As we look to build and scale our companies, we will have to hire employees (not just contractors). In order to attract and retain the best employees, we typically have to offer a variety of employee benefits. Let’s take a look at the most common employee benefits that small and growing businesses offer.
Paid Time Off
The joy of paid time off is that you don’t have to go outside your company to offer it and it’s also pretty easy to get started with.
While there are no federal requirements for paid time off, there are a variety of state and local requirements, particularly for paid sick time. Some jurisdictions have annual requirements for paid sick time, while others dictate how many hours you accrue per pay period.
Companies have a variety of policies regarding whether PTO is paid out at termination. Like paid sick time requirements, some states and cities require unused PTO to be paid out. This is also why some companies have moved to an unlimited PTO policy – to remove any requirement that they pay out at termination.
As you grow, you may also want to consider additional PTO categories like:
- New parent leave (maternity and paternity) which would include adoptions and surrogacy
- Bereavement leave to attend funerals and handle end of life matters for family members
- Anniversary leave to reward employees that have served extended times at a company (5 years, 10 years, etc)
- Voting Time Off for primary and general elections (don’t forget runoff elections too)
- Floating Holidays to account for individual religious and cultural preferences
Medical / Dental / Vision Insurance
The next most common employee benefit is medical insurance, usually with added optional dental and vision.
As anyone that has tried to shop for health insurance as an individual, you know how beneficial this employee benefit can be. Owners want this for themselves, and not on the individual market. As soon as companies start adding employees, they can be eligible for group health plans.
However, small groups are often very expensive. As a result, some companies will offer a stipend or reimbursement to allow employees to get their own plans from the ACA Exchange or other source. This will still qualify as an employee benefit.
It is worth shopping the group plan regularly to see when the costs become manageable as a small group versus offering the reimbursement.
Life and Disability Insurance
It’s not as expensive as you think to offer this. Most health insurance brokers can also shop for company sponsored life and disability policies. Most employers will offer employer-paid life insurance policies of $5,000-25,000 for all employees. For professional service firms with higher compensated employees, we will often recommend higher benefit policies that may cover multiples of the employee salary instead of a flat amount. The employee may also have an option to buy additional life insurance through your provider.
Similarly, employers can add disability insurance at a reasonable cost. Most employers that offer disability insurance will cover up to a portion of the employee’s salary after 90 days of disability.
Since most employees (and yes, even company owners) can’t cover 90 days with savings and PTO, many companies will also either cover a short-term disability policy or make it available for the employees to purchase. These short-term disability policies usually kick in around 5-10 days out of work up to the 90 days out of work, when the long-term policy kicks in.
Retirement Plans
Once you start making money as a founder or owner, you start wanting to look at how to minimize your tax burden. One of the ways to do so is through retirement plans, where you defer the income taxes until your retirement years.
On a personal level you could go with an Individual Retirement Account (IRA). But those are limited to $7,000 a person. So now you want more and look towards business retirement plans.
For a small business with just the owner and maybe a few key employees, a Self-Employed Pension Plan may be a good option. This is a retirement plan that is easy to setup that only the employer contributes to. However, the downside is that the employee has immediate 100% vesting in all contributions (no golden handcuffs) and all contributions must be uniform for all employees.
As companies grow, they may not want to do all the contributions themselves and instead have the employee put a portion of their salaries aside. That’s when a SIMPLE IRA may be a good option. The employee puts money into the IRA and then the company matches a portion up to 3% of salary or a 2% contribution for all eligible employees. This may reduce the amount that the company has to contribute since they are only doing 2-3% of salaries on an elective basis, but the owner can still put significant amounts away for themselves. This is only available for companies under 100 employees.
As you continue to grow, most companies look towards 401(k) plans. Some may skip all the other plans and go straight to the 401(k) if they want. The 401(k) offers the greatest flexibility in contributions and higher contribution limits. Because of this, however, the government is concerned that only high earners will use it and have discrimination testing in place to ensure that the benefit doesn’t only accrue to the top earners in a company. If you go with a 401(k), I highly recommend that you use the safe harbor matching provisions to avoid discrimination testing. Trust me, it’s a headache if you don’t.
See Also: Employee or Independent Contractor? New Rules for 2024
Student Loan Payment Assistance
In the past, student loan repayment assistance has been considered taxable income. But with the CARES Act in March 2020, the government made up to $5,250 tax-free for both employers and employees. That means no FICA or income taxes for either party. That’s a nice little boost for both sides and is a great recruitment incentive for companies that look to young or recent graduates to join their workforce.
Note that the current tax-free treatment is only good through 2025. I do expect that at some point that Congress will extend this, but we all know how crazy Congress is right now. It may well not happen until late 2025 or even 2026. (rolls eyes at Congress)
Professional Development
We want employees that are continuing to learn and develop in different ways, right? Many professional service firms (looking at you fellow lawyers, CPAs, and other licensed individuals) often cover the annual continuing education requirements for maintaining the licenses.
But you can also offer additional professional development budgets to your staff. Things like management and leadership or public speaking training, coursework on developments in their area of work, additional certifications, and more.
This is an area that you and your employees can get really creative with. Set a budget and let them go. But employees love to continue to develop and by putting the money behind that, you are showing that you care about them long-term.
Remember that you want to invest in them for your own benefit – you want well-rounded team members. Yes, they might leave, but do you want those that aren’t developing to stay on your team?
Commuter Benefits
If you have a physical office that people have to go into on a regular basis (even if it’s a hybrid work situation), look into offering commuter benefits. This will help reduce the impact of any return-to-office (RTO) policies you might be implementing right now.
Many cities offer discounted public transit passes for their systems when bought through an employer. If your office has paid parking, you may also be able to get a discount when it goes through the company account. You can pass this savings along to your employees.
If you don’t want to pick up the full cost of these benefits, you and your employees can still save by you managing the programs. You can run this benefit through payroll like you do health insurance or retirement for up to $300 per month on a pre-tax basis. That will reduce the employment taxes, increasing the overall compensation for your employees.
Child and Dependent Care Benefits
We know that child care is expensive, and companies that can help provide additional child and dependent care benefits can really benefit their employees. This can be a very attractive benefit for parents of young or disabled children.
Companies can receive a tax credit of up to $150,000 per year for employer provided child care. This is basically for on-site or nearby facility daycare. But employers can also offer family stipends on a pre-tax basis to help cover the costs of daycare and other services through a Dependent Care Flexible Spending Account.
Benefits that may not cost money but fall under this category could also be flexible work schedules and remote work opportunities.
See Also: Corporate Diversity in 2024: What Companies Should Be Doing
Home Office Stipends
As more employees are working remotely at least part-time, they have setup home offices. Employers can help by offering reimbursements under accountable plans to pay for things like furniture, cell phones, internet, and computer accessories that make the employee more productive in the home office.
Remember that employees don’t get the benefit of a home office or other business deductions like you do as the owner of the company. But we can basically transfer some of the costs to us as the company and use the expense to decrease our own taxable income. We can reduce the employee’s non-deductible expenses and move them to the company’s deductible expenses if they are in fact used in the business. This has the effect of increasing the employee’s total compensation and available cash.
If you do these through an accountable plan, you’ll be giving this benefit on a pre-tax basis so it’s a win-win for everyone.
Retail Discounts
From cell phones to pet insurance to hotels, there are a ton of programs where you can offer your employees discounts just because they are an employee. Sometimes you can shop these individually, especially for local companies.
Other times, you can look at professional organizations that you are a member of. And also many payroll providers like ADP and Gusto.
At various times, I’ve been able to offer employees discounts at hotels, off-site airport parking, cell phones, Dell, and even banking/checking accounts. This was in addition to what was available through our payroll provider and health insurances which offered discounts on gyms, pet insurance, travel perks, and more.
When Should I Offer Employee Benefits?
My clients often ask when they should start offering employee benefits. I typically recommend that they start with the easiest ones to administer as soon as they can manage it financially. This would include things like paid time off and student loan reimbursement.
But do not feel like you have to offer all the employee benefits from day one or even at all. Some benefits, like commuter benefits, may not make sense for a company that is entirely remote. Other benefits, like student loan reimbursement, may not help if your employees don’t have or have already paid off student loans.
I have also found that gradually increasing benefits over time has an outsized impact on your employee satisfaction. They see that you are constantly looking to improve the benefits as the company grows and evolves. A lot of the employee satisfaction is a “what have you done for me lately?” score. Also, to help with that satisfaction level, make sure you are constantly communicating the benefits you do have available.
Employees are also smart – they know that these benefits come at a cost, even if it is “just” administrative. The employees want long-term success as much as you, the owner, does. So don’t over-extend yourself by offering too many employee benefits before they are needed to attract and retain the best employees.