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Types of Employee Benefits
Updated on January 30, 2024
Types of Employee Benefits
Especially in recent years, the benefits offered by employers have become a key consideration when attracting candidates. Employers offer employee benefits like health care, paid vacations, retirement assistance, and more.
If you own a small business, knowing which employee benefits are mandatory and which are optional is essential when assembling an employee benefits package. Still, understand that the more benefits you can offer, the easier it will be to attract top talent to your organization.
There are some legally required benefits employers must provide to their employees.
1. Social Security
Social Security benefits are a form of financial support the government provides to eligible individuals and their families.
These benefits are intended to provide financial security during retirement but can also assist in certain situations, such as disability or survivorship.
Social Security benefits in the United States are administered by the Social Security Administration (SSA). Here are the primary types of Social Security benefits:
These benefits are designed to provide a source of income to individuals when they retire from the workforce. The benefit amount is based on the individual’s earnings history and the age at which they choose to start receiving benefits.
You can start receiving retirement benefits as early as age 62, but the full retirement age for Social Security purposes varies depending on the year you were born. Delaying retirement benefits until your full retirement age or even beyond can result in higher monthly payments.
Social Security Disability Insurance (SSDI) is available to individuals who are unable to work due to a disability that is expected to last at least a year or result in death.
To qualify for SSDI, individuals must have earned enough work credits through prior employment. The amount of the disability benefit is based on the individual’s past earnings.
Survivor benefits are provided to the surviving spouse, children, and, in some cases, dependent parents of a deceased worker who had earned enough work credits. These benefits can help support family members after the primary wage earner’s death.
Supplemental Security Income (SSI)
SSI is a needs-based program that provides financial assistance to disabled adults, blind individuals, and children with disabilities who have limited income and resources.
Unlike SSDI, SSI benefits are not based on work history but are designed to help individuals with low income and assets meet their basic needs.
While not directly a Social Security benefit, Medicare is closely associated with Social Security. Medicare is a federal health insurance program primarily for people aged 65 and older and certain younger individuals with disabilities.
Most people become eligible for Medicare when they turn 65 and have enrolled in Social Security. Individuals typically need to apply through the Social Security Administration to receive Social Security benefits.
The medical insurance benefit amount can vary widely depending on factors such as work history, earnings, and age. It’s important for individuals to plan for retirement and understand the benefits they may be eligible for to ensure financial security during their retirement years.
2. Workers’ Compensation
Workers’ compensation, often abbreviated as “workers’ comp,” is a system of insurance that compensates employees who suffer work-related injuries or illnesses.
Its primary purpose is to ensure that employees receive financial assistance and medical care if they are injured or become ill due to their job duties.
Workers’ compensation is a no-fault system, meaning that employees are generally entitled to benefits regardless of who was at fault for the injury or illness as long as it occurred during their employment.
3. Unemployment Insurance
Employers are fully responsible for paying unemployment insurance at both the federal and state levels. Some states may provide exemptions for nonprofits, very small businesses, or businesses operating only a few weeks out of the year.
Health and Wellness Benefits
Though not all employers are obligated to offer health insurance, the Affordable Care Act (ACA) requires employers to provide health insurance if they have fifty or more full-time employees.
1. Health Insurance
Depending on your organization’s needs, there are many different kinds of employee medical insurance.
For example, a PPO (preferred provider organization) allows employees to choose their own doctor, while an HMO (health maintenance organization) offers a list of covered preapproved doctors.
Employers may choose to offer basic health coverage or to add dental insurance, vision insurance, or mental health benefits. Coverage for prescription drugs is another add-on that can make a significant difference in the lives of your employees.
2. Wellness Programs
Studies have shown that exercise and wellness are some of the more effective methods of preventing health issues. As an employer, consider providing benefits that will allow employees to invest in their well-being, such as gym memberships or a stipend for wellness treatments.
Mental wellness is equally important. Some businesses offer access to therapy, wearable fitness devices that can monitor stress, or allow employees to bring their pets to work with them to create a positive environment for mental health.
Finally, work-life balance benefits like increased flexibility can help employees save money on commuting.
Another common employee benefit is making provisions for an employee’s retirement plans. There are several different approaches to retirement benefits.
1. 401(k) Plans
A 401(k) plan is a retirement savings vehicle offered by most employers in the United States. It allows employees to contribute a portion of their pre-tax or post-tax income, depending on the type of 401(k) (traditional or Roth), into investment accounts.
These funds grow tax-deferred until retirement age, at which point they can be withdrawn without penalty. Many employers also provide matching contributions, further enhancing retirement savings.
However, early withdrawals typically incur penalties, and minimum required distributions must be taken from traditional 401(k)s starting at age 72. 401(k) plans serve as a crucial tool for individuals to save for retirement while enjoying tax benefits, making them a significant aspect of retirement planning for many Americans.
2. Pension Plans
A pension plan is a retirement benefit program typically provided by employers to employees, designed to offer financial security in retirement. In a pension plan, employers contribute funds to a pool that is professionally managed and invested.
Upon retirement, employees receive regular pension payments based on a predetermined formula that considers factors like years of service and final salary. This arrangement provides retirees with a stable income stream throughout their retirement years, often for life.
While pension plans were once widespread, they have become less common in recent years, with many employers shifting towards defined contribution plans such as 401(k)s. Nonetheless, pension plans remain an important and valuable retirement benefit for those fortunate enough to access them, offering financial peace of mind in retirement.
3. Employee Stock Ownership Plans (ESOPs)
An Employee Stock Ownership Plan (ESOP) is a unique retirement arrangement wherein a company’s employees become co-owners of the company by acquiring shares of its stock.
This ownership structure aligns the interests of employees with the company’s success, as their financial well-being is directly tied to its performance.
ESOPs offer tax benefits to the company and participating employees, making them an attractive option for business owners considering succession planning or seeking to incentivize and retain talent.
Through ESOPs, employees can accumulate retirement savings while promoting engagement and commitment within the workforce.
However, the success of ESOPs heavily depends on the company’s performance, which can introduce risk if the stock value declines. Careful consideration and diversification of investment strategies are essential for employees participating in ESOPs.
Time-off benefits can reduce employees’ financial stress and encourage them to rest when needed. Paying time off is a critical benefit if you want to support a healthy work-life balance.
1. Paid Time Off (PTO)
Many businesses offer employees a set number of days for sick leave and paid vacation days, giving employees an allotted amount of time to miss work without being financially penalized.
2. Holidays and Paid Leave
Your business should also recognize public holidays and give employees the day off when possible. Finally, offering maternity, paternity, and bereavement leave demonstrates care for employees’ well-being as they deal with life changes outside of work.
1. Flexible Spending Accounts (FSAs)
A Flexible Spending Account (FSA) is an employee benefit program in the United States. It empowers employees to set aside a portion of their pre-tax earnings to cover qualified medical or dependent care expenses.
With an FSA, employees can use these pre-tax funds to pay for a wide range of eligible costs, including medical co-pays, prescriptions, and daycare expenses. This reduces their taxable income and assists in managing essential expenditures.
However, it’s crucial to plan FSA contributions carefully, as any unused funds typically don’t roll over at the end of the plan year (though some plans allow limited carryover or a grace period).
FSAs offer a valuable way for employees to save money on eligible expenses while making the most of their take-home pay.
2. Health Savings Accounts (HSAs)
A Health Savings Account (HSA) is a tax-advantaged financial account available to individuals in the United States with a high-deductible health insurance plan. HSAs are designed to help people save money for qualified medical expenses.
Contributions to an HSA are made with pre-tax dollars, reducing an individual’s taxable income, and the funds in the account can be invested and grow tax-free.
Unlike Flexible Spending Accounts (FSAs), HSA funds roll over from year to year, allowing for long-term savings for healthcare costs. HSA owners can use the money for various medical expenses, including doctor visits, prescriptions, and even some non-prescription items.
HSAs also offer a unique advantage: they are portable, meaning individuals can keep their HSA even if they change jobs or health plans, making them a valuable tool for both short-term and long-term healthcare savings.
Other Employee Benefits
Beyond healthcare and retirement, there are several other areas of benefits that employees appreciate from their employers.
1. Tuition Assistance
Many employees are constantly looking to level up their skills and advance their careers. Investing in employee education by helping with education-related expenses is an investment in your organization’s future.
This benefit is likely to improve employee loyalty and retention, all while supporting your team’s continued growth and education. College debt relief is another form of tuition assistance that can help your organization retain talented employees.
2. Childcare Assistance
Childcare benefits allow parents to balance work and professional life. On-site child care can motivate employees to remain working even while raising small children.
3. Employee Assistance Programs (EAPs)
EAPs, or Employee Assistance Programs, are workplace benefits designed to support employees with various personal and professional challenges that may affect their well-being and job performance.
EAPs typically offer confidential, short-term counseling and referral services to help employees address a wide range of issues, such as stress, mental health concerns, substance abuse, family problems, financial difficulties, and more.
The goal is to provide employees with a resource for addressing these challenges early, preventing them from escalating and potentially impacting job performance and overall health.
EAPs can also offer services like legal and financial consultations, educational workshops, and resources to assist with work-life balance.
These programs vary by employer but aim to improve employees’ mental and emotional well-being, ultimately benefiting both individuals and the organization by promoting a healthier and more productive work environment.
1. Life Insurance
Employers can offer a range of life insurance benefits to their employees, including Group Term Life Insurance, which often provides a basic level of coverage based on an employee’s salary.
Accidental Death and Dismemberment (AD&D) Insurance is another common option, offering benefits in case of accidental death or severe injuries. Supplemental Life Insurance allows employees to purchase additional coverage beyond the employer-provided amount.
Dependent Life Insurance covers family members, while Voluntary Life Insurance lets employees customize their coverage. Some employers extend life insurance benefits into retirement, and executives may receive specialized coverage.
These benefits help employees safeguard their loved ones’ financial well-being and can be an appealing part of a comprehensive benefits package, though the specifics can vary by employer and individual needs.
2. Disability Insurance
Employers can provide disability insurance benefits to safeguard their employees’ income in the event of a disability or illness.
Short-Term Disability Insurance (STD) offers temporary income replacement, usually for a few weeks to a few months, while Long-Term Disability Insurance (LTD) covers a more extended period, often until retirement age if the disability persists.
State Disability Insurance (SDI) is mandated in some states, offering short-term disability coverage. Employers may also offer supplemental disability insurance for employees to purchase extra coverage.
These benefits are vital for employees’ financial security during periods of disability when they cannot work, ensuring they can meet their living expenses and maintain their quality of life.
The specifics of disability insurance coverage, including benefit amounts and waiting periods, can vary, so employees should carefully review their options and consider their individual needs.
Emerging Trends in Employee Benefits
1. Remote Work Benefits
Opportunities for remote working or flexible hours have become priorities for many job-seekers. If possible, offer employees the most flexibility possible to support their work-life balance mental health, and improve your organization’s retention rates.
2. Mental Health Support
Coping with the challenges of modern work life has led many employees to place more and more value on the mental health resources offered by their organizations.
Consider offering access to talk therapy, a yoga membership, or mindfulness initiatives to invest in your employees’ holistic well-being and improve employee satisfaction.
Small businesses can explore options like offering a competitive salary, considering flexible benefits, and collaborating with insurance providers or benefit consultants to create cost-effective packages.
Some employers offer flexibility for employees to customize their benefits, particularly with flexible benefits like FSAs and HSAs. However, this can vary by employer.
Yes, employers must adhere to various legal requirements and regulations, such as ERISA (Employee Retirement Income Security Act) for retirement plans and federal and state labor laws governing benefits and compensation.
Employers who do not provide mandatory benefits or fail to comply with regulations may face legal penalties, fines, or lawsuits from employees. It can also lead to negative publicity and lower employee retention.
Employers should regularly review and update their benefits packages to remain competitive and meet the evolving needs of their workforce. Annual reviews are common.
Additional resources and information can be found through government websites, industry associations, HR professionals, and benefit providers. The article’s “Additional Resources” section may also offer guidance.