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The Ultimate Guide to Benefits

Offering benefits to your employees isn’t just a nice-to-have perk: Certain benefits such as health insurance are legally required by federal and state governments in the United States. Even benefits that aren’t required, such as paid time off, have become so common that employees expect them as part of a compensation package.

In this guide, we investigate which payroll benefits are mandatory and which are voluntary and then explore best practices for creating benefits packages.

Importance of payroll benefits

Having a competitive benefits package is essential for attracting and retaining top talent. Here’s why having payroll benefits matters:

  • Benefits such as paid time off increase job satisfaction, promote work-life balance and help prevent potential burnout.
  • Insurance coverage helps keep your employees healthy, decreasing downtime due to illness and injury.
  • A good benefits package can incentivize job candidates to choose your company’s offer over a competitor’s.
  • Certain benefits are legally mandated by state and federal governments, and you’ll be financially penalized if you don’t provide them.

Mandatory payroll benefits

Social Security and Medicare

Social Security and Medicare are both federally mandated benefit programs. Both employees and employers contribute to these programs via payroll deductions. Social Security offers income to employees after they retire or become permanently disabled. Medicare provides health insurance for people age 65 and older and people who meet certain criteria for health conditions and disabilities.

Unemployment insurance

Employees and employers must also contribute to unemployment insurance at both the federal and state levels. Unemployment insurance provides a partial, time-limited income replacement in the event that an employee involuntarily loses their job.

Workers’ compensation

Employers are legally required to provide workers’ compensation insurance, which covers the cost of medical care, paid leaves and rehabilitation for employees who are injured or become ill while on the job. If your costs are too high, switching from an annual system to a pay-as-you-go plan can help your business reduce workers’ compensation costs.

Family and medical leave

The Family and Medical Leave Act requires that businesses with more than 50 employees provide up to 12 weeks of unpaid leave while protecting job security. Employees must meet certain criteria to qualify for the unpaid leave, such as working at the company for a minimum of 12 months and having worked a minimum of 1,250 hours before the start of the paid leave. FMLA requirements only apply in certain situations, such as the birth of a child or caring for an immediate relative with a serious health condition.

Health insurance

The Affordable Care Act mandates that businesses with more than 50 full-time employees provide health insurance to full-time employees. Otherwise, the company will be penalized thousands of dollars per employee. Penalties for 2024 range from $2,970 to $4,460 per employee per year.

Disability insurance

Five states require companies to provide short-term disability insurance: California, Hawaii, New York, New Jersey and Rhode Island. Short-term disability insurance is different from workers’ compensation because disability insurance is more broad and doesn’t only apply to job-related illness or injury.

Payroll benefits voluntarily provided by employers

Additional insurance policies

Beyond what’s mandated by federal laws, many companies choose to offer additional voluntary insurance policies. Dental insurance and vision insurance are two of the most common options. Some others include short-term and long-term disability insurance, accident insurance, emergency hospital transportation insurance and life insurance.

Paid vacation time

While unpaid leave is required by federal law, paid family leave is not legally mandated except in a few states like California and Washington. Even so, paid time off (not just family leave) is one of the most popular voluntary benefits offered by employers. Two weeks of paid time off per year used to be the standard, but more and more employers are offering flexible or unlimited paid time off. Some employers also give extra days off for specific activities, such as volunteering, voting in elections or performing jury duty.

Retirement savings contributions

Another popular voluntary benefit is retirement savings accounts. Many different types are available, such as 401(k), 403(b) and IRA plans. Some employers further enhance this benefit by matching employee contributions up to a certain amount to help them save even faster.

Education assistance

Education and tuition assistance for employees and/or their children is another voluntary benefit offered by some companies. Companies may also help with books and other education-related expenses beyond just tuition.

Wellness programs

Corporate wellness programs can take many forms, from free memberships to subsidized assistance for quitting smoking. Your HR team can help you create a well-rounded wellness program that will incentivize employees to stay healthy and potentially lower health insurance costs.

Childcare assistance

In an effort to retain parents, companies have started offering additional childcare assistance beyond family leave. Companies may help with childcare costs or even offer onsite backup childcare.

Company equipment

Many companies provide employees with equipment, such as laptops and phones, so they don’t have to spend their own money. Keeping work and personal devices separate also protects company data and gives your business more control over what employees can and can’t do on their work devices.

Stock options

Stock options allow employees to buy a specific number of shares in the company at a predetermined price. Employees must typically work for a set period of time before qualifying for stock options. They must also wait for a certain period of time for their options to vest before they can consider selling them.

Training and professional development

In an effort to upskill and retain workers, many companies provide some kind of support for training and professional development. Employers may pay for conference registration and travel, offer formal or informal mentorship support and even pay for additional certifications or advanced degrees.

Best practices for your employee benefits

See what your competitors are doing

One of the main reasons that companies offer voluntary benefits is to ensure their compensation packages are competitive and on par with what similar companies in the area are offering. If you haven’t already, do an audit of your competitors’ benefits packages to see how your current benefits stack up. You may discover that you’re offering far fewer benefits than your competitors, which might explain why more potential candidates aren’t accepting your offers.

Ask current employees what they want

You should also ask current employees what they think of the existing benefit packages and if they have any suggestions for improvements. If employees are worried about making public comments, consider creating an anonymous survey using employee engagement software. This will keep everyone’s identity private and give workers more freedom to speak their minds.

Determine your budget

While many companies would love to offer all possible benefits, the reality is that your company will probably have at least some financial limits in this area. HR and finance should work together to determine a realistic budget for both mandatory and voluntary benefits and use that as a guideline when creating a comprehensive benefits package.

Comparison shop for benefit providers

If you’ve been with the same benefits provider for a while, then you might not be getting the best deal possible. Try shopping around and talking to different insurance brokers to see if you can get similar (or better) coverage for less money by switching providers.

Go beyond mandatory benefits if possible

While they may not be governmentally mandated, many voluntary benefits — such as paid time off and retirement savings accounts — are so common that employees now expect to see them as part of a standard benefits package. Offering even more voluntary benefits, such as stock options, will also entice potential employees to come work for your company and help to retain current workers.

Leverage software for benefits administration

Benefits administration, especially enrollment, can be hugely stressful and time consuming. Make things easier on your HR staff and your employees by implementing a benefits administration software platform like Paychex. This type of payroll software connects you to hundreds of carriers and automates the enrollment platform to reduce manual work.

A view of benefits stats on Paychex.
Figure A: A view of benefits stats on Paychex. Image: Paychex

Offer benefit information to employees

Sometimes your company already offers excellent benefits, but employees don’t know how to take advantage of them or decide between different options. To assist your employees, provide them with information about your benefits and resources that will help them make the best choice for their needs.

Regularly audit your benefit and compensation packages

Once you’ve created and launched a great benefits package, the process isn’t over: You need to regularly check in on competitors and audit your benefit and compensation packages at least once a year. This will ensure your benefits offering stays current and that you’re still getting the best deals from your benefits providers.

Frequently asked benefits questions

What percentage of payroll should be benefits?

Benefits made up roughly 30% of total compensation costs for civilian and private industry workers in 2023, according to the Bureau of Labor Statistics. However, these benefit costs may go up or down for certain positions and industries, so some fluctuation is to be expected.

How are payroll benefits calculated?

To calculate payroll benefits, you should add the total value of all benefits you offer to employees. To calculate the cost of a compensation package, add the value of the payroll benefits to the value of the direct pay (salary, wages, bonuses, etc.).

Are payroll benefits tax deductible for employers?

Certain payroll benefits are tax deductibles for businesses, such as retirement account contributions and vacation paid time off. However, there are typically additional stipulations that determine whether or not a benefit is tax deductible — check the IRS for the most up-to-date information.

Can payroll benefits contribute to a positive workplace culture?

Having a competitive benefits package contributes to a positive workplace culture by increasing job satisfaction and employee retention. Benefits also help to promote employee wellbeing, reduce burnout and enhance performance, all of which contribute to a positive company culture.

What is a typical compensation package?

Some of the most common elements of a typical compensation management package include base pay or salary, health insurance, retirement accounts, paid time off, bonuses and additional insurance. Compensation management software can help your company create competitive compensation packages that are on par with what is being offered by other companies in your geographic area.

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