Benefit Requirements for Small Businesses
- Completion time About 25 minutes
Costco. Starbucks. Adobe.
Besides these three companies being well-known brands, do you know what else they have in common? Great employee benefits. These companies have been applauded for offering employee benefits that show they care about their employees in and outside the office.
Of course, offering amazing employee benefits is easy to do when you're an established business. However, regardless of your business size and status, there are certain benefits you're legally required to provide.
But don't worry! We break down which you're responsible for and how you can choose the best plan that works for your budget.
Any employer with five or more employees is required to provide workers compensation. Workers compensation is an insurance policy that protects the small business owner if an employee becomes ill or injured on the job.
When an employee is injured or ill, workers compensation pays medical expenses, lost wages and rehabilitation expenses. If your small business doesn’t have workers compensation insurance, you – the employer – would be obligated to pay the employees' expenses out of pocket.
It's important to note that insurance is dictated at the state level; this means that some states require workers compensation in certain situations while others require compensation at all times. Be sure to find out what your state's insurance requirements are.
Under the Federal Unemployment Tax Act, employers are required to pay taxes toward state unemployment funds. These taxes are designed to pay for an employee's benefits if he or she is eligible to receive them; however, if the employee is terminated from a position for a serious offense or reason, the employee isn't eligible.
In the event an ex-employee files for an unemployment compensation claim, you’ll be notified, and the funds will be taken out of the business' unemployment tax account.
If your business is in California, Hawaii, New Jersey, New York, Puerto Rico, or Rhode Island, your business is required to provide disability insurance. This insurance covers employees who become ill or injured in a non-work related incident.
Disability insurance typically covers short and long term disability. Both policies are private policies you can buy for your employees and are designed to provide income to employees for a short or extended period of time. The employee, however, is required to wait a certain amount of time before the benefits begin being paid. In fact, for most long-term disability policies, the employee must be a full-time employee for at least a year to be eligible to receive benefits.
Although not required in every state, offering disability insurance is a sign you care for your employees. In a 2015 survey given to over 500 small business decision makers, employers believed that offering long-term disability benefits is in the best interest of the company and employees; they even found providing it improved productivity. Another reason to offer disability insurance is to save costs down the road. In the same survey, more than 55% of decision makers said that they offer long-term disability coverage in order to reduce company costs if an employee goes out on disability.
Under the Affordable Care Act, "any business with more than 50 full-time employees must provide health insurance". If you don't, you're responsible for paying a fee for every employee.
Small business owners have a few options when it comes to health insurance types:
- Traditional health plans: high premiums and a large selection of doctors.
- Managed care plans: lower premiums but a narrow range of doctors.
Most small businesses select High Deductible Health Plans (HDHPs) because employees pay more of the treatment costs up-front before the insurance agency chips in. Health Savings Accounts (HSA) working with HDHPs are a great option for small business owners too; with HSA, once the employee is enrolled in the plan, the employer deposits money into their account every pay period. These contributions are tax deductible on the company's tax return for that year.
Also, be sure to research what additional health insurance plans are offered. Most should include the following:
- Dental Insurance
- Vision Insurance
- Life Insurance
Overwhelmed? Selecting a good health insurance plan for your company can be tough, and that's why we recommend working with a health insurance broker. He or she will be able to explain which plan is best for your situation and the tax benefits.
At the very least, remember that the health insurance coverage you select should cover hospital visits and prescriptions drugs.
If you're an employer with 20 or more employees and offer group health insurance, you need to know about COBRA. COBRA is a federal law that requires business owners to continue to provide former employees health insurance coverage for a period of 18 months. Coverage applies to former employees and their families.
The exceptions to this rule are as follows:
- If your business employs less than 20 employees, you're exempt. But double check! Some states have adopted "mini COBRA" laws which apply to owners with less than 20 employees.
- If your business doesn't offer employees health care coverage under a group plan, you're exempt.
- Employment is terminated (either voluntary or involuntary).
- Employee is going through a divorce or legal separation from a spouse who is the coverage provider.
It's important to familiarize yourself with which employees are eligible, and which benefits carry over. COBRA applies in the following scenarios:
COBRA coverage can last 18-36 months. As the employer, your most important job is to make sure the employee understands their options to continue with benefits when/if a qualifying event occurs.
To find out more about your state's laws, check out An Employer's Guide to Group Health Continuation Coverage Under COBRA.
Family and Medical Leave
The Family and Medical Leave Act (FMLA) requires you to offer employees up to 12 weeks of job-protected, unpaid leave. You are also required to maintain group health benefits for the employee.
FMLA is not available to every employee, however. First, the employee has to have worked for your company for at least 12 months (doesn't have to be consecutive months). In addition, the employee has to have worked 1,250 hours in those 12 months.
Employees are allowed to take FMLA for the following scenarios:
- New child (birth, adoption, or foster care placement)
- To care for a family member's health condition
For more information on FMLA, visit the United State Department of Labor.
Benefits You Should Offer
If you're a startup or small business that is looking to attract top talent, offering "extra" employee benefits is one way to do that. These bonus benefits include:
Most small businesses will offer a contribution plan (such as a 401K) rather than a pension. This gives employees the chance to set aside their own money for retirement each pay period. Other retirement options include Simplified Employee Pensions (SEPs) and Savings Incentive Match Plan for Employees (Simple IRAs).
When you're deciding between these three options, you need to consider the following:
- Whether or not you want to match employee contributions.
- How much you want employees to contribute to the plan (if at all).
- Tax implications of each option.
Offering retirement options is a way to show employees you care about their long term personal goals as well as their career goals. In addition, there are also tax benefits and savings.
Traditional leave benefits aren't required by law but should be offered to employees. This includes:
- Holiday/vacation (a.k.a PTO)
- Funeral/bereavement leave
- Sick leave
To learn about employee "perks" you should offer, continue to the next lesson: Benefits that Retain & Recruit Employees.