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Guide to Small Business Employee Benefits


Running a small business is about efficiency. You determine your company’s success by making subtle changes that have a substantial financial impact. One of the most important changes C-level executives can make to their company structure is modifying their employee benefits package to fit job candidates’ needs.

When it comes to your businesses’ employee benefits, it’s best not to assume you have everything in order. Examine your company’s benefits, and see how you can make them more appealing to candidates. An American Institute of CPA survey found that 80% of the surveyed candidates said they would keep a job that offered better benefits rather than more salary.

The following guide teaches small business owners and executives everything you need to know about employee benefits packages. Use it to shape your employee benefits policy to attract and retain top talent, understand the required taxes and financial impact, and determine premiums.

Required Employee Benefits for Small Businesses

Excellent employee benefits are a staple of any successful business. But understanding what makes a great employee benefits package isn’t knowledge you’re born possessing. With that in mind, let’s start with which benefits a business owner must provide.

Workers’ Compensation

If your small business has more than five employees, you’re required by federal law to provide workers’ compensation. Workers’ compensation is an insurance policy that protects the employer and the employee when an employee gets injured on the job.

Workers’ compensation covers medical expenses, lost wages, and rehabilitation expenses when employees fall ill or get injured. It’s advisable to pay for workers’ compensation because if you don’t have it, and one of your employees is hurt, you’ll have to pay out of pocket to cover the costs.

It is wise for any small business to check their states’ workers’ compensation laws. Failure to understand state workers’ compensation laws could result in significant fines for small businesses.

Each state structures the particulars of workers’ compensation insurance, such as your monthly premium and deductible. Some states structure the coverage based on individual occurrences, while others require employers to provide compensation year-round.

The National Federation of Independent Business lists the regulations for workers’ compensation on a state-by-state basis.

Unemployment Insurance

The Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA) require employers to pay taxes to fund unemployment costs.

If a company lays off an employee for reasons outside of their control, the terminated employee will most likely be eligible for unemployment benefits. However, if an employee committed a serious offense, they will probably not qualify for benefits.

The SUTA requires contributions from both employers and employees. State unemployment tax rates vary along with their taxable wage base. A state’s taxable wage base describes the amount of their chargeable income. 

Some states also have a sliding scale of state unemployment tax rates. In these states, employers receive assessments, with which they must comply. The state updates these assessments periodically based on market fluctuations and other factors, such as the business’s industry. These rates fluctuate more for some industries because specific industries have higher turnover rates than others.  

It is always wise to check your state’s SUTA because states can change them annually. You can find each state’s SUTA requirements by visiting the state’s government website through the IRS website.

Disability Insurance

Like workers’ compensation, whether or not your business must provide disability insurance depends on the state. California, Hawaii, New Jersey, New York, Puerto Rico, and Rhode Island for example, all require their companies to offer disability insurance.

Disability insurance covers employees who become decapacitated due to a non-work incident. There are two types of disability insurance, short-term and long-term. These policies are run by private organizations and give employees income for either a short or extended time.

What disability plans cover depends on the private organization, but share many similarities. For short-term disability plans, the median coverage length is 26 weeks. According to the Bureau of Labor Statistics, these numbers have remained steady over the past twenty years. Their numbers also show limited fluctuation from industry to industry.

The Bureau of Labor Statistics numbers also show that typical short-term plans have a 60% salary replacement rate, which has remained steady over the past twenty years. 75% of the people covered by a short-term disability plan have a maximum benefit amount. The median amount for this maximum payout plan was $584 as of 2014.

Much like short-term plans, long-term plans usually provide a fixed percentage of the employee’s annual earnings. In the study, 95% of those covered by a long-term plan had policies that included a fixed rate of their yearly earnings. The median amount for this fixed rate was 60 percent of the employee’s annual salary.

88% of long-term disability plans had a maximum amount payable, and the median maximum payout from the study in 2015 was $8,000.

The 2015 study shows the potential upside of offering disability insurance. Since 1999, there has been a marked increase in small businesses that provide long-term and short-term disability benefits. That said, at that time 51% of the workforce was still without disability benefits.

With both short-term and long-term disability insurance, there are stipulations. Aside from the maximum amount payable, most long-term policies also require employees to have at least one year’s tenure before gaining eligibility. For most policies there is also a one year time limit for employees to apply.

But despite the qualifying factors, disability insurance can be a very useful employee benefit. Because workers’ compensation claims can incur staggering expenses to companies, many have turned their eyes to using accident and disability benefits to curb the costs of workers’ comp.

An Aflac study found that 42% of the companies that offered voluntary disability insurance saw declines in workers’ compensation claims.

If you’re concerned about disability insurance costs, in most states, you can opt for a plan that utilizes both employer and employee contributions. The average cost for employers to offer disability plans was $0.06 per hour for short-term disability and $0.05 for long-term disability plans.

Health Insurance

The Affordable Care Act stipulates that businesses with more than 50 employees must offer health insurance. If you, as a business owner, don’t want to provide health insurance, you’ll have to pay a fee for each employee.

But don’t let the Affordable Care Act make you feel constricted as a business owner, there are several different types of health insurance plans to choose from.

Traditional Health Insurance Plans

As the name suggests, traditional health insurance plans are the go-to among employers. These plans usually have higher premiums, but you can enjoy a large selection of doctors.

Managed Care Plans

Managed care health insurance plans have lower premiums but have a smaller doctors’ circle.

Most small businesses use group coverage health insurance. Group health insurance plans cover eligible employees. Private insurance companies often give the company a few options to present their employees, and the employee chooses the plan that fits them best.

Small business owners with 1-50 employers may be eligible to purchase a group health insurance plan through the Small Business Health Options Program of, a government-run health insurance agency.

Small businesses often choose High Deductible Health Plans (HDHPs) because employees chip in more for the costs before the insurance agency pays.

But a great alternative to HDHPs is Health Savings Accounts (HSAs). These plans give employers the benefits of tax-deductible contributions. Once the employee enrolls in the HSA, the employer deposits a fixed amount of money into the employee’s account. HSAs result in lower premiums, and no further tax burdens to the employee. 

Preferred Provider Organization

Preferred Provider Organizations (PPOs) encourage employees to use a designated network of doctors and health professionals. The selected providers give healthcare to businesses at a negotiated or discounted rate.

Employees may or may not be required to choose a primary care physician, but they will have to go out of pocket if they go to a physician or healthcare service outside their provider network.

With a PPO, employees have to pay an annual deductible before their insurance covers their medical bills. This process is also known as “disaster” coverage and refers to insurance companies providing for the employee in the event of severe health care costs.

Employees may also have a copayment for specific services. In these cases, employees are responsible for a percentage of their medical expenses.

PPOs are ideal benefits for small business owners who understand their employees prefer a plan with lower premiums and some degree of choice among providers.

Health Maintenance Organization (HMO)

On average, HMOs give employees lower premiums and less flexibility. HMOs always require employees to choose a primary care physician. To see specialists with an HMO, employees have to get a referral from their primary care physician.

Although HMOs require referrals from an employee’s primary care physician, they usually cover a more extensive range of preventative services. Just like PPOs, HMOs don’t allow employees to seek assistance outside their network. 

Typically, HMOs require a copayment and may also have a deductible before their coverage kicks in.

HMOs are desirable benefits for companies that want plans with comprehensive preventative services such as checkups and immunizations.


The Consolidated Omnibus Budget Reconciliation Act (COBRA) is essentially a continuation of the Affordable Care Act for employees. COBRA gives ex-employees the right to choose whether they want to remain under their former employers’ employee benefits programs.

COBRA only goes into effect for specific circumstances such as a death in the family, divorce, reduced hours, and transitioning between jobs. However, employees may or may not be eligible for COBRA benefits regardless of whether they voluntarily or involuntarily terminated their employment. COBRA covers these ex-employees with extended health insurance for 18 months.

Most small businesses are exempt from COBRA if they have fewer than 20 employees, but it’s always wise to double-check. Some states have created smaller-scale versions of COBRA to provide for employees with less than twenty employees.

COBRA coverage can last 18-36 months. As the employer, your most important task is to make sure employees understand opportunities to continue their health insurance.

Vision Insurance

Vision insurance is crucial for employers looking to reduce their health insurance costs. The HCMS Group found that companies with vision insurance saved $5.8 billion on healthcare.

Vision insurance saves money on healthcare costs because of its preventative qualities.

Optometrists can spot early signs for many potentially hazardous health conditions such as cardiovascular disease, leukemia, and brain tumors.

The sooner doctors identify these conditions, the sooner employees can start treatment, and the more employers and employees can mitigate the costs from health insurance.

Dental Insurance

A recent National Association of Dental Plans study showed that in 2016, the number of Americans who had dental insurance was on the rise at 77%. That number was an 11% increase from 2015. Of the 77% insured in 2016, 90% got dental insurance from their employer. The report cites Medicare as a leading cause for the increase.

These numbers show that it’s increasingly important for companies to offer dental benefits.

Dental insurance costs vary based on how many employees companies have, the type of coverage they provide, and their location. Employers can contribute to lower the employees’ expenses and encourage them to enroll in the benefits program.

“100-80-50” Dental PPOs

These types of dental plans are the most common. The “100” refers to the policy covering up to 100 percent of cleaning and regular preventative care fees. The “80” refers to the costs for essential restorative services such as fillings and other procedures. The “50” refers to any dental work the employee needs that requires significant reconstruction or a complex surgery.

Employers don’t need to offer dental and vision insurance, but offering dental and vision does show potential candidates that your company cares about their well-being. It also improves small businesses’ bottom line. According to a Centers for Disease Control Study, companies lose 8 billion dollars of productivity per year due to vision impairment issues. Companies can reduce those costs by offering vision insurance.

Family and Medical Leave

The Family and Medical Leave Act requires employers to give employees up to 12 weeks of unpaid, job-protected leave. While these employees are on family and medical leave, the employer must maintain group health insurance benefits.

The Family and Medical Leave Act does not pertain to every employee. The employee has to have at least one year’s tenure (doesn’t have to be consecutive) and have worked 1,250 hours within those twelve months.

Family and Medical leave benefits apply to employees who:

  • Had a new child (birth, adoption, or foster care placement)
  • Need to care for a family’s member health condition

Optional Employee Benefits

Now that we have covered mandatory employee benefits, it’s time to shift focus to benefits companies aren’t required to provide.

Retirement Plans

Employers must pay taxes toward Social Security and 401ks. But not all employers have to give their employees pensions. Providing employee pensions is an easy way to remain a cut above your competition in terms of talent acquisition.

If offering a pension isn’t an option, you can still find ways to outbid your competition. Contribution plans also put you a step above other companies when it comes to retirement benefits.

There are also IRA funds to consider when deciding which retirement plan best suits your small business.

When deciding on what retirement plan benefits you want to offer your employees, consider the following:

  • If you wish to match your employee contributions
  • The designated amount for employees to contribute to the plan
  • The tax implications of your proposed plan

Defined Benefit Pension Plans

Defined benefit pension plans (traditional retirement plans) used to be the most common type of employer-sponsored retirement plan. But since the 1980s the number of employers who offer defined benefit pension packages has steadily decreased.

Defined benefit pension plans designate a set amount of compensation for employees after they retire. With these plans, employees don’t have to make contributions. The supplier provides all the inputs and bases your monthly retirement benefits on your salary and tenure. This means that employees have little control over where their retirement investments go.


Today, 401k plans are the most common plan in the workforce. Large, for-profit businesses usually offer these plans, and employers’ input to these plans fluctuate.

401ks are considered a derivative of defined contribution plans, and employees control the majority of the contributions. The employee can decide which investments he/she wants and has complete control over their money after reaching retirement age.

The employees’ contributions are also tax-deductible within the year. Investment earnings accrue based on tax-deferral. After retirement, the money the employee receives will be taxable income. While the employee contributes, however, they are exempt.

If the employee withdraws their funds before retirement, they can roll their funds into a traditional IRA fund without incurring taxes or early withdrawal penalties. But if the employee withdraws funds from their 401k and does not turn them into a regular IRA account, they are subject to a 10% early withdrawal penalty.

In 2020, employees can contribute up to $19,500 per year.


Some companies have unlimited PTO, and others continue to move toward giving their employees up to four weeks out of the year for PTO. But what are the benefits to each?

The pros and cons of unlimited PTO benefits come from (pro) employees’ increased productivity from rest and rejuvenation, and (con) when employees take advantage of the benefits.

The United States is the only country of the 37 comprising the Organization for Economic Co-operation and Development that does not mandate PTO benefits. This puts American C-level executives in a unique position of control when it comes to PTO.

Project: Time Off’s 2018 survey found that employees regarded PTO as the second most important employee benefit. But what may surprise you is the previous year, the same study found that workers forfeited 206 million vacation days.

What those numbers reveal is that companies should structure their PTO based on what fits their workers’ needs. It also shows employers must be communicative about their employees’ PTO benefits.

Preventative Health Care

Preventative health care solutions are an optional employee benefit that can actually help reduce health insurance costs while improving your employees’ wellness. At CulverServices, we help companies to craft a Proactive Health Management Plan (PHMP). This preventative health care solution incentivizes employees to perform a small health-related task each month, such as having a phone call with a nurse. These incentives encourage employees to take more care of their health, reducing premiums and medical costs down the line. PHMP leads to an average 11-17% decrease in overall health care spend after two years in the program.

Because CulverServices’ PHMP program takes advantage of the tax code, it’s free to employers and gives employees more money each payday. With PHMP, the average increase in employee take-home pay is between 2-5%.

Benefits Can Make the Difference

In today’s business world, candidates choose employers who provide them with the most security rather than the highest salary. It doesn’t matter whether you’re a small business or a giant corporation, the companies who take their employees’ health and well-being into account are the most successful.

When it comes to employee benefits, workers’ compensation, unemployment insurance, health insurance, and disability insurance are mandated. But choosing the correct optional benefits is what places you in a class of your own. With benefits such as PTO, dental and vision, and strong retirement benefits, you’ll enjoy a world-class reputation no matter your size. Discover how you can take your business to the next level with employee benefits by checking out what CulverServices has to offer.

Ty Culver headshot
Written by

Ty Culver is the Client Development Director of CulverCareers focusing on talent acquisition and workforce solutions with a wide variety of local, national and global clients.

Ty has been working in various aspects of the industry for over 10 years and developed deep expertise in Executive Search, Executive Benefit and Talent Acquisition Programs along the way. He has a range of experience from SMB to Enterprise clients and hyper specific executive searches to high volume recruiting with companies in a dynamic state of flux.

Today, Ty leads a talented team of Talent Acquisition Specialists, Executive Recruiters and Client Success Managers at one of the most respected Recruiting Firms in the Nation, CulverCareers. While leadership is a key aspect of his role, Ty still enjoys working with clients on recruiting strategies, executive benefit solutions and workforce solutions to help clients build a holistic approach to talent acquisition and talent retention.

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