Some local and federal programs offer commuter benefits on a pre-tax basis as long as they follow IRS regulations. However, you can offer your employees a taxable commuter and transportation stipend for any transit or commuter-related expenses.
Pet insurance is quickly becoming a popular employee benefit. Like regular health insurance, employees can use pet insurance to cover their pet’s medical expenses. This is particularly beneficial if your employees have older pets that need more healthcare as they age.
Coverage typically comes in three levels: Accident-only plans, comprehensive plans, and wellness plans. Wellness plans are usually an “add-on” option to an accident-only or comprehensive plan.
You can partner with an insurance carrier and offer a group pet insurance plan like a traditional group health plan. Or, you can offer a pet care stipend that will enable your employees to pay for pet insurance and other expenses, like boarding costs, pet food, and more.
Employee assistance program
The competitive job market has increased employee burnout worldwide. To help your workers navigate the stress of their work and personal lives, you can add an employee assistance program (EAP) to your benefits package.
EAPs are mental health resources that help employees resolve work and personal issues that may negatively impact their lives, like relationship troubles, financial stress, health and wellness struggles, and more. Employees can access EAP services in the office or at home, meaning remote employees can also participate.
Employers typically fund EAPs, but the services employees access are confidential. Employees reach out to mental health professionals via phone, online, or in person in a secure location at the office so their conversations remain private.
How much do employee benefits cost?
Now that you understand all the employee benefits available to you, it’s time to cover how much your benefits package could potentially cost. Knowing the costs and value of each benefit can help you choose the right benefits for your organization, employees, and budget.
According to a U.S. Bureau of Labor Statistics report, employee benefits for private industry workers comprise 29.4% of total compensation costs, 38.1% for state and local government employees, and 30.9% for civilian workers. Insurance benefits comprised 7.3%, 11.2%, and 8% of compensation costs, respectively; legally required benefits accounted for 7.5%, 5.3%, and 7.1%, respectively.
Offering employee benefits may require a substantial upfront cost, but they offer advantages that will help your business succeed in the long run. For example, offering PTO reduces absenteeism due to illness and increases productivity.
A robust benefits package also shows employees you care about them, making your company more attractive to job seekers and reducing your recruitment costs.
How can small businesses administer employee benefits?
While you can self-administer your employee benefits, handling administration on your own can be time-consuming, complicated, and expensive. A third-party administrator can help you manage some processes, but if you want more control, consider benefits administration software.
Administering employee benefits for your small business with benefits administration software allows you to manage some or all your perks through a single platform, which saves you time, reduces errors, and keeps you safe from potentially costly penalties.
At PeopleKeep, we help thousands of small businesses offer personalized employee health and lifestyle benefits. With our benefits administration software for HRAs and employee stipends, you can offer your employees the ability to use their benefits for the expenses that matter to them the most.
With our HRA administration software, you can offer your employees one of three types of HRAs: a QSEHRA, ICHRA, or GCHRA. Our team reviews your employees’ medical receipts, guaranteeing health privacy, and we store documentation digitally according to federal regulations. When an employee’s medical expense is verified and approved, our software notifies you and prompts you to submit the reimbursement payment.
Our WorkPerks employee stipend administration platform allows you to design custom employee stipends for any expense category you choose. Your funds stay with you until you approve employees' reimbursement requests.
With our HRA and stipend software solutions, you can easily manage your benefits in minutes each month without hassle so you can focus on your business and employees.
Are you interested in offering small business employee benefits with PeopleKeep?
At PeopleKeep, we’re here to help you build a benefits package that suits your unique needs and budget. Our easy-to-use software and award-winning customer service allow you to easily administer HRAs and employee stipends, so you can provide personalized health and lifestyle benefits without having to juggle multiple vendors or spend time tackling pesky administrative tasks.
Speak with a PeopleKeep personalized benefits advisor to get your questions answered and for help designing a flexible benefits package.
Frequently asked questions about small business employee benefits
Do small employers have to offer health insurance?
Small employers with fewer than 50 full-time equivalent employees (FTEs) don’t have to offer health insurance to their workers. However, the federal government requires organizations with 50 or more FTEs to provide health insurance that meets minimum essential coverage (MEC) or pay a penalty to the IRS.
How much do small businesses spend on employee benefits?
According to the U.S. Bureau of Labor Statistics, employee benefits for private industry workers comprise 29.4% of total compensation costs, 38.1% for state and local government employees, and 30.9% for civilian workers. Insurance benefits comprised 7.3%, 11.2%, and 8% of compensation costs, respectively; legally required benefits accounted for 7.5%, 5.3%, and 7.1%, respectively.
What employee benefits must small businesses offer to their workers?
Under federal law, employers may have to follow the Affordable Care Act (ACA) health insurance requirements, comply with the Family and Medical Leave Act (FMLA), or pay unemployment taxes for all employees if they employ above a specific number of employees. Additionally, most states require all employers to have workers’ compensation insurance and allow employees time off for specific situations, like jury duty.
Depending on your state or organization type, you may have to provide disability insurance, paid sick leave, payout vacation time, or reimburse your remote employees for work-related expenses.
What employee benefits are taxable and tax-free?
Certain employer-sponsored health plans, health reimbursement arrangements (HRAs), flexible spending arrangements (FSAs), health savings accounts (HSAs), pre-tax retirement plans, and commuter benefits are pre-tax benefits. Employers deduct these types of benefits from an employee’s paycheck before federal income taxes are applied, reducing the worker’s tax liability.
In contrast, employee stipends, post-tax retirement plans, disability insurance, life insurance, and garnishments are provided on a post-tax basis, meaning they’re taxable to employees.
To learn more, read our article on what expenses an HRA can reimburse.