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Small Business Employee Benefit Packages and Why They Matter

  • Employee Benefits
  • Article
  • 6 min. Read
  • Last Updated: 12/02/2022

coworkers discussing the advantages of small business employee benefit packages

Table of Contents

Benefits are any type of perk or compensation that are offered on top of an employee's regular wages. Ranging from traditional to creative, a small business’s employee benefits can be a strategic tool that helps your business stand out among competitors and demonstrates how well the business takes care of its employees.

Employers should not underestimate the importance of employee benefits for small businesses. According to its 2022 Trends report, the Boston College Center for Work & Family attributes overwork, burnout, and a quest for more purpose and values-driven work as some of the reasons behind millions of Americans leaving or changing jobs each month. A small business employee benefits package that meets employees' needs on these issues, when added to a competitive salary, can attract job candidates, and encourage great employees to stick around, helping to ensure the longevity of the business.

What should you keep in mind when building a small business employee benefits program? Here are some questions to guide you through the process:

Do Small Businesses Have To Provide Benefits?

Some employee benefits are legally mandated by state or federal laws. As a result, there are a certain number of basic benefits for small businesses that a worker is entitled to receive.

The U.S. Bureau of Labor Statistics reported that the cost of these mandatory benefits make up a very small portion of a worker's hourly wage. As of June 2022, the median cost to businesses of private sector employees came to $2.93 for every hour worked.

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

Social Security and Medicare

Social Security and Medicare are funded by the Federal Insurance Contributions Act (FICA), a federal payroll tax, and are used to provide benefits to older Americans, disabled individuals, and children. Social Security benefits are based on an employee's lifetime earnings record.

Workers' Compensation Insurance

Workers' compensation insurance is a safety net that provides financial support to people unable to work due to a workplace injury or illness. Subject to some exceptions, workers comp insurance is generally required for all employers, regardless of size.

Unemployment Insurance

Qualified full-time and part-time workers receive financial protections 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.

You may notice that health benefits are not part of this list. There are mandated health benefits for applicable large employers (ALEs); companies with an average of 50 or more full-time employees, including full-time equivalents, in the previous calendar year. There are no such requirements for smaller businesses.

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 reliable workers and who cares about the overall health and well-being of their employees. Fortunately, there are several affordable health benefit options available to small employers that can help you keep your employees happy, healthy, and productive.

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

The importance of employee benefits lies in its function as a strategic tool. While some benefits are required by law as we've outlined above, savvy small business owners recognize that simply meeting the legally required minimum benefits offerings may not be in the best long-term interests of the business. Many employees consider the benefits package a major factor in deciding whether to accept a job offer or a top reason why employees choose to leave a job. To build and keep a strong labor force, employers must be competitive in their benefits offerings.

Small business employee benefits can be personalized to fit corporate culture and workers' needs. Finding a sustainable work-life balance that protects employees' financial, physical, and mental wellness is a top priority for many workers. A small business benefits package that can help them achieve it will likely inspire loyalty and nurture positive attitudes in the workplace.

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 retirement plan, a flexible spending account, and a health savings account/health reimbursement arrangement. Other benefits offerings may include life insurance and disability coverage (five states require that employers provide short-term disability insurance to employees). Although mandated by federal and state law, Social Security, workers’ compensation and unemployment insurance taxes are considered employee benefits as well.

What Benefits Can a Small Business Offer?

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 serve as a powerful recruitment tool.
  • Medical flexible spending account (FSA): Pretax contributions to an employer-owned account give employees funds to use 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 to use 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 pretax funds that can be used for qualified medical expenses. Both employers and employees can contribute. The key difference between an HSA 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: Give employees the ability to make pretax 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 the savings goals they need. 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 for 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 smart 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.

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/or 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 a worker 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 of 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 a business.

Fringe Benefits

Additional 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 an important and integral part of overall wellness. Without a dental or vision plan, many employees may opt to go without.
  • 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. Similar to a medical FSA, a dependent care FSA lets an employee set aside pretax 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 the use of 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 their life while experiencing a sense of gratitude to their employer for making it happen.

What Benefits Can Set My Company Apart From Competitors?

Research and determine what other firms in similar industries are offering their employees — perhaps the local Chamber of Commerce or a local HR association have benefits survey results for the local area. Your insurance and tax professionals are also good resources for getting information on "what everybody else is doing." It may also be helpful to talk with employees and determine what they would most like to have — and there may be an affordable way to get them what they want.

For example, employers can open an IRA or 401(k) plan without a company contribution. In the case of health coverage, they can set up a high-deductible health plan and fund a portion of the deductible through a health reimbursement arrangement — there are numerous options available, and it's worth having a conversation with your CPA or insurance broker. It makes the most sense to think about starting or expanding benefits that will mean something to your workforce, and maybe provide tax savings for the business.

How Much Do Benefits Cost a Small Business?

Depending on what's being offered, some employee benefits don't cost small businesses anything. Some benefit plans do not need any funding from an employer (other than administrative costs to manage the plan), such as a flexible spending account for dependent care expenses as well as dental and vision insurance, which can be paid completely by the employee who enrolls in the plan. Depending on the size of your business, you may also be eligible for a small business health care tax credit if you offer healthcare to employees.

To further 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, etc.) to incentivize employees.

How Do I Show Employees the Value of the Benefits I’m Offering?

Create and distribute a total compensation summary for each employee. These statements illustrate, in dollars and cents, the value of not only the employee's salary but also the employer's contribution toward both mandatory and voluntary benefits. Seeing these figures in black and white can help employees understand the real value of these benefits.

If you've previously offered benefits and are changing or updating your benefits package, develop a communication plan (scroll down to Establish a Communication Plan) for delivering this information. A well-thought-out plan can help ensure that employees thoroughly understand the reason for the changes, the impact of new and updated benefits offered, and where to go for additional information or questions.

How Can I Minimize the Work Involved With Managing an Employee Benefits Program?

Technology now makes it possible to integrate your benefits administration with your payroll processing. While offering a benefits package is important to your business, it doesn't need to add additional administrative burden onto your HR team. Solutions like Paychex Flex® can handle the heavy lifting while still allowing you to do what you do best — run a successful business.

How To Offer Benefits as a Small Business

You may be wondering, how can a small business offer benefits that can compete with larger corporations? Making strategic choices that personalize your offerings to your employees' needs can help ensure you develop a benefits package that works to support your brand and business objectives. In addition to researching employees' needs, ask them what they want. You can also research your competitors to make sure your benefits stand apart from the competition.

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.

Insurance sold and serviced by Paychex Insurance Agency, Inc., 225 Kenneth Drive, Rochester, NY 14623. CA License #0C28207.


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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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