For all employers, and especially small business owners, benefits are a delicate balancing act. Benefits help employees stay healthy and productive. A good benefits package shows your staff you care about them, and benefits can be key to attracting and retaining good employees.

But, benefits can be costly and time consuming. As a percentage of payroll or salary/wage costs, benefits can account for between 10% and 55% of your payroll.

This article will (1) identify benefits that other employers are offering (some at large companies only), (2) recommend a competitive benefit package, (3) identify what the potential cost to you could be and, (4) share cost-saving ideas that might work for your company.

This article will offer approaches you can use to provide "competitive" benefits while controlling the current and future costs of the benefits you offer.

For the purpose of this article, all benefits have been grouped into one of four categories:

  • Legally Required Benefits
  • Time-Off Benefits
  • Social Benefits
  • Future Financial Security Benefits

On average, benefits cost an additional 45 percent of payroll and account for nearly 30 percent of a private business’s total compensation costs, according to the Bureau of Labor Statistics. If you provided no benefits except for those legally required, the annual cost would be between 10% to 13% of annual payroll.

If this isn’t enough to grab your attention when considering funding or adding benefits to your compensation costs, you also need to know that benefits can be tricky and complicated. Great care should be taken when considering paying for, adding or improving any benefit program because:

Once you offer/give a benefit to your employees, you cannot reduce or eliminate it without a SIGNIFICANT impact on the morale and loyalty of your employees. Except under extreme circumstances, ONCE YOU GRANT A BENEFIT, IT WILL MOST LIKELY SURVIVE, NOTWITHSTANDING THE FINANCIAL STATE OF YOUR BUSINESS. DO NOT OFFER OR IMPROVE A BENEFIT UNLESS YOU HAVE COMPLETELY EXAMINED THE POTENTIAL SHORT AND LONG-TERM EFFECTS OF THE BENEFIT ON YOUR COMPANY.

Most benefits are seen by employees as a function of "providing and caring for themselves and their family members." We are talking about dealing with employee perspectives that emanate from meeting basic security needs. Expect to encounter continuous, overt as well as subtle, employee requests to provide or improve a myriad of very divergent benefits to address each individual’s situation. To be able to retain your good people, you will have to respond sincerely to each such request, but "responding" does not equal "acquiescence". You must decide what makes the most sense for your people and your business, but always remember that:

BENEFITS ARE COSTLY AND COMPLICATED because you will never be able to please everyone-YOU WON’T BE ABLE TO AFFORD TO PLEASE EVERYONE. And, you must have just the right "people" cost structure so that your two-legged costs don’t create a profit problem for your business.

So, what do you do? What’s a small business owner to do knowing that some benefits must be offered or he will lose the all-important "attract and retain" game? Let’s talk about each of the benefit categories (Legally Required, Time-Off, Social, and Future Financial Security) and for some specific benefits, let’s go back through the list and determine some alternatives that could save you money and provide you with more control of both current and future benefit costs.

Legally Required Benefits (Cost: 10% to 13%)

Legally required benefits include:

  • Social Security taxes (paid by both the company and employee)
  • Medicare taxes (paid by both the company and employee)
  • Federal and State unemployment taxes (paid by the employer)
  • Workers’ compensation insurance or state taxes (paid by the employer)
  • Overtime compensation (for employees not exempt from the Fair Labor Standards Act {Federal and/or State})
  • In some states, contributions to short-term disability programs
  • In some states, time off-typically 2-3 hours—to vote in elections.

As the name of this category suggests, all businesses, no matter how many people are employed, must abide by the provisions of these federal or state laws. Depending on the nature of your business and the cost for Workers’ Compensation), generally the benefit "cost" of this category ranges between 10% to 13% of payroll.

Cost Savings Ideas

Other than having no employees, there is not much that can be done to ameliorate the cost associated with legally mandated taxes and benefits. Luckily, most small business owners are exempt from certain federal and state laws if they do not meet threshold levels of employment. For example, the Family and Medical Leave Act only applies to employers with 50 or more employees.

Time-off Benefits (Cost: 6.5%)

These benefits provide for time away from work for a variety of good and sufficient reasons that all employers face when dealing with employees who have other demands placed on their time. Time away from the job can be paid or not paid depending on what you wish or need to offer your people to recruit and retain them.

  • Holidays
  • Vacation
  • Sick leave
  • Bereavement leave
  • Jury Duty
  • Military leave
  • Personal and Medical leaves of absence (Family Medical Leave of Absence legislation at the federal and state level does not apply to businesses with fewer than 50 people in one location)
  • Flexible hours/schedules
  • Telecommuting
  • Job sharing

At a minimum, to be competitive a small business owner must provide at least six paid holidays per year, 10 paid vacations days per year, the "average" annual sick leave usage of four days per year, and at least one day should an employee experience the death of an immediate family member. In total, 20 days of paid time-off per year is competitive. This amount of paid time-off is equivalent to 6.5% of all annual available work days, so it would "cost" an additional 6.5% for time off (Note: Paid time-off does not add to your annual payroll cost. Paid time-off only means that there is no "productivity" for paid days off.)

Cost Savings Ideas

There are no federal legal requirements to provide paid time-off. However, businesses that are subject to the FMLA (generally with 50 or more employees) must provide unpaid time off in certain situations. And the states of Massachusetts and Rhode Island require employers to pay employees for certain national and state holidays.

Beyond that, employers have a great deal of latitude in how they structure days off. Since each of your employees mayhave their own notion of which days off are important to them, one strategy is to provide something that has beencalled Flexible Paid Time-Off (FPTO).

FLEXIBLE PAID TIME OFF IS AN APPROACH THAT CAN SAVE YOU MONEY and provide your employees with a choice of when they want to use paid time-off.

What FPTO does is to lump paid time-off under one banner. Some FPTO arrangements include only vacation and sick time, while others also include holidays, personal days, and bereavement days. This approach recognizes today’s increasingly diverse workplace, accommodating employees who want time off for specific cultural or religious holidays, family needs, or a death outside the immediate family.

.And, rather than making a number of paid days off available at a specific time in a calendar year (e.g., January 1, 20XX), an FPTO approach provides that employees earn FPTO each week/bi-week/month worked (depending on your pay cycle) and employees can save this time-off up to a pre-set number of hours, (usually a total of 18 days or 144 hours) over which they do not earn any more time-off until their "balance" is below the maximum allowed.

Also, in lumping all time off together, the "average" number of paid sick-leave days is reduced by at least one-half (two days) and then added back to the holidays (six days) and the vacation (ten days) to provide 18 paid days off for any pre-approved time-off request or for any sickness/emergency. If the employees FTO bank is empty, any time taken off for any reason is on an unpaid basis.This approach reduces paid time-off "costs" by 10 percent.

Other than the FPTO approach discussed above, there is not much a small business owner can do to reduce the cost of Paid Time-Off except reduce the number of paid vacation days or declare that there are no paid sick/emergency days for anyone, (and NOT FOR ANYONE is key because if you make an exception to this rule even once, you will create a significant employee relations problem). On the flip side, granting additional paid days off in recognition of extraordinary effort or achievement is a relatively low-cost employee "reward" that is highly appreciated.

Social Benefits (Cost: 17% to 31%)

Social benefits include:

  • Health insurance (and pharmacy)
  • Dental insurance
  • Long-term disability insurance
  • Vision care insurance
  • Life Insurance
  • Short-term disability insurance
  • Child care subsidies/facilities
  • Elder care subsidies/facilities
  • Employee Assistance programs (counseling)
  • Education/tuition assistance reimbursement

"Social Benefits" are not based on wages, but the market cost to acquire insurance or pay for programs like child care/day care. As a business owner and purchaser of this type of benefit, you have very little control over the current and future cost of such benefits, especially for health/medical/pharmacy and dental insurance.

Health insurance costs vary by location, type of plan and provider network. The "average" cost of family health insurance coverage in the U.S. is about $1700.00 per employee per month ($20,576 per year) as of 2019, according to the Kaiser Family Foundation. Of that, the employer pays, on average, $1213 a month ($14,561 a year).

For a $30k per year employee, this employer contribution represents 50% of the employee’s annual pay. For a $60k per year employee, it would be one half of that, or 25% of their annual pay. Long-term disability insurance is usually relatively inexpensive until a claim is filed, (a bit less than 1% of annual pay). Depending on the type of dental insurance coverage, it, too, can be fairly inexpensive, adding another 2% of annual pay to the Social Benefits cost.

Providing health, life, dental, and disability insurance will help you attract and retain good employees, but it can be expensive. And under the Affordable Care Act, employers with 50 or more employees face a penalty if they don’t offer employer-sponsored health insurance.

Understanding Insurance Costs

"Insurance" works because, armed with a large group of people to be insured, detailed and good data, and actuarial studies that effectively predict what costs will be, insurance companies charge premiums to cover the predicted expense of claims, plus the cost to administer those claims, plus the cost of umbrella coverage on the risk they have underwritten, plus a profit for the insurance company. As you will note, unless the insurance company’s predictive model is incorrect or there is an unanticipated reduction in size of the insured "pool" (their revenue stream), insurance companies are designed to make money no matter what happens. And if insurance companies don’t make money in a given year, you can be certain they will make it up in subsequent years by increasing their rates for people who purchase insurance. The conclusion is obvious: as a small business owner (a small fish in a very large pond), you have little or no control over insurance costs other than to walk away from your current provider, reduce/change your policy coverage, or pass on any increase directly to your employees-a real "Hobson’s choice" in human resource/employee relations terms.

There are many ways for the employer to provide traditional insurances for health, dental, disability, and life, and the most straightforward choice is to purchase insurance that provides basic coverage at the least expensive cost on behalf of your employees and take your chances with the inflating costs of these benefits and how you will respond if prices rise faster than your ability to pay for them.

Cost Savings Ideas

One way to save money, especially on health care, is to join an association composed of a large number of people and use the power of numbers to negotiate the best rate possible for insurance. There are many such professional/trade associations throughout the United States and you may wish to check with them to see if your company qualifies for participation and what their insurance rates might be.

There are several ways to save money on employer-sponsored health insurance plans:

  • Offer a less expensive plan that operates as an HMO or has a smaller provider network
  • Require employees to pay a greater share of the monthly premium cost
  • Offer high-deductible plans-generally the higher the deductible, the lower the monthly premium. Some high deductible plans allow employees to make tax-free contributions to a health savings account that can be used to pay medical expenses.
  • Offer employee health insurance through the Federal Government’s Small Business Health Options Program (SHOP). SHOP program participants may be eligible for the Small Business Health Care Tax Credit and state premium assistance programs. Participants must have 50 or fewer employees and meet other eligibility requirements.

You can also give your employees a monthly stipend and allow them to choose their own social benefit plans. Similar to the discussion about employees having different needs and desires for paid time-off, there are a variety of competing needs that make particular Social Benefits more important to some employees and of no interest to others.

Under this approach, you’d pay your employees a monthly "stipend" amount over and above their base pay and let them choose the items they want to purchase based on their unique situations-be it health insurance, disability insurance, life insurance, child care, elder care, etc. Employees could purchase their own health insurance on the federal insurance marketplace or state exchanges. The advantage of this approach is that employees decide which benefits they want, and you as the small business owner can control your costs. The disadvantages to this approach are:

  • No large consumer "group" so there is no buying power. However, workers may qualify for Affordable Care Act subsidies that will reduce their insurance costs.
  • All company contributions/stipends are fully taxable.
  • A small administrative expense for the business owner because of the need to make periodic checks to ascertain that employees receiving the stipends continue their chosen insurance coverage. Without such "proof" of coverage (whatever that might look like) then the stipend should not be continued.

Another advantage to the "buy your own coverage," whether completely on one’s own or as part of a larger group, is that the benefits are portable and not dependent upon employment with your company. One of the legacy exposures a small business carries with a company-provided insurance plan (especially health insurance) is the requirement to provide continued coverage after someone is no longer employed if they qualify for such coverage. For health plans, this is known as COBRA coverage and can last for up to 18 months following termination from your company, albeit at the employee’s expense to fully pay for this coverage.

To conclude this section on Social Benefits, realize that you are a small business and that you do not want to bear the burden of the administrative requirements to run and manage your own benefit plans. Not only can this be a time-consuming task, but there is always some expense for doing so.

Future Financial Security (Cost: 0% to 5%)

Future financial security costs include expenses for:

  • Pension plans
  • 401k plans
  • Profit sharing plans
  • Employee Stock Ownership plans (ESOP’s)
  • Deferred Compensation plans
  • Stock Option plans

(Note: Federal Social Security and Medicare are not listed here because they are legally required benefits, but both affect this category of benefits as will be discussed later.)

Future financial security aims to help your employees in their retirement years. As a rule of thumb, a person should aim to have 80 percent of their pre-retirement income once they’re retired. Social Security is one component of retirement income, and employer sponsored plans are another.

For many years, the employer’s response to this need was to make contributions to a "company" pension plan. These plans were initially modeled around the reality of near "life-time" employment with the same company. Coupled with Social Security, someone who worked for 35-40 years for the same company and retired at age 65 could have a modestly comfortable retirement. Of course, when this model was popularly adopted, the life expectancy of retirees was nowhere near what it is today.

Today’s problems with pension plans are many. First, few people work for one company for their entire career. Based on today’s workforce demographics and trends, less than 2% of all people employed will meet the mold of the past in terms of employment longevity with one company. The point to employers is that if you offer a pension, it must be completely portable with a short vesting period, if any.

The second largest problem with what were traditional pension plans (defined benefit plans) is that they have become much more regulated, controlled, expensive, and difficult to account for. There have been new rules about funding levels, higher annual per participant fees (also known as taxes) paid to the Pension Benefit Guaranty Corporation (PBGC), more required government filings, and the uncertainty of the stock market and investments.

Today, if there is a future savings plan sponsored by employers at all, it’s usually a tax-deferred savings plan like a 401k, sometimes with an employer matching contribution. A 401K is administered by a third party, with employees having control over their investments.


Cost Savings Ideas

Although there is some cost to the company to set up and administer a 401K, a company 401K plan also gives small business owners an opportunity to maximize their own retirement savings. An investment advisor can help you evaluate 401K options and see what’s best for your business.

If you decide not to have a 401k plan or a pension plan, your employees may set up and contribute to their own Individual Retirement Accounts (IRAs). Contributions are on a pre-tax basis and earnings are not taxed until withdrawn. As the employer, you could provide a periodic, taxable, stipend that employees could add to their savings.

Secondly and similarly, your employees could also open a Roth IRA. While contributions are made after tax, withdrawals made after retirement are not taxed. There are annual income limitations on who is qualified to contribute to a Roth IRA. Any contribution you as the employer might make would be achieved by providing a periodic participation stipend in the form of taxable additional cash compensation.

A variation on a theme for these first two cost-savings ideas could be that any stipend you might give to your employees would be tied to the profitability of your company; in and some years it might be paid and in other years it might not depending on the financial performance of the business.

Businesses with fewer than 100 employees can also set up a Savings Incentive Match Plan (or "SIMPLE") plan, which is essentially an employer-sponsored Individual Retirement Account (IRA). You as the employer are required to either make a matching contribution (up to 3% of annual pay if your employee contributes 3% or more) or make a 2% contribution across-the-board for all employees, whether they have chosen to participate by making pre-tax contributions to the plan or not.Information on the SIMPLE alternative is available on the US DOL website at: This type of plan seems to be unencumbered with a lot of regulation and reporting and is totally portable. There are also some minimal annual tax savings for the employer for the first few years after initiating this savings vehicle for small business employees.

Small business owners need to offer a reasonable benefit plan to be in the "attract and retain employees" game. There are ways to do this while prudently minimizing the cost of and administrative time spent on benefits. Any benefit plan/option must be thoroughly vetted in terms of current/future cost and complexity before it is even hinted to employees that additions or changes to the benefit plan are being reviewed or contemplated.