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Offering a comprehensive employee benefits package is an extremely important human resources function if you want to hire and retain top talent. According to a recent survey by Zenefits, an HR software company, 70% of employees agree that benefits are a major consideration in evaluating future job opportunities.
However, creating a comprehensive benefits package that will attract top talent is a complex process that must factor in many different variables. You need to figure out what kinds of benefits you should offer, how much you should pay for them, and how you will administer them. This process differs from business to business based on factors like industry, employee age, employee role, and business location. It’s enough to make your head spin.
As a business owner, you want to focus on growth, not HR administration. That’s why we’ve created this guide to setting up employee benefits packages. We’re going to take you step-by-step through the process you’ll use to set up a comprehensive employee benefits package that will attract and retain high quality candidates.
But first, let’s educate ourselves about what employee benefits are, and why they are so important.
Employee benefits, which fall under the blanket term “fringe benefits,” are defined by the IRS as “a form of pay (including property, services, cash, or cash equivalent) in addition to stated pay for the performance of services.”
These benefits are provided to the employee by the employer. Although the term “fringe” might imply these benefits are unusual, they are actually very common. Examples of fringe benefits include:
These are just a handful of the dozens of different types of fringe benefits offered by employers today. It’s important to note that certain fringe benefits are required by law, such as workers’ compensation insurance and (for businesses with over 50 employees) health insurance. Others are offered in an effort by the business to attract and retain top talent.
Employees select their benefits package during the onboarding process and during open-enrollment periods, as is the case with healthcare and retirement plans. Other benefits are provided as perks, and can be redeemed by the employee at any time (i.e. discounts on company products). Still others are offered as rewards for good performance (i.e. holiday bonuses).
As we said earlier, employee benefits help attract and retain top talent. But according to Fundera VP of People Alisa Krasner, the impact of employee benefits goes far beyond that:
“A good employee benefits package makes the employee feel like they are being taken care of as a whole. That peace of mind and sense of security help an employee feel more confident about their work, and makes them happier and more engaged.”
There are a myriad of statistics to back this up:
As a small business owner, you need smart, capable people around you to help your business thrive. Therefore, offering a good employee benefits package could literally be a make-or-break situation for your business.
So let’s learn how to build one that will create a workplace full of talented, happy, and engaged workers.
Now that you understand the stakes, let’s figure out how to build our employee benefits package. The first step is to think critically about what you hope to accomplish by offering employee benefits.
Before you embark on the complex and oftentimes expensive process of creating an employee benefits package, it’s important to understand what you want the return to be on this investment. This will help guide you as you navigate the employee benefits market.
We’ve already given you plenty of reasons as to why you want to offer employee benefits, but your business-specific goals could differ. Here are some good reasons to offer an employee benefits package:
Knowing what your goals are will give you a roadmap for how you proceed. For example, if you are looking to increase worker productivity, your benefits package may differ from someone looking to hire top talent. Determining your goals will make navigating the rest of this process much easier.
Once you know your goals, you must create a budget. There are a lot of employee benefits options on the market—if you don’t know what you can afford, you may end up going on a shopping spree that puts you way over budget.
Krasner says businesses should be prepared to budget about 20%-30% of an employee’s salary for benefits. In other words, an employee earning $100,000 annually in salary will cost a business between $120,000 and $130,000 when you factor in their benefits.
For a more detailed understanding of what it costs to offer employees benefits, the Bureau of Labor Statistics shares how much employers pay per hour to offer different types of workers benefits. On average, it costs an employer $11.55 per hour worked to offer a civilian worker benefits (it costs the employer $25.22 per hour worked in wages and salaries).
Also keep in mind that the more comprehensive the benefit, the more money it will cost. For example, it will typically be more expensive to offer an employee health insurance than it would be to offer them free lunch on Fridays.
Finally, there are tax considerations to understand. Employer benefits are subject to income tax withholding and employment taxes. Certain fringe benefits are also taxable to the employee, such as job-related moving expenses. Still others are tax-deferred, such as a 401(k) plan. To understand your business’s tax liability when it comes to benefits, refer to the IRS’ comprehensive tax guide to fringe benefits.
Once you have an idea of what it will cost you to offer your employees benefits, you are ready to begin building your benefits package.
The first thing you need to do when building your employee benefits package, according to Krasner, is understand which benefits you are required by law to provide to your employees.
According to the Bureau of Labor Statistics, “Legally required benefits provide workers and their families with retirement income and medical care, mitigate economic hardship resulting from loss of work and disability, and cover liabilities resulting from workplace injuries and illnesses.”
These may differ from state to state, but generally most employers are required to offer their employees the following benefits:
Factor the cost of supplying these benefits into your budget before you start shopping for additional benefits. Once you know how much these will cost you, you will have a better idea of what else you can afford.
This is where things get interesting. The optional benefits you select are what set your business apart from your competition, and will have the greatest impact in hiring and retention.
“When selecting optional benefits, employers need to consider who they want to hire and what will be relevant to them,” Krasner explains. “You must also account for the market you are in and the roles you are hiring for. Ideally, you want to select the benefits that will have the biggest impact on the most employees.”
For example, if you are trying to hire recent college graduates for an entry-level position, you may consider investing in a tuition relief program. On the other hand, if you are looking to fill a role that requires someone with at least 10 years’ work experience, you may want to consider a generous family leave program or work from home flexibility.
“In the fintech industry, it is fairly common for employers to offer a flexible PTO program,” Krasner says. “However, offering flexible PTO wouldn’t work for a shipping fulfillment center, where employees are expected to be on the clock during certain hours.”
Generally, the benchmark standard for optional benefits is a combination of health and wellness programs, including medical (if under 50 employees), dental, vision, disability, a retirement plan, and PTO. Your business should consider investing in these optional benefits in order to stay competitive in the job market.
If you already have employees, Krasner recommends asking them what type of benefits they want:
“Survey your current employees to figure out what is most important to them in terms of benefits. It shows that you not only care about their well being, but you are responsive to their needs.”
If you need some inspiration in determining what benefits to offer, here is a list of some of the most popular optional benefits:
Once you know which benefits you want to offer and how much you can spend, it’s time to find a vendor that can supply and administer these benefits on behalf of your business. These vendors are known as benefits providers, and they come in many different shapes and sizes.
However, for small businesses, Krasner recommends aligning with a professional employer organization (PEO). PEOs provide comprehensive benefits solutions to small and midsize businesses by co-employing a company’s worksite employees. Under a co-employment agreement, the business owner maintains full control of the business and its operations, but the PEO becomes the employer of record—meaning it is legally responsible for paying your employees and dealing with taxes, benefits, and insurance.
The benefit of working with a PEO is that PEOs are able to group co-employees from all their client companies together in order to secure comprehensive benefits packages and rates typically reserved for large corporations. In other words, your business gets wholesale pricing on its employee benefits package. PEOs also oversee compliance and share liability on employment-related issues, providing business owners with a layer of legal protection. Furthermore, working with a PEO means you won’t have to hire internally for HR, as PEOs administer your entire benefits program.
“The way it works is you approach a PEO with a list of the benefits you want, the number of employees you have, and a budget,” Krasner explains. “They will offer you an array of options and quote you a price for how much it will cost to implement and administer.”
When searching for a PEO to work with, Krasner recommends getting quotes from at least three different providers. You should also be sure to ask each vendor about their practices in regards to implementation, reporting, scalability, and support.
Here are some PEO options to consider for your business:
TriNet provides small and medium-sized businesses with a wide range of workforce management solutions, including human resources and benefits administration, compliance services, applicant tracking, performance management, and more. The benefits TriNet can administer on behalf of your business include medical, dental, vision, and disability insurance, retirement plans, flexible spending accounts, pre-tax commuter benefits, gym membership discounts, and employee assistance programs.
Like most PEOs, the pricing on TriNet depends on services required and the size of your team. Business owners do not need a minimum number of employees to work with TriNet, and can cancel their contract at any time by providing 30 days’ notice. Reach out for a free consultation.
Paychex started as a payroll service provider way back in 1971, but has expanded over the years to become a fully formed PEO. Paychex’s longevity and experience make it one of the most comprehensive PEOs on the market. In terms of benefits, Paychex offers all types of health insurance as well as liability insurance, business insurance, retirement plans, a learning management system, and more.
One unique benefit of working with Paychex is that they will typically send an HR representative to your office, giving you direct access to an HR professional. Paychex also provides 24/7 customer support. Pricing is determined by the location of your business, benefits needed, and number of payroll periods.
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If you don’t want to pay for a PEO, there are other more simplified benefits administration solutions you can look into, such as HR and payroll software. However, these solutions are also more labor intensive than a PEO.
“If you choose to use software, you are probably going to have to do your own administration, ” Krasner says. “If you’re already knowledgeable in HR, you might be able to handle it, but many business owners don’t have time to deal with benefits administration.”
While PEOs are a good option for small businesses, Krasner says a business with more than 150 employees should consider bringing their benefits administration in-house.
An employee benefits package should be treated as a living, breathing thing. In other words, you should be constantly looking to hone and improve it as your business grows and changes. For example, as a small business it may not be realistic to offer 401(k) matching. However, as your business grows and becomes more profitable, a great way to reward employees is by matching their retirement contributions.
Constantly listen to your employees. Conduct surveys, hold focus groups, and ask them face-to-face about the benefits that matter most to them and will lead to higher job satisfaction. An employer who prioritizes their employees’ personal health and wellness will be rewarded with hard work and loyalty.
Creating an employee benefits package requires a game plan. Understand why you want to offer employee benefits, work out a budget, understand your state and federal requirements, pick out the benefits that will move the needle for your business, and hire a PEO. Then hone and refine your benefits package to make sure your employees are pleased with your offerings.
Overall, offering a comprehensive employee benefits package is good business. It fosters a positive work environment full of dedicated and productive employees. So what are you waiting for? Get started on your employee benefits package today.