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Is it Time to Audit your Employee Benefits Package?

Offering benefits is a balance between satisfying employee needs and staying within budget parameters. Learn why now is an ideal time to review your benefits offerings.
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Offering employee benefits is a balancing act between meeting employees' needs and staying within your budget. In this job market, employee benefits can be an important feature for recruitment and job retention. From time to time, it's a good idea to review where you stand when it comes to your employee benefits package.

What benefits do you currently offer employees?

While federal law doesn't require small businesses to offer most types of benefits, many choose to offer additional perks to help their employees and to stay competitive. Here are some types of benefits that you may want to consider:

  • Health benefits: Many large employers offer health care coverage due to the employer mandate under the Affordable Care Act; smaller companies that aren't required by this law to offer health coverage may need to consider doing the same as a way to stay competitive. For budget reasons, consider health savings accounts combined with high-deductible health plans or qualified small employer health reimbursement arrangements (QSEHRAs). You may also want to consider flexible spending accounts for medical costs, which don't require any employer contributions.
  • Retirement savings: Help employees save for their retirement by offering a qualified retirement plan. You can so do with no significant cost to you (e.g., 401(k) plans without any employer contributions). And there's a tax credit for the administrative costs of setting up the plan and educating employees about contributions.
  • Training and development: You can pay to train employees on the job or take courses outside of work. You can set parameters on this benefit and arrange for it to be tax-free to employees. A learning management system can also enable you to provide accessible online courses to your workforce.
  • Paid leave: You aren't required by federal law to offer paid leave, but if you do so, you may be eligible for a tax credit.
  • No-cost benefits: Don’t forget the benefits you can offer that have no associated costs. Consider offering flex time, permitting employees to work from home, or other alternative work arrangements that allow workers to better manage their work/life balance.

You can view the list of fringe benefits, and whether they're exempt from employment taxes, in IRS Publication 15-B.

Some benefits require you to give notice to employees. This notice allows them to opt out in some situations or to take advantage of the offering in others. Here are a couple of examples:

  • Safe Harbor 401(k) plans require a notice to be distributed 30-90 days in advance of the plan year, outlining rights, obligations and certain minimum benefits, as well as the timing and method for making salary deferral elections.
  • QSEHRAs: at least 90 days before the beginning of the year, notice must be furnished to eligible employees which states the permitted benefit and coverage requirements to maintain eligibility.

Are you required to offer a benefits package?

As mentioned earlier, federal law does not require employers to offer fringe benefits (beyond the employer mandate where large companies can choose to pay a penalty in lieu of offering health coverage). Still, a growing number of states are imposing certain fringe benefit requirements. Check your state rules on:

  • Retirement plans. A handful of states, including California (effective July 1, 2019) require private-sector employers without qualified retirement plans to enroll their employees in state-run programs. No employer contributions to the plans are allowed, but there are administrative costs to consider.
  • Paid leave. A few states require paid family leave time, which is funded through employee-paid withholding.
  • Paid sick leave. Several states now require employees to offer a certain amount of paid sick leave.

Are you reporting benefits correctly and timely?

Some benefits are subject to payroll taxes, while others are exempt. Be sure you are factoring in the correct status when reporting on:

  • Employees' W-2s
  • Quarterly employer tax returns (Form 941)

Are you following proper withholding practices?

Some benefits such as cash bonuses, payments to employees of business expenses under a non-accountable reimbursement plan, or personal use of a company vehicle are taxable compensation (called "supplemental wages") to employees and subject to withholding. Where supplemental wages are less than $1 million, there is a choice about withholding:

  • Combine regular wages with supplemental wages and withhold income taxes under the usual withholding rules for wages.
  • Treat the supplement wages as separate amounts subject to a flat withholding of 22 percent.

Note: For supplemental wages of $1 million or more, withholding at the rate of 37 percent is required.

Regardless of the employee benefits package you choose to offer, they should align with your budget and your employees' needs. Taking the time to conduct a benefits audit can pay off in the long run and help your business stay competitive in today's tight job market.

barbara weltman
Barbara Weltman is a tax and business attorney and the author of J.K. Lasser's Tax Deductions for Small Business as well as 25 other small business books.
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