A Quick Guide to Employee Benefits

Understanding and offering a comprehensive employee benefits package is crucial to attracting and retaining top talent. When presented with an enhanced benefits package, 73% of employees would be more inclined to remain with their current employer for an extended period of time.

This article will provide valuable insights into the various types of benefits your business should consider offering in order to attract and retain top talent. We’ll cover the reasons for offering benefits, the different types of employee benefits, and best practices for creating an effective benefits program.

What are employee benefits?

Employee benefits are non-wage compensation offered to employees beyond their regular salaries or wages. These benefits often include health insurance, retirement plans, paid time off, disability insurance, and life insurance.

More comprehensive employee benefits packages may encompass wellness programs, tuition reimbursement, flexible working hours, remote work options, parental leave, and employee assistance programs. These benefits aim to enhance employee satisfaction, well-being, and work-life balance, making your company more attractive to current and potential employees.

Reasons for offering employee benefits

Businesses should offer various employee benefits to their employees for many reasons. Some of these reasons include:

• Competitive advantage in hiring top talent. A comprehensive benefits package can make your company more attractive to potential employees, giving you a competitive edge in the job market.
• Employee engagement. Benefits like flexible work hours and wellness programs can boost employee engagement, leading to a more committed and motivated workforce. In a survey of thousands of HR professionals across the U.S., 90% of participants said health care was a crucial employee benefit, while 83% highlighted the importance of flexible work arrangements and leave time.
• Employee retention. In their Annual U.S. Employee Benefits Trends Study, MetLife found that 73% of responding employees felt that a robust benefits offering would help them decide to remain with an employer.
• Enhanced productivity. A study by the International Foundation of Employee Benefit Plans suggests that companies with high levels of productivity offer benefits like paid leave, health care, retirement, flexible hours, and wellness benefits. These benefits can contribute to a more productive and focused workforce.‍
• Improved employee well-being. Offering benefits like health care, mental health support, and wellness programs can help improve the overall well-being of employees, leading to a healthier and happier workforce.‍
• Employer branding. A generous benefits package can enhance your company's reputation as an employer that values and cares for its employees, making it more appealing to current and potential talent.‍
• Tax benefits. In some cases, offering employee benefits can lead to tax savings for the company, making it a financially advantageous strategy. For example, in the United States, employer contributions to health insurance premiums may be tax-deductible, reducing the overall taxable income for the company and resulting in potential tax savings.

Types of employee benefits

From health plans to fringe benefits (i.e., extra perks provided to employees beyond their regular salaries or wages), many different types of employee benefits exist.

Types of employee benefits to consider:

• Health insurance
• Retirement plans
• Paid time off and holidays
• Wellness programs
• Disability insurance
• Life insurance
• Flexible spending accounts
• Employee assistance programs

1. Health insurance

Health insurance is a vital benefit for employees worldwide. In countries with nationalized health care, employers may offer supplemental insurance to cover expenses not included in the public system. In countries with privatized health care, such as the United States, health insurance benefits are often a primary concern for employees.

These are some of the services and insurance types that fall under the “health and medical insurance” umbrella:

• Health insurance. Health insurance provides coverage for medical expenses, with various insurance plan types (e.g., PPOs, HMOs, HDHPs) offering different levels of deductibles, copayments, and premiums. These plans can include options like Preferred Provider Organizations (PPOs), Health Maintenance Organizations (HMOs), and High Deductible Health Plans (HDHPs).
• Dental insurance. Dental insurance covers preventive measures and procedures, such as teeth cleanings, X-rays, fillings, and major dental work (e.g., crowns and bridges).
• Inclusive health benefits. Inclusive health benefits cater to diverse employee needs, including transgender health care (hormone therapy, mental health care, and surgical procedures).
• Telemedicine or telehealth. Telehealth supports remote medical care through electronic communications, reducing employee absenteeism and increasing productivity.
• Prescription drug coverage. Prescription coverage offers partial coverage for medications prescribed by a doctor, with employees paying the remaining cost.
• Mental health benefits. Mental health benefits cover mental health care costs, including counseling, treatment for mental illness, and substance abuse treatment.

2. Retirement plans

An essential component of many compensation packages, retirement plans help offer your employees long-term financial security.

Examples of different retirement plans include:

• 401(k) plans. These are popular employer-sponsored plans with tax incentives, allowing both employee and employer contributions.
• Pooled employer plans. Pooled employer plans enable employers to pool assets into a 401(k) plan administered by a professional provider, reducing costs and fiduciary risk.
• SIMPLE IRA plans. These are for small businesses with 100 or fewer employees, requiring employer contributions and offering tax benefits.
• SEP plans. SEP plans cater to self-employed individuals or small business owners, with only employer contributions allowed.
• Profit-sharing plans (PSPs). PSPs allow employers to reward employees with contributions based on company performance.
• Employee stock ownership plans (ESOPs). ESOPs grant employees stock ownership in the company, providing tax benefits for the company.
• 457 plans. Similar to 401(k) plans, these are offered through governmental employers and nonprofit organizations.
• 403(b) plans. These are for employees of public schools and tax-exempt organizations, with deferral of salary to individual accounts.
• Cash-balance plans. Cash-balance plans offer high contribution limits for older employees, with a set percentage of salary contributed by the employer.
• Non-qualified deferred compensation plans (NQDCs). NQDCs allow qualifying employees to defer part of their annual compensation to a future tax year.

These plans often include employer matching of contributions up to a certain percentage, with tax benefits for the company. Retirement benefits vary globally and may encompass pension plans, Social Security, and savings accounts for eligible employees.

3. Paid Time Off (PTO) and holidays

Paid time off (PTO) and holidays are essential benefits that contribute to an employee's work-life balance.

PTO encompasses various types of leave, such as vacation days, sick days, personal days, and holidays, allowing employees to address personal needs, such as doctor's appointments, dental visits, or car repairs, without sacrificing their financial security.

A well-defined PTO system reduces stress for employees when requesting time off and gives them the confidence to express their needs. Offering PTO as part of an employee benefits package can help attract and retain talent, demonstrating the company's commitment to employee well-being.

In the United States, the federal Family and Medical Leave Act (FMLA) allows eligible employees to take up to 12 weeks of unpaid time off for specified family and medical reasons, with job protection. Many countries and states have their own laws requiring employers to provide specific types of paid leave, such as sick leave or family leave.

PTO benefits may vary for full-time and part-time employees, with full-time employees often receiving more generous PTO allowances.

4. Wellness programs

Helping employees to increase their overall well-being can increase your profit, lower your healthcare-related costs, and improve the quality of life of your workforce. Effective wellness programs are often hands-on, providing employees with valuable information about health and supporting them in building better habits.

Rather than merely offering gym memberships, a holistic approach can include high-tech and high-touch solutions that cater to individual needs and promote sustainable lifestyle changes. By implementing a comprehensive wellness program, your company can increase productivity, improve employee satisfaction, and have better workplace engagement.

Examples of wellness programs your company can consider offering include:

• On-site fitness centers or discounted gym memberships
• Health screenings and assessments
• Mental health support like counseling services, stress management workshops, or mindfulness training
• Nutrition education and support like healthy cooking workshops, nutrition counseling, or providing healthy food options in the workplace
• Smoking cessation programs
• Physical activity challenges, such as step-count competitions or group exercise classes
• Wellness seminars and workshops on various wellness topics, such as sleep hygiene, stress management, or work-life balance
• Financial wellness programs like financial education workshops, budgeting tools, or access to financial advisers

5. Disability insurance

Disability insurance provides financial support to employees who cannot work due to a disability. This type of insurance can be divided into short-term disability and long-term disability coverage.

In countries with nationalized health care systems, such as the United Kingdom and Australia, disability benefits are often provided by the government. However, employers in these countries may still offer supplemental disability insurance to enhance their employees' compensation packages and provide additional financial security.

In countries like the United States, where health care is primarily privatized, disability insurance plays a more significant role in employee benefits. Employers often provide disability insurance to ensure their employees can access financial support in the event of a disability.

6. Life insurance

Life insurance provides financial protection to an employee's beneficiaries in the event the employee passes away. Employers typically offer access to a group life insurance plan underwritten by an insurance company. Some well-known providers of group life insurance plans include Protective Life, MetLife, and Prudential Financial in the U.S., and Aviva, Legal & General, and AIA Group in other countries.

When offering group life insurance, the employer does not pay out the amount directly. Instead, the insurance company that underwrites the policy is responsible for paying the amount to the designated beneficiaries.

The employer's role in providing life insurance involves paying the premium for the group policy or, in some cases, contributing a portion of the premium.

Employees may also have the option to purchase additional coverage for themselves, their spouses, or dependents at their own expense, typically at a lower rate than they would pay for an individual policy.

7. Flexible Spending Accounts (FSA)

Flexible Spending Accounts (FSA) are a type of employee benefit commonly offered in the United States that allows employees to set aside pre-tax dollars for qualified medical or dependent care expenses. This tax-advantaged account can help employees save money on their health care and dependent care costs by reducing their taxable income.

One of the major downsides of FSAs is the "use it or lose it" rule. Employees who do not use the funds in their FSA by the end of the plan year or a specified grace period forfeit the remaining balance. Consequently, employees must be cautious and carefully plan their anticipated expenses to avoid losing their contributed funds.

There are limitations on the amount employees can contribute to an FSA. In 2023, the maximum contribution limit for a Health FSA was set at $3,050, and for a Dependent Care FSA, it was $5,000 for married individuals filing jointly or $2,500 for those filing separately. These limits may be subject to change in the future.

Countries outside the U.S. may not have an exact equivalent to an FSA due to differences in health care systems and tax regulations. However, some countries may offer similar tax-advantaged accounts or benefits for health care or dependent care expenses. Employees in countries with nationalized health care systems might still benefit from such programs to cover expenses not fully covered by the public health care system or to save on dependent care costs.

8. Employee Assistance Programs (EAP)

Employee Assistance Programs (EAPs) are employer-sponsored programs designed to provide employees with a range of support services, such as counseling, mental health assessments, consultations, and resources for dealing with personal and work-related issues. These programs aim to help employees navigate challenges in their lives, promote emotional well-being and, in turn, enhance their overall job performance.

The primary goal of EAPs is not to encourage employees to pour all their energy into their work but rather to help them strike a healthy work-life balance. This enables people to be as productive as possible while at work, and helps minimize “presenteeism.”

By offering employees access to professional support and resources, EAPs empower them to address any personal issues that may affect their emotional well-being and productivity. This support enables employees to be more centered, focused, and resilient, both in their personal lives and in the workplace.

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Understanding employee benefit plan requirements

Employee benefit plan requirements can vary greatly depending on the company’s industry, location, and size. Employers often provide a combination of legally mandated benefits and optional perks to stay competitive in their respective markets.

Some benefits are legally mandated in the U.S., such as Social Security, workers' compensation, unemployment insurance, and family and medical leave (FMLA). These benefits are designed to protect employees and provide a safety net in case of illness, injury, or job loss. Companies must comply with these regulations to avoid penalties and protect your employees’ rights.

On the other hand, employers provide optional benefits to attract and retain top talent. These may include health insurance, retirement plans, paid time off, life insurance, and wellness programs. The extent of these benefits can vary significantly across industries, states, and countries.

Different states and countries also have varying benefits requirements. For instance, some states in the U.S. mandate paid sick leave, while others do not. European countries typically have more extensive social safety nets, such as universal health care, generous parental leave policies, and mandatory vacation time.

How much do benefits cost the business?

The cost of providing employee benefits can vary widely depending on the size of the business, the industry, and the specific benefits offered. Generally, employee benefits typically account for 30% to 40% of an employee's total compensation package. The cost breaks down into different components: health insurance, retirement plans, paid time off, and other perks.

For small businesses, benefits can be a significant expense. Health insurance premiums can be particularly costly, with average annual premiums for small group coverage in the United States around $7,911 for single coverage and $22,463 for family coverage in 2022. However, businesses can sometimes offset the cost through tax incentives, such as the Small Business Health Care Tax Credit for businesses with fewer than 25 employees.

Medium and large businesses may have more resources to invest in employee benefits but face higher overall costs due to a larger workforce. These companies can often negotiate better rates with insurance providers and retirement plan administrators, lowering per-employee costs.

The cost of providing benefits for larger businesses can range from a few thousand dollars per employee for basic packages to tens of thousands for more comprehensive plans. For example, an employee making $100,000 a year could cost the company $125,000 to $140,000 when benefits are added.

It's important to consider the return on investment (ROI) when evaluating the cost of employee benefits. A well-designed benefits package can increase employee satisfaction, lower turnover rates, and improve productivity. For example, providing health insurance can result in healthier employees who take fewer sick days, while offering a retirement plan can increase employee loyalty and long-term commitment to the company.

Offering competitive benefits can help your business attract and retain top talent in its industry. This can save money in the long run by reducing hiring and training costs associated with high employee turnover.

What are the tax implications of employee benefits?

When offering employee benefits, businesses need to understand the tax implications involved. Providing employee benefits can lead to tax advantages for both the company and its employees, but businesses must adhere to specific requirements and limitations to be eligible for these tax benefits.

Generally, employee benefit expenses are considered ordinary and necessary business expenses, making them tax-deductible for the company. However, the business must be liable for these costs and the payment amount must be reasonable and connected to the services the employee performed.

The tax implications of different employee benefits vary. For example, health insurance premiums paid by the company for group hospitalization and medical insurance are tax-deductible. Similarly, costs related to workers' compensation insurance and state unemployment insurance fund tax (if considered a tax by the state) can also be deducted.

In the case of retirement plans and group health plans, businesses can deduct the costs associated with setting up and administering these plans as long as the IRS qualifies them for tax deduction purposes. Working with an employee benefits specialist is recommended to comply with IRS regulations.

Businesses can also deduct costs for providing employees with professional publications, tools, uniforms, and business meals, subject to certain limitations and requirements. For example, employee meal costs are generally deductible at a 50% rate, while meals provided as part of recreational or social activities are deductible at 100%.

Employee benefits like discounts on products or services, commuting reimbursements, and achievement awards can have different tax implications depending on the specifics of the benefit. For instance, certain commuting benefits are no longer deductible, but bicycle commuting reimbursements can be deducted if included in employee pay.

Remember that specific requirements and limitations apply to each type of employee benefit, so it's essential to consult with an employee benefits specialist or tax professional to stay compliant with relevant regulations.

Create an effective benefits program

Here are some steps you can take to create the right employee benefits program for your company:

• Assess employee needs. Conduct surveys or hold human resources focus groups to determine the benefits most important to your workforce.
• Align benefits with company culture. Design a benefits program that supports and reinforces your company's values and objectives.
• Consider legal requirements. Ensure your benefits program meets federal, state, and local regulations and industry-specific standards.
• Budget for benefits. Determine the resources available for providing employee benefits and prioritize the most important offerings based on employee feedback and budget constraints.
• Offer flexible options. Provide a range of benefits that cater to diverse employee needs, such as flexible work arrangements, telecommuting options, or customizable health plans.
• Communicate effectively. Ensure employees are aware of the benefits available to them and understand how to access and use these offerings.
• Regularly review and update. Periodically evaluate the effectiveness of your benefits program and make adjustments as necessary to keep it relevant and competitive.
• Seek expert assistance. Consult with employee benefits specialists or HR professionals to ensure your benefits program is well-designed, compliant, and effective in attracting and retaining talent.

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Employee benefits FAQ

There’s a lot to know about employee benefits. Check out some of the most commonly asked questions regarding employee benefits below.

How can offering benefits help attract potential employees?

Offering benefits can help attract potential employees by showing a commitment to their well-being and work-life balance. A competitive benefits package demonstrates that your company values its employees and is invested in their personal and professional growth.

Research indicates that job seekers prioritize benefits when considering employment options, and companies with attractive benefits packages are more likely to attract top talent.

What makes employee benefit plans competitive?

Employee benefit plans become competitive when they offer a comprehensive range of benefits that cater to diverse employee needs.

Some unique benefits that make a plan more enticing than competitors include gym memberships, student loan repayments, tuition assistance, generous paid time off, benefits for family members, child care, and more.

By offering a mix of traditional and innovative benefits, a company can differentiate itself and appeal to a wider pool of potential employees.

What’s the best way to communicate your benefits package to potential employees?

You can effectively communicate your benefits package to potential employees through various methods, including:

• Adding benefits information to job listings. Clearly outline the benefits offered in job postings to attract candidates looking for these specific offerings.
• Showcasing benefits at job fairs. Use bulletin boards, brochures, or other visual aids at job fairs to highlight your benefits package.
• Advertising benefits. Create advertisements, social media posts, or blog articles that elaborate on the benefits your company offers.
• Discussing benefits during interviews. Use interviews as an opportunity to explain the benefits package and how it complements the company culture.
• Expanding on benefits when making an offer. When extending a job offer, provide detailed information on the benefits package so potential employees clearly understand what they will receive.

Need expert help? Find a benefits specialist on Upwork

In this article, we've discussed the importance of providing a comprehensive employee benefits package, covering areas like health care, retirement plans, paid time off, wellness programs, disability insurance, life insurance, flexible spending accounts, and employee assistance programs.

Navigating the complex landscape of employee benefits can be challenging, especially when trying to tailor a package to meet the unique needs of your workforce. To ensure you're offering the best benefits package for your employees, consider hiring a benefits specialist from Upwork.

A benefits specialist can help you assess your current benefits offerings, identify gaps, and recommend improvements to better support your employees and keep your company competitive in the job market.

Find the perfect benefits specialist for your organization today with Upwork and take the first step toward creating a comprehensive and attractive employee benefits package.

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This article is intended for educational purposes and should not be viewed as legal or tax advice. Please consult a professional to find the solution that best fits your situation.