How to Build a Competitive Employee Benefits Package
There are many ways to measure the success of an entrepreneur, including the number of new ideas launched, the revenue and profits earned, and the ways in which he or she serves an industry or a community. But perhaps the chief among these is the impact the entrepreneur is able to have on the lives of employees. Beyond tangible rewards such as pay, and intangibles such as mentoring, a business owner can profoundly shape a worker's life by providing a generous package of employee benefits. Indeed, many entrepreneurs acknowledge that the effect they have on the lives of workers is one of the most rewarding aspects of being a business owner.
It also has the potential to keep you up at night.
That's because in order to offer generous benefits, you must first practice careful financial planning. Most benefits packages do not come cheap and costs can rise exponentially as your company expands. Furthermore, once you offer a benefit, it is awkward to take it away should the economy turn south.
That said, if your company becomes known for offering good benefits, you will generally find it easier to recruit talented employees and you may even see some positive side effects with respect to marketing and sales. So what constitutes a solid employee-benefits package, and how do you set up various benefits plans? Here is an overview of the basics.
Employee Benefits: Health Insurance
The largest line item on your employee benefits budget is also typically the hardest to maintain due to rapidly rising premiums. More small businesses have opted to drop health insurance in recent years, a trend that in part prompted the health care reform legislation recently signed into law. For companies that are now looking to add or switch their health care provider, there are generally 5 options:
• Health Maintenance Organizations, or HMOs, are probably the most common option. Employees are expected to choose a primary care physician, who helps manage health care (and the related costs) by providing the worker with referrals to other doctors who are a part of the HMO network. The workers pays a copayment for each doctor's visit, and the insurance company covers the rest. The traditional value proposition for an HMO tends to be that a company and its workers give up a bit of freedom in return for lower costs; in practice, HMOs today tend to draw large networks of doctors, but they are no longer as cheap as they once were.
• Preferred Provider Organizations, or PPOs, are generally the most expensive option available to you. They are more common at large corporations than at small businesses. PPOs offer employees lots of choice in terms of doctors and hospitals; moreover, these plans allow workers to see specialist outside of the network, although a patient will usually be expected to pay some additional fees out of pocket.
• Point-of-Service Plans offer a compromise. Employees choose a primary care physician who makes referrals either within or out-of-network.
• High-Deductible Health Plans have grown in popularity in recent years, particularly among young companies with a high proportion of younger workers who are less likely to require health care on an ongoing basis. Most companies offer a high-deductible plan in tandem with a tax-advantaged Health Savings Account to help employees pay for basic medical needs.
• Self Insurance is a final option, and can be an attractive one. Companies agree to cover their own costs and work with a self-insuring company, which is not technically an insurance company, to set up coverage. There are usually fewer fees to pay, and no premium for risk. Most businesses that opt to self-insure will buy stop-loss insurance to limit exposure (both for individual workers and for your workforce as a whole) in the event of a catastrophic illness or tragedy. Self-insuring companie have more control over the design of their coverage, which means you, the entrepreneur, can create a plan that reflects your values—meaning it can be either limited in scope if you desire to be fiscally cautious, or it can be expansive if you have a strong commitment to wellness or holistic medicine and the like.
Dig Deeper: How to Choose a Health Care Plan
Employee Benefits: Dental Insurance
Dental insurance is a common benefit though not required by law. Like toothpaste, dental plans come in several flavors. Among them:
• Fully-Funded Employer Plans: A company covers 100 percent of its employees' costs.
• Partially-Funded Employer Plans: A company pays a share of its employees' costs, usually in the ballpark of 80 percent. Employees cover the remainder.
• Fully-Funded Employee Plans: Employees pay the entire cost of their dental benefits, while the company absorbs only the costs of administrative costs and payroll deductions.
Dig Deeper: How to Choose a Dental Plan
Employee Benefits: Flexible Spending Accounts
Flexible spending accounts, or FSAs, are a means of helping benefits set aside money on a pre-tax basis in order to cover basic medical expenses. An employee makes an election (up to a maximum dollar amount established by the employer) that is available throughout the plan year (January 1 to December 31) to pay for out-of-pocket medical, dental, and vision expenses. If you intend to offer employees FSAs, keep in mind that you should have cash on hand in order to reimburse employees for expenses, which, by law, you are required to fulfill from the first day of the year—even if the employee contribution is, at that point, less than the total amount of the expense.
Dig Deeper: Setting Up a Flexible Spending Account Program
Employee Benefits: A 401(K) Retirement Savings Plan
A strong retirement benefit can help you recruit employees and reduce turnover. Yet these programs are somewhat rare at private companies. Only 15 percent of companies with between five and 99 employees offer a 401(k) plan, the most common type of employer-sponsored retirement savings program.
A 401(k) is a voluntary retirement savings plan into which employees can contribute a portion of their pre-tax earnings. Employers administer and control the plan, and many companies match 401(k) contributions on a tax-deductible basis. (Fees may also be deducted, but employers can be held liable if exhorbitant fees are allowed to go unquestioned, or in the event of some other form of mismanagement.)
Employees can borrow against the value of a 401(k) plan, withdraw funds at a penalty prior to retirement, or wait for tax-free distributions when the retire. When employees move from one company to another, rollovers are common. Given the care you must take to administer a 401(k), it's a capital- and time-intensive way to reward workers. But it is appreciated by employees, largely because it offers them greater financial independence.
Dig Deeper: How to Setp Up a 401(k) Plan
Employee Benefits: Vacation Time
Providing workers with paid vacation time is extremely common, and generally considered a low-cost benefit to offer. Two weeks paid leave is fairly standard for a small business in the U.S. Many companies start workers at two weeks and reward them with additional time off as they accrue seniority. Some companies will also pro-rate vacation time, so that new hires who start on or after July 1 are only offered a week's vacation time in their first year. If you are creating a vaction policy from scratch, you should also consider rules about how much notice an employee must give before booking a vacation. You may also want to consider a use-it-or-lose-it policy. Some 66 percent of employees neglected to use all of their vacation time in 2009, according to a study released by Right Management, a consulting firm in Philadelphia. Workaholic employees may seem attractive in theory; in practice, they will likely suffer from burnout and cause stress among other workers. That's why many companies are actually requiring employees to use all of their vacation time—some even require that workers take two weeks' off at a time.
Employee Benefits: Additional Paid Time Off
Family Medical Leave
Since 1993, employers with a headcount fo 50 or more have been required by law to allow workers to take up to 12 weeks of unpaid leave to care for a sick family member. A company is required to keep the person's job open until such a time as he or she can return, and to continue to cover the employee's health benefits. Read more
Most employers offer new mothers 12 weeks of paid maternity leave, and many companies have begun offering paternity leave for new fathers as well. As an added benefit, companies usually have a designated nursing room for new moms and make adjustments to schedules to accommodate new childcare issues. Typically, a company will pay a new mom 100 percent of her salary in the period before she returns to work, although some businesses pay only a partial amount of a worker's earnings during her maternity leave. Still others place new moms on disability leave. It should be noted that, by law, pregnant women are a protected class and may not be terminated or otherwise the subject of job discrimination.
Under a flexible work arrangement, an employee can choose to work atypical business hours so long as they complete assignments in a timely manner. These arrangements take many forms including working a 4-day week, telecommuting, and job-sharing. Flextime is considered a smart benefit particularly if you are trying to tap certain segments of the workforce such as older workers or new mothers.
Sabbatical programs, whether paid or unpaid, are fairly rare but some companies swear by them. Typically, employees who have been with a company for a certain period of time (say, five years) are allowed to take time off to travel, live in another city, or pursue a passion. A sabbatical might be an automatic period of time (say, three months) or it might be a one time opportunity for an employee to take three additional weeks of vacation on top of the three weeks he or she is awarded under a company's standard vacation policy. The payoff, advocates say, is increased retention and a sense of renewal and boosted creativity once an employee returns to work.
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