What Are Employee Benefits
Employee benefits are non-wage compensations you provide to your employees alongside their regular salaries or wages. These perks are designed to support their well-being, boost job satisfaction, and position your company as a desirable workplace. Benefits can be mandatory, as required by law, or voluntary, offered by you to gain a competitive edge in attracting and retaining talent.
Employees can pay a small portion of the cost, with you as their employer covering the rest. Offered on a monthly basis, the four main categories of employee benefits are:
- Insurance plans, such as life or health insurance
- Retirement plans, such as 401(k) plans
- Additional compensation plans, such as bonuses
- Time off policies, such as paid vacation or sick days
Most benefits are subject to income tax withholding and employment taxes because the IRS considers them part of the employee’s gross income for services rendered. When factoring in mandatory and extra benefits, they can account for up to 9% of your total compensation costs per employee, according to the Bureau of Labor Statistics.
Why Are Employee Benefits Important
Employee benefits contribute to both your employees’ well-being and your company’s success. For example, offering generous employee benefits packages can help you manage a positive employee lifecycle by attracting and recruiting top talent, improving employee health and job satisfaction, and retaining top talent. These benefits enhance your company’s competitive edge and productivity.
Let’s take a look at each of these advantages.
Attracting Top Talent
Up to 34% of employees see benefits as the second biggest motivator to look for another job. Clearly, employers who offer competitive benefits packages are more likely to draw in jobseekers, lending to their overall competitive edge in their industries.
Enhancing Employee Satisfaction
In a 2022 study conducted by LIMRA, 63% of employees said their benefits packages contribute to their decision to stay with a company. This means the benefits you offer your employees directly correlate to whether they are satisfied enough with their jobs. In addition, the number of benefits you offer may contribute to higher on-the-job satisfaction. In the same study, two-thirds of employees said they were satisfied with six or more benefits compared to only three out of 10 saying they were satisfied with one to three benefits.
Improving Employee Health
Health insurance is mandatory under the Affordable Care Act (ACA) for companies with more than 50 full-time or full-time equivalent employees. It also benefits businesses by ensuring healthier, more productive teams. Employees not worrying about a sick child or other dependent at home are often more focused at work.
Many health plans come with preventative care that can hinder the development of serious personal or familial illnesses. These plans may reduce underproductivity and minimize excessive time off, saving your company from financial and productivity loss.
Strengthening Employee Retention
Employees who can plan their retirements with your company are incentivized to stay long-term. You can encourage this kind of loyalty by offering pension and 401(k) retirement plans, among others. A pension plan could offer employees a retirement income, while a 401(k) plan offers an employer contribution to an employee retirement savings plan.
Employee Benefits Types
Employee benefits are divided into four categories. Below is an overview of each, followed by a table listing benefit options for each category.
Insurance Benefits
Insurance benefits may include health, dental, vision, life, and disability insurance. But to stand out in a competitive job market, you can also include these additional benefits:
- Accidental death and dismemberment (AD&D) policies: These plans are often add-ons to health or life insurance policies. They cover expenses related to the policyholders’ accidental deaths or dismemberments, such as if the holder loses a limb, vision, hearing, or speech in an accident.
- Short-term disability policies: These policies help employees keep afloat if they experience a sudden but transitory disability, such as a non-work illness, injury, or other medical condition.
- Flexible spending accounts (FSAs): These accounts are often part of healthcare plans and allow employees to set aside part of their pre-tax salary for healthcare expenses and co-pays, self-care expenses, and even child care.
- Long-term care insurance: This policy pays employees who need long-term care. It can cover assistance with everyday tasks like bathing, dressing, and eating; adult day care services; transportation; or a place in an assisted living or nursing home.
Retirement Plans
For companies of a certain size, retirement plans are part of the legally mandated offering. However, even smaller companies that are not required to provide them often do so to drive employee satisfaction and retention. Some examples of retirement plans you can offer as employee benefits include:
- 401(k) plans: Employees contribute a portion of each paycheck to save for retirement. You may also match these contributions, provide a partial matching program, or offer profit sharing. These 401(k) plans often come with employer tax benefits.
- SIMPLE IRA plans: Similar to 401(k) plans, these plans are usually offered by smaller employers. Employees can contribute funds from their paychecks, while your company can agree to match their contributions. Funds are contributed on a pre-tax basis, and employers also enjoy tax benefits from offering SIMPLE IRA plans.
- Employee stock ownership plans (ESOPs): These plans award employees ownership of the company in the form of stocks at retirement. In doing so, they incentivize active employees to work toward the company’s profitability and stay with the company until retirement.
Additional Compensation Plans
While employee benefits are often interchangeably referred to as “fringe benefits,” the latter are offered outside of the company’s standard or legally mandated benefits package. Even though some of these benefits are not provided in monetary form, I caution that many are considered taxable as part of employees’ wages. For example, while athletic club memberships are taxable, a tuition reduction program may not be.
Fringe benefits may include work-life balance benefits, personal development benefits, wellness benefits, family-planning services, and additional levels of standard benefits. Here are a few examples of fringe benefits:
- Bonuses: You may offer bonuses based on employee performance and/or company performance. These bonuses may be given annually or on an ad-hoc basis. Keep in mind that bonuses are taxable benefits.
- Athletic club memberships: These types of benefits offer employees access to health clubs, benefiting their health while helping them reduce health-related underproductivity or time off. These are taxable benefits.
- Tuition reduction programs: These types of benefits offer employees ways to develop new skills or qualifications, usually benefiting both the employee and the employer. In many circumstances, these benefits are not taxable.
Leave Benefits
Leave benefits give employees paid or non-paid time off. Some leave benefits are required by law (such as FMLA leave), while others are expected but not compulsory. Still, employers offer other benefits as added incentives for employees to stay with the company.
Here are some examples of other employment benefits related to leave:
- Vacation policies: These policies can be based on the time your employee has been with the company, a standard amount of time off per year, or unlimited time off per year.
- Holiday days off: Many employers provide time off for specific holidays or offer premium pay for employees who work on those days. International companies often have country-specific holiday leave policies.
- Organ or bone marrow donation leave: Some organizations offer up to a month of paid leave for organ donation and a week for bone marrow donation. Ultimately, the period will be up to you as the employer and the carrier you’re working with.
- Funeral leave: While not legally required, funeral leave provides paid time off to attend the funeral, usually of a close family member, demonstrating compassion during a difficult time.
Here are more examples of each type of employee benefit.
| Employee benefit type | Examples |
|---|---|
| Insurance plans |
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| Retirement plans |
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| Additional compensation |
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| Leave benefits |
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Mandatory Benefits
Employers are required to offer some benefits by state or federal law, or both. Opting out of providing such benefits, comes with penalties. For instance, failing to provide ACA-qualifying insurance can rack up a penalty of $5,000 per employee per year. However, minimum employee and rate requirements may differ from state to state.
| Benefit type | Description |
|---|---|
| Social Security and Medicare | Employers and employees are required to pay 12.4% tax on up to $168,000 of employee earnings. These funds then become available to the employee when they reach a certain age and often form part of employees’ retirement plans. |
| Unemployment insurance | To be required to pay unemployment insurance, your employee must have worked on any day of the week for at least 20 weeks during the calendar year for you, and they must have made over $1,500 in wages throughout the year. Employers pay both federal and state unemployment taxes, including 6% of the first $7,000 of employee annual wages for federal unemployment tax (FUTA). |
| Workers’ compensation insurance | This type of insurance protects people who are injured while on the job by covering their medical expenses and lost wages. The requirement to provide this type of insurance is state-specific. For instance, Texas does not require it for small businesses and Missouri only requires employers to provide it if they have four or more employees. |
| Disability insurance | Jersey, and Rhode Island. In other states, disability insurance is offered as a fringe benefit. Normally, this insurance covers wages, medical expenses, and pregnancy expenses for a short period of time. Rates and other coverage guidelines vary by state. |
| FMLA requirements | Some companies are required to provide FMLA coverage, meaning that, under certain circumstances, they must provide up to 12 weeks of unpaid, protected leave each year for employees. This leave can be taken for medical or familial reasons, such as a child adoption, a serious health condition, or caring for a seriously ill family member. Federal organizations, public agencies, schools and school boards, and private-sector employees with at least 50 employees within a 75-mile radius during 20 or more work weeks in a calendar year are required to adhere to FMLA requirements. |
| ACA requirements | Businesses with 50 or more full-time or full-time equivalent employees must provide employee health insurance under the ACA. Specifically, the plan must cover the employee and their dependents, including biological and adoptive children but not spouses, stepchildren, or foster children. |
| Consolidated Omnibus Budget Reconciliation Act (COBRA) | This coverage offers employees the option to keep paying for and retaining their health insurance after they leave the company. If your company offers group health, dental, or vision plans and you have 20 or more employees who worked at least 50% of the days of the previous calendar year, you must provide them with COBRA coverage. However, this does not apply to employees who are fired for gross misconduct. |
Best Practices For Employee Benefits
As you consider which benefits to offer your employees, here are four best practices to follow.
Offer Benefits to Remain Competitive
Small companies looking to attract top talent should consider offering benefits even if on a tight budget and not required by law. For those on very tight budgets, remember that benefits don’t have to cost a lot. Some benefits are even free. Here are examples of low-cost or free benefits you can offer:
- Free parking spaces
- Time off for volunteering
- Company discounts
- Public transit cards
- A gym membership
- Remote work or flexible working opportunities
- The option to bring pets to work
- Company gatherings
- Gift cards
- A small yearly bonus
Consider Your Employees’ Needs
As you choose the right employee benefits, consider the demographics of your employees. If your team consists mainly of young adults, offering short-term disability insurance might make more sense than long-term care insurance. Similarly, providing a local gym membership or tuition assistance could be more practical than frequent company gatherings for a globally dispersed team. Conducting an employee survey can help you identify which perks employees value most, enabling you to tailor your benefits to meet their needs effectively.
Use HR Software
Human resource (HR) or employee management software can simplify many aspects of managing your company’s benefits. From guiding new hires through enrollment to calculating and managing deductions, these tools remove much of the guesswork.
For example, ADP’s mobile app walks employees through open enrollment and provides detailed information. The software also integrates directly with payroll, ensuring deductions are calculated and applied automatically. Additionally, it offers insights into company-wide benefits spending, participation rates, and the most popular options among employees.
If your budget is limited, use our free HR software guide to find a cost-effective solution.
Clearly Communicate Your Employee Benefits
Choosing and enrolling in benefits can be overwhelming for your employees, so make the process easier by including clear instructions in your employee manual. For additional support, Workable provides a downloadable, easy-to-fill, guided, and free employee handbook template specifically designed to help communicate benefits.
Be sure to also offer employees support during the benefits selection process. Many HR software includes guided surveys to help employees choose the best options, but whether your software includes this feature or not, make sure your HR team is knowledgeable and available to answer questions.
FAQs
What are the top three most sought-after employee benefits?
According to SHRM, 88% of candidates look at the dental, health, and insurance benefits offered by potential employers. The CNBC/SurveyMonkey Workforce Survey found that 80% of employees value vacation time, while a separate survey, Ciphr found 67% of employees citing sick pay as their preferred benefit. Meanwhile, a Future Forum survey of 10,000 knowledge workers revealed that 95% care most about having flexible working hours.
Are employee benefits really necessary?
Most companies are mandated by law to offer certain employee benefits. For instance, ACA mandates that employers with more than 50 full-time or full-time equivalent employees provide a basic benefits package covering employees and their dependents. If they do not, they must pay an employer shared responsibility fee to the IRS on a yearly basis. Other required benefits include FICA contributions, state-mandated workers’ compensation insurance, and federal and state-equivalent unemployment insurance.
Beyond legal requirements, providing comprehensive benefits can be crucial to maintaining a competitive edge in the job market. Benefits can boost employee engagement, productivity, and retention, as well as attract top talent.
What is the standard benefits package in the U.S.?
By law, most companies must offer workers’ compensation, unemployment insurance, Social Security and Medicare contributions, and disability insurance. This applies only to companies that don’t fall under the minimum employee thresholds established by the ACA, FMLA, and COBRA.
