For all employers, and especially small business owners, benefits are an important ingredient in the "attract and retain employees" recipe for having the right people to perform your business' important roles/tasks. 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

As a general comment/observation about benefits, the range of the total cost of all benefit plans (expressed as a percentage of payroll) for the items presented in this article (above) is from 33.5% to 55.5% (again, depending on the average annual pay of your employees and the benefits you offer and subsidize). 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%)

  • 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
  • Provide up to two hours for each employee to vote in elections, if requested

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 insurance (three states require employers to pay taxes based on wages paid to employees and the experience rating of the company), 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 many federal and state laws if they do not meet threshold levels of employment (some of which become applicable if a small business owner has fifteen or more employees -including him- or herself and any family members - on the payroll).

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 legal requirements to provide paid time-off. Since each of your employees may have their own notion of which days off are important to them, whether they are holidays or vacation days, one strategy is to provide something that has been called Flexible Time-Off (FTO).

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 FTO does (unless you deem it wise to close the office/business on specific holidays) is lumps all paid time-off under one banner, including payment for any paid sick time-off. 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 FTO approach provides that employees earn FTO 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.

Not only does this approach reduce the paid time-off "costs" by 10%, it also rewards people for not taking sick days (they have two more "discretionary" days at their disposal if they don't use paid sick time) and reduces the paid vacation/holiday time-off for people who use more paid sick time than average.

If there are holidays on which the small business wishes to close the entire business (because your customers close on these days, too), you can still use the FTO approach by just combining the vacation time and the sick time. Another advantage of having a purely FTO approach that includes holidays is that people have different days of the year they might want to celebrate as a holiday (for religious reasons, cultural reasons, etc.) and the "pure" FTO approach sidesteps any discussion about which days the company chooses to observe.

Other than the Flexible Time Off 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%)

  • Health insurance (includes 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.

The cost of Social Benefits varies significantly because of multiple-plan variables. The "average" cost of family coverage health insurance is about $700.00 per month (assuming a "typical" family of four along with a competitive plan design). For a $30k per year employee, this would represent 28% of their annual pay. For a $60k per year employee, it would be one half of that, or 14% 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. If you were to provide company-paid health (including pharmacy), dental and LTD insurance, you would be more than competitive and this benefit category's cost would be somewhere between 17% and 31% of annual wages depending on the average annual compensation you pay to your employees.

Social Benefits provide for the needs and situations that arise for which there is no government provided service at the state or federal level, except in true hardship cases for the most seriously affected individuals or for the unemployed. (As of the writing of this article, the newly enacted "Health Care & Education Affordability Reconciliation Act" and the "Patient Protection & Reconciliation Care Act" will only affect either employed individuals or companies who do not currently have medical insurance if they employ 50 or more people-whether full or part-time. Most of the provisions of the new health care reform acts do not take effect until 2014.)

Most Social Benefits had their genesis in the labor movement in the United States as unions negotiated coverage for their represented members who had endured financial hardships and were not covered by any form of insurance or government program to offset their losses (i.e., major medical illness/expense, death of the primary wage-earner, non-work related debilitating disability to the primary wage-earner, etc.). The more well-off people did not require insurance because they had the means to cope with the financial cost of such unanticipated occurrences. Out of this "common man need", the health, life and disability product offerings grew as these insurances were made more widely available.

"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 comprised of a large number of people and use the power of numbers to negotiate the best rate possible for insurances. 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.

Another approach is to purchase or make available insurance coverage for your employees that insures only catastrophic situations. For health insurance, that might mean there would be no coverage for your employees until they have paid a specific dollar amount out of their own pockets after which the insurance covers expenses over and above that dollar amount. The cost of this type of coverage is based in large part on the dollar amount each employee has to pay before the "catastrophic" coverage kicks-in, and the monthly cost for such coverage varies based on the plan's deductible (the amount the employee pays before the insurance begins). It is simple to search the Web for individual policy quotes to get an idea about what is available in terms of product design and cost. In your search engine of choice, type in "catastrophic health insurance" and choose a site to drill-down into to get the information. Again, remember, the numbers you will be seeing are individually purchased coverage and they will be based on a number of demographics like age, sex, tobacco use, home address, and an individual's current health status, etc.

Similar to the discussion about employees having different needs and desires for paid time-off are the ones about Social Benefits. There is a variety of competing needs that makes particular Social Benefits more important to some employees and of no interest to other employees.

Rather than choose specific Social Benefits and make them applicable to all employees, one approach might be to provide a specific dollar amount over and above each employee's wage/salary that he/she can use to purchase the Social Benefits that meet his/her unique needs.

A "clean" way to provide Social Benefits is to 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, pay for child care, elder care, etc. The advantage of this approach is that, as the employer, you are not making group choices to apply to individual situations- your employees are doing it themselves based on their own need/wants. You may see literature that talks about "cafeteria plans" and that is what the "buy-your-own/stipend" approach accomplishes. The advantage of this approach is that you as the small business owner contribute toward coverage a fixed amount until you decide to change it. You control your costs. The disadvantages to this approach are: no large consumer "group", so there is no buying power and your employees will be paying top dollar for any insurance or program they choose; and all company contributions/stipends are fully taxable. Also, for the small business owner, there would also be a small administrative expense 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.

As a variation on the "buy their own" theme, there will be a number of "exchanges" established by the new health care reform legislation of 2010 that allow individuals to be treated like the large professional/trade organizations in terms of having group "buying power." Unfortunately, it will take some time to establish these exchanges.

You can help reduce your employees' cost by setting-up an Archer Medical Savings Account to help pay their health care expenses. Such accounts can be set up through any financial institution, including, in all likelihood, your current bank. The Archer MSA allows employees of small businesses to put their money into these accounts pre-tax and then pay their medical expenses that are not paid by insurance. Funds that aren't used can accumulate and earn interest, all tax-free, but money in the accounts can only be used to pay for approved medical expenses.

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.

As for the other Social Benefits, all the logic presented above applies to anything that is also an insurance coverage (Dental, Vision, Life, Disability, etc.). By definition, a small business is a small group, so there is no way for the company to buy the least expensive insurance available in the market unless the company aligns with a larger group. There are a number of "Small Business" groups and associations that offer health, dental, vision, disability, life, etc., plans for their members. And, as was previously noted, not all of these insurances are required by all of your employees based on their unique situations and needs at the time. Another way to get aligned to a larger group that is not a "professional/trade" type organization is for your employees to join a public group (like AARP) and let them decide which benefit levels and types they may want purchase themselves from a public group. Membership in such groups enrolls people into an organization with much stronger "buying" power and individual health and other insurance plans are often offered at group prices.

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. Also note that at the very least (especially after health care reform provisions take affect), all employers will need to offer a way for their employees to participate in some form of health insurance plan/program.

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

  • 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.)

You are already making an employer contribution to Social Security and Medicare and that accounts for 7.65% of annual wages. Above these legally required benefits, most small business owners do not have a company program covering Future Financial Security for its employees that results in a fixed cost (e.g., a 401k plan, including a company match on employee contributions). So, for Future Financial Security benefits, the annual cost to the average small business owner could range between 0.0% to 5%.

As a rule of thumb, over the working life of an individual, people must save enough money so that, when combined with Social Security income, they have funds that will enable them to replace 80% of their annual pre-retirement income for the remainder of their lives. The "driver" behind this 80% replacement number is the cumulative effect of inflation over the "retired lifetime" of people who actuarially are living much longer than their parents and their grandparents. Suffice it to say, there is a great deal of pressure on employers (both small and large) to provide Future Financial Security benefits since what is available from other sources is insufficient to meet the total need.

Federal Social Security is not on this article's Future Financial Security list because it is included as a Legally Required Benefit. Functionally, it belongs in this category as Social Security marked the beginning of the movement for the government and employers to provide for their workers' future financial needs after they "retired" from the workforce or were not able to work because of an incapacitating disability (non-work related). In any case, the items in this category are all clustered around the question, "How will retired employees supplement their Social Security benefits so that they can maintain their standard of living after they have ceased to be active in the workforce?"

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 in the twenty-first century.

Today's problems with pension plans are many. The most compelling difference today is that no one works for one company for his/her entire working 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 people entering today's workforce will work for an average of eight to 10 different companies over their working careers (this does not include jobs worked before "seriously" entering the work force as an adult). The ramifications of this demographic on Future Financial Security delivery-mechanisms are significant. The point to employers is that if you have an offering in this area, 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 became much more regulated and controlled following the corporate debacles of the 1980's and even more recently. They also became more expensive and harder to fund/account for with the introduction of new accounting rules regarding pension plans. 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, the demise of the "certainty" of the stock market/investments over the last 10 plus years, etc. All of these factors have led to what is certainly the death knell of pension plans as previously known.

Today, if there is a future savings plan sponsored by employers at all, the trend is to provide some mechanism for employees to put pre-tax money into a plan like a 401k, sometimes with an employer matching contribution, and let the employee manage her/his investments and essentially "own" his/her "future savings" plan without interference or a great deal of help from the employer. Even very large, well-established employers (like IBM) have frozen their current pension plans and told all new hires that they will only be participating in a 401k plan with an enhanced company match-no more pension plan.

The point of this extended pension history is this:


Cost Savings Ideas

There are a couple of mechanisms available to achieve this objective. First, if you as a company do not have a 401k plan or a pension plan, your employees may set-up and contribute to their own Individual Retirement Accounts (IRAs, which are essentially tax-qualified individual 401ks, if you will). Contributions are on a pre-tax basis and earnings are not taxed until withdrawn. 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 you pay to your employees for them to 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.

Finally, and a bit contrary to the advice previously given, another savings vehicle that is available to small business owners (less than 100 employees) is called a SIMPLE plan (Savings Incentive Match Plan for Employees). Reportedly, these plans are simple to administer (no pun intended) and there is no annual financial reporting required by the federal government. 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.