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The Basics of Benefits

“The Basics of Benefits”

Here’s a handy list of fourteen types of attractive employee benefits with short explanations of each. Do you have these available for your staff? Should you?


Beyond Social Security and Medicare taxes, unemployment tax and worker’s compensation premiums (where applicable), you generally are not required to provide anything besides a paycheck to your workers. But consider that money spent on a good benefits program can repay dividends in keeping good employees and reducing the cost of obtaining and training new ones. Many workers will even accept lower pay in exchange for a benefits program that suits their financial needs and personal life.

Still, small business benefits programs generally lag behind those of larger companies.

In this Quick-Read you will find:

  • A list of benefits entrepreneurs may want to consider in creating an attractive package for their employees.


First, decide how to structure your employee benefits package. Do you want to offer the same benefits to everyone, or provide individual perks based on such criteria as length of service or position in your company? Be careful that your program isn’t interpreted by lower level employees as good for the "big shots," but not for them.

Remember, though, that you and your family will get the benefits too. And most of the employee-benefit costs can be deducted at tax time. That means your company can provide the benefits for about two-thirds of what they’d cost you and your employees in after-tax dollars.

Many firms give workers some choice among benefits, such as health and life insurance, letting them pay according to the coverage they desire. Some even establish "cafeteria plans" that give each employee a lump sum to spend on the benefits of their choice. This can be attractive to someone with a working spouse already receiving insurance coverage. Guidelines for establishing cafeteria plans can be seen in the Quick-Read "Cafeteria Plan Offers Benefits and Savings."

Unemployment insurance is not an option. You will be taxed at an adjusted federal rate of 0.8% of the first $7,000 of each employee’s wages, plus a state rate that varies. Virtually all other benefits are up to you.

The options

  1. Health Insurance: You’ll need to offer a good health plan just to stay even with most of your competitors. The three major health care choices are:
    • Fee-for-service coverage that lets patients to go anywhere for health care. This is the most expensive coverage and is rare these days.
    • Health Maintenance Organizations (HMOs) that require patients to receive health care from one specific commercial provider. This is the cheapest coverage but provides the least choice to patients, which many employees don’t like.
    • Preferred Provider Organizations (PPOs) that enable patients to choose from a list of health care providers approved by your insurance company. This compromise solution is the fastest growing type of health coverage.

    You’ll also need to make choices such as: Will you pay the entire premium, or split it with insured employees? Will your policy have a deductible amount that each employee must pay before an expense is covered? Does the policy require an employee to contribute a percentage or a set copayment for each medical expense? Will coverage be extended to family members or live-in partners, and at what cost? Will you provide coverage for dental and eye care?

    Whatever you decide, try to reduce premiums by approaching insurers with the largest group possible. If your staff is small, consider teaming up with other entrepreneurs in your area, or investigate programs offered by trade groups or other professional organizations. And though many companies require full-time employment for health coverage, consider extending it to permanent part-time workers as well.

  2. Life and Other Insurance: The three most common types of life coverage are:
    • An equal dollar amount for all employees.
    • Coverage based on one’s position in the firm.
    • Coverage equal to some multiple of a worker’s pay (for instance, if the multiple is three, a $30,000 salary would qualify for $90,000 in life coverage). As previously noted, be cautious about offending employees by offering different coverage amounts to different people.

    Disability insurance covers off-the-job injuries or protracted illnesses. The two major types are short-term coverage that pays anywhere from 50% to 100% of salary for up to six months, and long-term coverage that usually pays 60% of salary for up to two years or longer. The longer the benefit period and higher the salary percentage payout, the more premium you’ll pay.

    Besides these conventional insurance benefits, you can stand out from competitors by offering employees the opportunity to obtain reduced costs for other insurance they might need, such as auto and homeowner’s. By approaching insurers as a group with multiple potential sales, you’re better able to leverage discounts.

  3. Partner Coverage: Some firms cover unmarried partners of employees, but it is one of the stickiest benefits issues around. Moral issues aside, same-sex, live-in couples have argued that, because no state laws currently recognize such unions, they are discriminated against because they cannot receive the same insurance benefits as spouses. Indeed, a few cities, such as San Francisco, have even required that businesses that deal with them — from window washers to United Airlines — provide employee benefits for same-sex couples. Now opposite-sex couples are challenging such decisions, protesting that marriage should be mandatory as a standard for a "permanent" relationship.

    The truth is that, even in places such as the Bay Area, same-sex partners usually include less than 1% of "significant others" receiving benefits in companies that permit such coverage. That’s probably because employees usually have to sign a statement explaining their union, and many are hesitant to proclaim their sexual orientation at work. If you’re considering partner coverage, proceed, but know that this is new and uncertain territory.

  4. Flexible Spending Account (FSA): Most commonly, this is an account used to cover an employee’s uninsured health care and child care costs, created with money deducted from the person’s paycheck. Because the deduction is pretax, funds in such an account provide more "bang for the buck" than the same amount of money after taxes. FSAs are strictly regulated. Money an employee sets aside but doesn’t spend in a calendar year is forfeited and can be distributed among all plan members or used to cover administrative expenses. Your company must pay the cost of administering the FSA program but won’t have to pay Social Security or unemployment taxes on the wages employees invest.

  5. Wellness Program: Employers are finding that an ounce of prevention is often worth several dollars of savings in lost worker time because of illness. Wellness programs can range from company exercise programs and lunchtime jogging clubs to free or reduced-price membership at a nearby health club, vitamins or consultations with homeopathic practitioners. Gear your offerings to the makeup of your employees: Sun Microsystems, with a large percentage of young working mothers, even includes a lactation support group in its wellness program. More ideas for wellness program features can be found in the Quick-Read &q
    uot;Working Well Together: Promoting Health in the Workplace."

  6. Employee Assistance Program (EAP): If you think alcohol and drug abuse are an employee’s personal problem, consider that such workers are absent from the job more than twice as much as other workers ("An Analysis of Worker Drug Use and Workplace Policies and Programs," U.S. Substance Abuse and Mental Health Services Administration, 1997), and file five times as many worker’s compensation claims ("Drug and Alcohol Abuse — An Important Workplace Issue," International Labour Organization, 2000). An EAP to help employees through substance abuse, marital, family, legal, financial and other stressful problems is good for your workers and your business. Many entrepreneurs cannot afford to keep expert consultants on staff for these problems but refer troubled employees to outside professionals and pick up the cost. It is critical to keep such referrals confidential and assure employees that referrals are for their benefit and will not be used against them.
  7. Vacation, Holidays and Sick Leave: Most firms provide a week or two of vacation after six months to a year, increasing the amount the longer an employee stays with the company. But consider making an exception to immediately match the paid vacation time a desirable prospect is already receiving from another employer. Your paid holidays should match those of comparable businesses in your area. If you have a diverse workforce, consider giving employees their choice of a couple of days off instead of automatically awarding holidays, such as Christmas or Good Friday. And when employees must work a holiday, be generous with overtime. Some companies don’t have a sick leave policy but simply give employees a reasonable number of days off for illness. Others set a number of "personal" days employees can use for illness, sick-child care or other individual matters. After the limit, they’re not paid for missing additional days.

    Companies differ in how they handle unused vacation and personal days. Some require employees to "use them or lose them" within each year; while others permit unused days to be carried over into succeeding years, or even compensated. Requiring employees to use all their days annually can create an empty office toward the end of the year as they rush to take their remaining days; while carry-overs or compensation for unused time might encourage ailing employees to come to work when they should stay home. Many firms adopt a middle ground that permits some, but not all, unused time to be carried over or compensated.

  8. Pensions/Bonuses/Profit Sharing: Increasingly, entrepreneurs who provide compensation beyond salary opt for performance-based rewards instead of automatic bonuses or pension-fund contributions. Quite simply, the more employees can share in your company’s financial success, the harder they will work to improve the bottom line. Just be sure that your results-sharing program doesn’t encourage snap money-saving decisions that ultimately hurt your business, such as eliminating a service position and driving disgruntled customers to your competitors.

    Considerations include whether to award bonuses at the same rate for everyone or as a percentage of salary, and whether workers must be on your payroll for a minimum period before they qualify. While "vesting" requirements used to be common at companies, today’s prevailing wisdom is that all employees are critical to a firm’s success and should be rewarded immediately for their positive contributions. Other considerations are listed in the Quick-Read "Profit-Sharing Options: Pros and Cons."

    401(k) retirement savings plans provide twice the benefit of some other plans. Put $1,000 in an employee 401(k) account, and if you’re paying 30% in taxes, it will cost you $700. The employee will have $1,000 invested that might have required $1,300 in income if it weren’t pretax. You do have to be careful not to exceed an employer limit on contributions, or the employee will have to pay tax on the entire amount — an employee relations disaster.

  9. Flexible Hours and Time Off: As workers increasingly juggle job and family responsibilities, flexibility is a benefit that costs you little or nothing, yet often makes the difference between an employee’s staying with or leaving your company. It pays to offer flexible hours, vacation and holiday schedules, as long as work needs are met. Consider also telecommuting and job-sharing requests, with the understanding that they must first undergo a trial period before they’re guaranteed. The Quick-Read "Telecommuting: Pros and Cons" provides tips if you want to pursue that option.
  10. Moving Expenses: This can be a big incentive for key people to join your company or move to a new location. Companies that pick up relocation costs generally pay for packing, moving and unpacking household goods; short-term storage charges if necessary; disconnecting appliances at the old home and connecting them at the new; and meals and lodging for a reasonable number of days if the employee’s family must travel long distance to the new location. Some companies also help the employee sell an old house and buy a new one, or even buy the employee’s house immediately at an agreed-upon market value and re-sell it themselves. You’ll have to decide what moving expenses you can afford.
  11. Continuing Education: Supporting higher education rewards both employees, who gain knowledge and skills to advance their careers, and entrepreneurs, who get more effective workers. If you have limited funds for educational benefits, limit support to classes directly relevant to your business needs. Many employers also control costs by setting a limit on tuition reimbursement, or choosing qualifying colleges and universities. Options for providing continuing education incentives can be found in the Quick-Read "Offering Training and Continuing Education Opportunities"
  12. Product Discounts: Depending on your business, this could be a perk for employees at little or no cost to you. It is common, for instance, for restaurant chains to provide free meals to workers on the job. Or if you’re in a retail business, such as a clothing store, it’s in your best interest to provide employees apparel at cost to "model" before customers.
  13. Child and Elder Care: As working and single-parent families increase, providing quality dependent care has become a magnet for attracting and keeping good employees. Increasingly, several companies within the same area band together to negotiate group discounts at local day-care centers or even establish their own joint facility to provide services to employees free or at cost.
  14. Other Personal Services: Use your staff’s size to negotiate creative discounts and special services from local merchants. Consumer businesses from movie theaters to health clubs frequently lower their prices to members of groups. Many services, such as dry cleaners and photo finishers, will also make daily pickups and deliveries to your work site if the business volume is large enough. See the Quick-Read "Beyond Paychecks: Creative Ways to Reward and Retain Employees" for more unusual perks you may want to consider.


Memphis-based F
irst Tennessee Bank had a well-regarded benefits program, and yet high employee turnover disturbed the institution’s officers. This revolving door translated directly to dissatisfied customers, who desired personal relationships but were dismayed to see a new person handling their money almost every time they entered the bank. The problem was not a lack of benefits but that they were applied with the stiffness of a new $20 bill. For example, employees were forced to all work the same hours and take their vacations in two-week blocks. And while employees were permitted from six to eight absent days a year, depending on service length, they were fired if they missed one day more — no exceptions.

An anonymous survey revealed that the policy stifled employees who had to choose between being at work and neglecting their families. Some even faked outside "meetings" so they could collect a sick child at school. The bank’s top management saw that their policies had to be rescued from the dark ages. The chairman began by symbolically burning the attendance policy and permitting each work group to set its own rules as long as customers were served. Employee morale and productivity improved almost immediately. For example, the accounts-reconcilement group decided to work twelve-hour days at the beginning of each month, when they were busiest, in return for time off at the end of the month. They slashed the time needed to reconcile the books from eight days to four, and customers received their statements sooner.

After permitting employees unlimited time off — as long as the work got done — to attend to their children, First Tennessee couldn’t ignore the lost productivity costs resulting from about 1,500 "sick kid" days a year. So the bank launched a "Sniffle and Snuggles" program that allowed Memphis employees to drop sick kids off at a local hospital for $15 a day. The bank subsidizes the hospital to run the program. While administrators estimated that the bank would have to save about 100 lost-time days a year to pay for the program, the average yearly gain is 150 days.

In general, making flexibility a key company benefit has saved First Tennessee millions in recruiting and training costs. It now retains employees twice as long as the industry average, and those familiar faces have helped the bank hold customers. First Tennessee’s customer retention rate has grown 96%, compared to an industry average of 87%.

DO IT [top]

  1. Poll your employees to see what matters most. A fairly young workforce might prefer a free health club membership to a retirement plan, or a large group of working mothers might be especially attracted to affordable dependent care.
  2. Consider a "cafeteria" plan that provides employees a set amount of money to spend on the benefits they choose.
  3. Save "executive privilege" benefits for special cases, and make your program beneficial to all employees. Provide at least something for all permanent employees, including part-timers.
  4. If your staff is small, seek opportunities to partner with other companies to reduce costs for everything from insurance to local services. Ask your local Chamber of Commerce staff and your professional association’s local chapter officers about existing joint benefit programs.
  5. Benchmark your benefits against what competitors are offering, and evaluate them at least once a year to ensure that they are competitive and desirable to your employees. Find details about public-company employee benefits in their 10-k reports (http://www.sec.gov/edgar/searchedgar/companysearch.html) filed with the U.S. Securities and Exchange Commission. Look for your smaller competitors’ offerings in their job ads.
  6. Promote benefits as strongly as salaries. Have prospects talk to current employees who are especially happy with your benefits package.
  7. Because many benefits, such as health care and retirement plans, must meet regulations to carry tax benefits, be sure to consult an accountant or attorney — or even an experienced benefits consultant — before finalizing your benefits plan.



Employee Benefits, 6th edition, by Burton Beam and John McFadden (Real Estate Education, 2001).

The Handbook of Employee Benefits: Design, Funding and Administration, 5th edition, by Jerry S. Rosenbloom (McGraw-Hill, 2001).

Pension Planning: Pension, Profit-Sharing and Other Deferred Compensation Plans, 8th edition, by Everett T. Allen (Irwin/McGraw-Hill, 1997).

The Irwin Guide to Healthcare Benefits Management: A Seven-Step Program for Reducing Your Company’s Costs by Amy J. Katzoff (Irwin Professional, 1996).

A Commonsense Guide to Your 401(K) by Mary Rowland (Bloomberg, 1998).


"Hot Tip: Unorthodox Perk" by Jill Hecht Maxwell, Inc. magazine, August 1, 2000.

"How Can I Develop Unique Benefits For My Employees?" by Rudy Karsan, Inc.com, May 18, 2000.

"Employee Benefits: Editor’s Picks," Entrepreneur.


"Employee Benefits in Small Private Industry Establishments, 1996," U.S. Bureau of Labor Statistics, 1998.

"Retirement Planning: Foolish Retirement Plan Primer," Motley Fool, 2001.

"Fringe Benefits," Symmetry Software, 2000.

"Wages and Other Compensation," "Sick Pay Reporting" and "Pensions and Annuities," Chapters 5, 6 and 8 in Publication 15a: Employer’s Supplemental Tax Guide. U.S. Internal Revenue Service, annual.

Insure U for Small Business.

Article Contributors

Writer: John Duggleby