Executive Summary
- Most employers offer health insurance and 401(k) if they can. Those benefits are nearly impossible to replicate as an individual. Many employers offer some contribution towards the health premium.
- The other coverages: vision, dental, long-term and short-term disability, and life are add-on coverages that you can offer for your employees’ convenience. Many employers contribute very little to none of these costs.
- Don’t forget about employee benefits that are very appreciated and don’t cost very much. Additional time off is an easy one.
When you start a new business, you may get away without offering any employee benefits. But only for a while. You will reach a point where your benefits, or lack thereof, will be an issue when recruiting talent. And even you as the owner may be tired of relying on your spouse’s health coverage and retirement savings.
But don’t panic. Employee benefits are getting less complicated and they are more affordable than you might think. Remember, if you have fewer than 50 full-time employees, there is no mandate regarding what health benefits you must provide or how much you must contribute towards their cost. And the other benefits — vision, dental, long-term disability, 401(k) — don’t require any contribution by the employer at all. Just making them available to employees can be a benefit in itself.
Health Insurance
Health insurance has changed a bunch since the passage of ACA (Affordable Care Act), including how employers purchase it. A small group plan, meaning any plan consisting of 2 to 50 employees, is no longer subject to the health of your employees and negotiations with the carrier. The carriers set their premiums based on the age and gender of the participants and the state the employees are located in. So, once you get a quote, it won’t be re-quoted based on employees’ health histories.
Historically, benefits brokers didn’t like to spend too much time on small plan quotes because it was a commission desert. That’s where companies like Gusto, which started as a payroll service provider, have stepped up to the plate. They will help an employer of any size find health coverage. And because they act as the broker of record, the plan integrates seamlessly into your Gusto payroll. Deductions are automatically updated from the carrier. So, other than making sure your employee records are accurate in the payroll system, you’re set until time for annual renewal. (And we can help with both of those.)
Costs: In Texas, I see basic plans averaging around $500 a month for individual coverage to $1,500 a month for family coverage. (Employee + spouse and employee + child fall somewhere in-between.) Most employers offer a contribution of a fixed dollar amount per employee and the employee absorbs the rest. I’ve seen a range of $100 a month to $500 a month in employer contributions. I’ve occasionally seen an employer offer a percentage (such as 50% of the premium), but that creates an unequal benefit based on the coverage an employee selects.
Employers should not incur a cost for the administration of health benefits. The broker receives a commission from the insurance carrier, not from the employer.
Annual Filings: A Form 1095-B needs to be provided to each health insurance participant indicating how many months they had coverage during the year. Make sure your benefits broker or administrator will prepare those for you.
You might hear the term HSA or Health Savings Account as you shop for insurance coverage. This is a savings account for employees that allows them (and you) to contribute pre-tax dollars for payment of medical costs. It is designed to help employees pay the out-of-pocket costs on higher deductible health plans.
Dental Insurance
Most dental plans are reasonably priced, because they don’t attempt to cover all your dental work. They usually cover two cleanings a year and a discount off other services. The plans usually have an annual maximum benefit. Some employers cover all of the costs, some split the costs with their employees, and some offer no contribution towards the cost.
Cost: I see Dental plans around $50 per employee per month and family plans for $160 per month. The employer usually pays an “administrative fee” to the carrier for $10-20 a month. If your employees are located in the same community, you may be able to buy a plan from a local dental group that is more competitive.
Vision Insurance
Vision insurance usually covers one eye exam and one pair of glasses or contacts a year (or a portion thereof). Many employers pass the entire cost on to their employees.
Cost: Expect this coverage to run $15-30 a month for an individual or $40-70 for a family. The employer may be charged a monthly “administrative” or “billing” fee of $10-20.
Life, Short-Term Disability, Long-Term Disability Insurance
I throw all of these into one big pile because that is how they are often bundled and offered for your company. These policies vary wildly in rates because the coverages can be vastly different. $15,000 worth of life insurance costs a few dollars ($2-5 a month). A life insurance benefit of 2 times salary is quite a bit higher.
Short-term disability is designed to cover short absences of 3 to 6 months, such as for pregnancy. Long-term disability is designed for the long-term (clever, eh?) of 2, 5, or 10 years or until retirement. As you might guess, the higher the percentage of salary it is replacing and the longer the term of the plan, the higher the cost.
Cost: Again, there is no standard as to how much an employer contributes to these coverages. Some employers offer a small life insurance policy at their cost and the employee pays for any supplemental amounts.
Section 125 or Premium-Only Plan
You will run into this super-secret code word at some point in the benefits conversation. This is the IRS code that allows you, the employer, to create a plan called a Section 125 plan or, informally, a premium-only plan, that allows employees to pay their portion of insurance costs pre-tax. Almost all employers that offer benefits have one of these plans.
Costs: Some benefit providers will set up and maintain the plan for you at no cost. Some will charge you an annual fee of a few hundred dollars ($125-500).
Annual Filings: With some exceptions, a Form 5500 must be filed for your cafeteria plan annually with the IRS. Make sure someone is preparing and submitting that for you.
401(k)
In the old days, like when I started practicing accounting, 401(k) plan creation and administration was complicated and expensive. You had to find and pay an administrator and an investment advisor. And they all charged you thousands in fees, so most small businesses couldn’t touch them.
Fortunately, there are new players in that field, such as Guideline, which will set up your 401(k) plan, administer it, and provide multiple investment options for a set-up fee of $500 and a reasonable monthly fee per employee. And it is all done through their online web portal.
Costs: $500 set-up fee. A monthly base fee + $8 per month per employee. If you choose to offer a “safe-harbor” match, your maximum exposure is 4% of total compensation.
Annual Filings: A Form 5500 is required to be filed with the IRS every year. There are also rules (can you say “ERISA?”) about providing Summary Plan Descriptions to participants in a timely manner, so make sure someone is handling your 401(k) compliance.
ERISA is the federal law, Employee Retirement Income Security Act of 1974, that sets minimum standards for voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.
Safe Harbor Plan
This is another super-secret code word that will come up in your benefits adventure. I’ll make the explanation as short and painless as possible. I
f you are an owner or highly-compensated employee (HCE’s currently defined as compensation over $115,000), you are allowed to contribute a little more, but not too much more than everyone else. If the rest of the employees contribute 3% of salaries, for example, the owners and HCE’s can only contribute 5% (2 percentage points more). Otherwise, you fail the discrimination tests of a 401(k). The government says this benefit should be for everyone, not just for the owner and big-wigs.
However, if you offer a safe-harbor employer match (meaning the employer matches 100% of the first 3% of employee contributions, 50% of the next 2%, which maxes out to 4% of an employee’s compensation), the owner and HCE’s can contribute as much as they want (within the annual IRS imposed limits).
Other Benefits
As you put together your benefits package, don’t forget about benefits that can have a big impact with your employees that don’t cost very much. Think about adding a paid day off for employees’ birthdays. It’s not that expensive, it is spread throughout the year, and employees will love it.
You can also add floating holidays. That’s the concept of adding a paid day off that the employee can use at their discretion throughout the year. Employees often add this to their Thanksgiving time off, 4th of July, or Christmas. Again, think of a benefit that is not that expensive and can have a big impact with employees.
Though benefits are easier to administer than they have ever been, I don’t suggest navigating these waters on your own. It is time-consuming to evaluate options, and you have many other things to do. An advisor can help you sort through the choices and maintain them headache-free. And yes, we can do that for you. Just remember you can offer benefits just like the big boys.
To talk about small business employee benefits, contact me today! I’d love to discuss your business needs and how we can set up a nice benefits package to help retain your talent.
