Small Business and Startup Employee Benefit Packages and Why They Matter

Startup or small business benefits, from traditional to creative, are strategic tools to help your business stand out among competitors and can demonstrate loyalty to your employees.

When added to a competitive salary, employers should not underestimate the importance of employee benefits for small businesses. A typical small business employee benefits package that focuses on employees' needs while following current benefits trends can attract qualified job candidates and encourage top talent to stick around, helping to ensure the longevity of your business.

For example, total wellness benefits have emerged as a popular employee benefit in recent years. With 2 in 5 employees experiencing stress, performance issues, and mental health conditions, employers are going beyond traditional health plan benefits by offering benefits that support the whole person, such as mental health benefits, lifestyle education programs, biometric screenings, or employee assistance programs.

These benefits are particularly effective in recruiting and retaining young talent, such as that from Generation Z. Employees of this generation have cited mental health benefits as a desired benefit, just under compensation, that would increase their likelihood to stay at a company.¹

Curious about another way to attract Gen Z? Offer them a professional development path, giving them the skills to grow with your company. Upskilling, reskilling, and professional development help younger workers and promote your business, allowing you to stay competitive while demonstrating your commitment to your employees' career progression.

What should you consider when building a small business employee benefits program? Here are some questions and answers to guide you through the process:

Do Small Businesses and Startups Have To Provide Benefits to Their Employees?

Some employee benefits are legally mandated by local, state, or federal laws. As a result, small businesses and startups must provide certain benefits to workers.

The U.S. Bureau of Labor Statistics reported that the cost of these mandatory benefits is a portion of a worker's hourly wage. As of March 2024, the median cost to businesses of private sector employees was $3.21 for every hour worked.

All employers, regardless of size, must provide the following benefits to employees.

Social Security and Medicare

Social Security and Medicare are mandatory entitlements funded by the Federal Insurance Contributions Act (FICA), a federal payroll tax. These benefits provide certain retirement, disability, and survivor benefits to older Americans, disabled individuals, and children.

Social Security benefits are based on an employee's lifetime earnings record and provide retirement, disability, and survivor benefits. Medicare supports the federal health insurance program for individuals over age 65.

Workers' Compensation Insurance

Workers' compensation insurance is a safety net that provides financial support to employees who become injured or ill as a direct result of their job. Subject to some exceptions, workers' compensation insurance is generally required for all employers, regardless of size.

Unemployment Insurance

Through unemployment insurance, qualified full-time and part-time workers may receive financial protection in the form of income for a limited period of time when they are let go due to mergers, layoffs, or termination without substantial proof of cause. Employers contribute to unemployment insurance through federal and state payroll taxes.

Other Size-Dependent Health Benefits

Depending on the size of your small business or startup, you may have to provide certain health-related benefits, such as those under the Consolidated Omnibus Budget Reconciliation Act (COBRA). Under COBRA, employers with 20 or more employees must provide continued health coverage to employees and their families if their employment ends or they experience a "qualified event," such as a divorce or birth of a child. Depending on the situation, COBRA coverage can last between 18 and 36 months. Small employers should remember that some states provide continued health coverage—often called "mini-COBRA"—for employers with fewer than 20 employees.

You may notice that health benefits are not part of this mandatory employee benefits list. Are small businesses required to provide health insurance?

Applicable large employers (ALEs) must offer affordable and adequate health insurance coverage to full-time employees and their dependents or risk a potential assessment if at least one full-time employee receives a premium tax credit. These companies generally have an average of 50 or more full-time employees, including full-time equivalents, in the previous calendar year. No such requirements exist for health benefits for small businesses which are not ALEs.

So, when should a small business offer health benefits? The answer varies for each business, but health benefits should be provided by every employer, no matter the size, who wants to attract top, dedicated talent and cares about their employees' overall health and well-being. Fortunately, several affordable health benefit options are available to small employers to help keep employees happy, healthy, and productive.

Why Is It Important for Small Businesses and Startups To Offer Employee Benefits?

Offering employee benefits is an essential strategic tool, helping you attract and retain top talent, improve worker productivity, and create a healthy workforce. Implementing new employee benefits strategies is a top HR challenge for attracting and retaining top talent.² Understanding employee benefits trends is critical to offering your employees desired benefits. Offering hybrid schedules, career development programs, wellness programs, and mental health support can increase employee engagement and happiness while improving workers' overall health.

Your business benefits package signifies your investment in your employees' future.

What Does a Basic Benefits Package Include?

A typical benefits package for small businesses can include health insurance, dental and vision coverage, paid time off, a 401(k) retirement plan, a Flexible Spending Account, and a Health Savings Account/Health Reimbursement Arrangement.

Other benefit offerings may include life insurance and disability coverage. Five states, including California, Hawaii, New Jersey, New York, and Rhode Island, plus Puerto Rico, require that employers provide short-term disability insurance to employees.

Finally, although mandated by federal and state law, Social Security entitlements, workers' compensation, and unemployment insurance benefits must be provided.

What Benefits Can a Small Business or Startup Offer?

Many small businesses and startups offer standard benefits, such as health insurance, retirement plans, and paid time off. However, to distinguish your business from your competition while appealing to different generations in the workplace, you should expand your employee benefits package.

Here is a list of some employee benefits for your small business and startup.

Physical Health Benefits

Not only can healthcare costs create financial anxiety among workers, but businesses lose money and productivity when employees are sick or managing a chronic health condition.

• Group health insurance plans: Safeguard the health of your workers and their dependents by giving them much-needed access to more affordable healthcare. These plans also come with tax savings for your business and can be a powerful recruitment tool.
• Medical flexible spending account (FSA): Pre-tax contributions to an employer-owned account give employees funds for qualified healthcare-related costs. Employers and employees can contribute to this account and enjoy tax savings.
• Health reimbursement arrangement (HRA): Fully owned and funded by the employer, this account also gives employees access to funds for qualified healthcare expenses. This account also comes with tax savings benefits.
• Health savings account (HSA): Like an FSA and HRA, HSAs give employees access to pre-tax funds that can be used for qualified medical expenses. Both employers and employees can contribute. The critical difference between HSAs vs. HRAs and FSAs is that an HSA is an employee-owned investment account that accrues tax-free interest.

Financial Health Benefits

When employees fret over finances due to today's high cost of living, they are likely to come to work filled with anxiety and be distracted, making them less engaged and productive. Chronic anxiety can also increase their risk for physical and mental health issues.

• Retirement accounts: Allow employees to make pre-tax contributions to a retirement account, like a 401(k), and reap the benefits of compounding interest. Consider making a matching contribution to help workers achieve their savings goals. HSAs can also serve as a vehicle for retirement savings.
• Annual pay raises: Reduce the impact of inflation on your employees' financial health by implementing a system that provides regular cost of living adjustments in addition to any annual performance-related increases they may receive.
• Financial education: Financial wellness includes understanding how to manage finances. Classes and workshops in money management can empower employees to make intelligent decisions with their funds and give them lifelong skills for better financial fitness.
• Tuition and student loan assistance: Many college-educated employees are burdened with student debt. A benefit that helps with student loan repayments can make your business look more attractive to many Generation Z, Millennial, and even Generation X workers. Another variation is to provide a tuition reimbursement program to help employees further their education.
• Equity compensation: Many employers now allow employees to purchase a portion of the company through discounted stock or stock options. Doing so gives employees a personal stake in the business, encouraging them to boost performance and outcomes. This equity compensation is typically part of the employee's overall compensation and benefits package, allowing companies to provide another financial health benefit to their team.

Mental Health Benefits

Creativity, engagement, productivity, and even physical health can all take a hit when a worker is suffering from chronic or acute mental health issues. These can arise from feeling overwhelmed in the workplace or at home.

• Employee assistance program (EAP): An EAP gives employees confidential, 24/7 access to trained professionals and counselors who can help them and their dependents with a variety of life's stressors – anything from parenting teenagers to relationship issues to anxiety or dependency.
• Employee resource groups (ERGs): Giving employees a chance to bond or learn more about shared interests, characteristics, and experiences can help create a culture of acceptance, respect, and inclusion within your business.
• Social perks: Socializing with other employees and bonding over shared experiences can help workers feel connected and part of a community. Such activities can also increase resiliency against depression and feeling isolated.
• Flexible work schedules: Balancing home and work obligations in today's demanding world can deplete an employee's time and energy, leading to burnout. Choices in flexible and hybrid work schedules allow employees to juggle work and home responsibilities more equally.
• Wellness programs: Encouraging behaviors that improve physical and mental health, either through classes, inclusive group challenges, or incentives, can create a sense of teamwork and accomplishment, all while helping lower healthcare expenses for employees and businesses.

Fringe Benefits

Additional small business employee benefits in the form of cash, cash equivalents, or services are all considered fringe benefits and can help strengthen worker loyalty. Many of these are ideal benefits for small businesses because they are often relatively affordable.

• Dental and vision: Healthcare plans typically do not cover dental or vision costs, yet both are integral to overall wellness.
• Life insurance: Give employees peace of mind that in the event of the unthinkable, their dependents will have a financial safety net.
• Dependent care flexible savings account: Childcare and eldercare expenses can overwhelm a worker's monthly budget. Like a medical FSA, a dependent care FSA lets employees set aside pre-tax earnings for qualified care expenses, thus reducing their annual tax obligation.
• Gift cards: Gift cards to places like restaurants, grocery stores, and gas stations are a way to recognize a job well done and can go a long way toward validating a worker's contribution while putting a little extra money in their pocket. Take care to be equitable in using gift cards to avoid having some staff members feel overlooked and forgotten.
• Paid volunteer days: Many workers want to contribute their time to a meaningful organization but lack the time or money to do so. A paid volunteer day lets them know your business cares about giving back to the community and lets employees fulfill a greater sense of purpose.
• Memberships and passes: Passes to museums, sports events, public transportation, or even a gym membership are all extras that can help your employees enjoy life while they're off the clock.

Is There a Difference Between Employee Benefits for Startups and Small Businesses?

Employee benefits are now a must-have for all businesses, whether you own a startup or a more established small business. While building your startup, you may feel like you lack the time or money to offer potential employees benefits. After all, you're putting each penny back into the business, and you may not have a benefits team or a skilled HR professional helping you manage employee benefits.

However, you still need to attract and retain top talent to make your startup succeed. One way to start is to determine what other, more established businesses – large and small – offer their employees. For example, group health benefits, retirement plans, and paid time off can help you distinguish yourself from other startups or small businesses.

Additionally, you'll need to focus on any legal requirements and budget considerations, which will help you refine your startup employee benefits.

Legal Requirements

When offering your startup team benefits, it's critical to understand your worker's legal classifications. For example, at many established small businesses workers are classified as W-2 employees, not independent contractors receiving Form 1099.

If you're a later-stage startup and you've hired W-2 employees, you must offer certain benefits to these workers based on federal, state, or local laws and regulations. However, if your business uses independent contractors, you're not required to provide certain benefits, like group health insurance or 401(k) plans. It's best to consult with an employee benefits attorney or a benefits advisor so you can offer the right startup company benefits.

Budget Considerations

As an early-stage startup, you may think offering your team benefits will break the bank. However, you can craft your benefits offerings for any budget.

For example, you can offer your employees stock options, a form of equity compensation. This allows you to boost your employees' overall compensation when you have lower cash flow. Additionally, as your startup grows, these options can become lucrative for your team.

You can also offer a retirement plan with only employee contributions, limiting costs. Under current law, as a new business, you may also be entitled to certain tax credits to help you offset any 401(k) plan administration costs.

Some other inexpensive benefits include wellness stipends, commuter benefits, flexible work schedules, and cell phone reimbursements.

Flexibility and Customization

When creating your employee benefits package, embrace flexibility and customization. For example, consider your budget, employees, industry, and benefits administration technology when customizing your benefit plans. Also, consider benefits that are portable to the employee, such as retirement plan assets, HSAs, and group disability or life insurance that can be converted to individual policies.

What Benefits Can Set My Company Apart from Competitors?

Going beyond a basic benefits package for employees can help set you apart from your competitors. Research and determine what other employers in similar industries offer their employees — perhaps the local Chamber of Commerce or a local HR association can provide benefits survey results for your local area.

Additionally, your benefits brokers, advisors, and tax professionals are reliable resources, providing insight into "what everybody else is doing." Talking to your employees – individually, in small groups, or through confidential surveys – can also help you understand which benefits they value. Once you know what your employees want, you can plan affordable ways to offer some or all of those benefits.

For example, you can establish a SIMPLE individual retirement arrangement (SIMPLE) or 401(k) plan. In the case of health coverage, you can set up a high-deductible health plan and fund a portion of the deductible through a health reimbursement arrangement.

If you're thinking about offering or expanding your small business employee benefits package, consider what's most important to your workforce. Add in tax savings for your small business? That's a win-win.

How Much Do Benefits Cost for a Small Business?

Small business employee benefits costs are often a concern when expanding benefit offerings. However, they don't have to be.

Many benefits don't cost small businesses anything; others may only have certain associated administrative costs. For example, the employee can solely fund a flexible spending account for dependent care expenses and can pay premiums for dental insurance, or vision benefits. The employer will only be responsible for any administrative costs to help run the programs.

Depending on the size of your business, you may also be eligible for a small business healthcare tax credit if you offer healthcare to employees. These tax credits are only available from group health plans bought on the ACA Group Marketplace (SHOP).

Many benefits can be affordable for small businesses. According to a 2024 Bureau of Labor Statistics news release, benefits costs in December of 2023 averaged $12.44 per hour worked in services industries and $14.44 per hour worked in goods-producing industries. For paid leave (including vacation, sick, holiday, and personal leave), these costs averaged $3.34 per hour worked in services industries and $2.82 per hour worked in goods-producing industries.

Here are some other examples from the Bureau of Labor Statistics of the employer's cost per hour worked for private industry employees:

• Life insurance: $0.05
• Health insurance: $2.94
• Short-term disability: $0.10
• Long-term disability: $0.05
• Defined contribution retirement plans (like a 401(k) plan): $1.07
• Social Security and Medicare: $2.57
• Federal unemployment insurance: $0.03
• Workers' compensation: $0.43
• Paid leave: $3.34

When broken down like this, small business employers are often surprised at how affordable employee benefits for small businesses can be. With the costs of employee benefits for small businesses having a minimal impact on your bottom line, these benefits can significantly impact your employee's engagement and satisfaction.

Small Business Benefits Cost Management

To minimize costs associated with your small business employee benefits program, consider non-traditional benefits, such as flex scheduling, employee assistance programs, or telecommuting. You can also include low-cost benefits such as paid time off enhancements, free meals, or rewards for a job well done (like gift cards for a local coffee house, gas station, and others) to incentivize employees.

Here are some other small business benefits strategies to help you get the most bang for your buck:

• Purchase multiple lines of insurance coverage from a single provider, such as health, dental, and vision benefits, which could potentially provide you with discounted benefits packages.
• Offer voluntary benefits, such as wellness and employee assistance programs, empowering your employees to take charge of their health.
• Provide partially or fully employee-funded benefits, such as high-deductible health insurance plans and health savings accounts (HSAs), allowing you to offer more expensive benefits. Even with employees chipping in on the cost, they still receive a more affordable benefit through their employer than they could secure on their own.
• Continually educate your employees on your benefits so they use them fully. After all, you don't want to provide benefits that employees don't use.
• Work with a professional insurance or benefits broker or advisor, helping you identify the benefits you need while staying within your budget.

How To Offer Benefits as a Small Business

You may wonder how a small business can offer benefits that compete with larger corporations. Making strategic choices that personalize your offerings to your employees' needs can help you develop a benefits package that supports your brand and business objectives.

Seeking assistance from a third-party HR services provider can help you organize the most comprehensive and advantageous benefits package. With a reputable, outsourced benefits provider like Paychex, you can save time, money, and headaches by reducing administrative overhead and the associated potential risk of errors, all while staying ahead of ever-changing state and federal regulations. See Paychex's employee benefits package options and discover how you can offer more to your employees than you may have thought possible. Your business and your workers will be glad you did.

How To Offer Benefits as a Startup Company

Just like small businesses, startup companies must consider their budgets while choosing the right benefits. However, there are some key differences.

For example, established small businesses often have established revenue streams, while startups (especially early-stage startups) have limited cash flow, requiring them to focus on cost-effective, creative startup employee benefits.

Where many small businesses may follow more traditional benefits packages, startups can be more innovative when attracting talent. Additionally, startups may need to outsource certain benefits compliance services while more established businesses have the resources to handle compliance requirements and concerns.

Final Thoughts on Small Business and Startup Employee Benefits

While small businesses and startups often have the same goals when establishing an employee benefit program, there are differences. Choosing your benefits package depends on your industry, the number of employees versus independent contractors, and the phase of your business (established or startup).

Understanding your needs and what makes your company unique can help you offer the best employee benefits package to attract and retain the talent you need to take you to the next level.