|Benefit Plans for Small Businesses
If you own a small business, you may be finding it
increasingly necessary to implement a benefit program to attract and retain
employees. For small businesses, benefit plans generally consist of some of the
major insurance benefits, discussed here, as well as employer-sponsored
Group health insurance
and health care reform
Health insurance is by far the most common benefit offered
by employers, and the one most requested by employees. Employers are generally not required to offer
coverage, but those that don't may be subject to a
penalty tax. In 2020, the penalty tax applies to
employers with 50 or more full-time equivalent
employees (FTE) who do not offer qualifying health
coverage to at least 95% of their FTEs and
dependent children up to age 26 (spouses are not
considered dependents and coverage does not have
to be offered to spouses of FTEs). The penalty is
assessed to eligible employers that do not offer
coverage if at least one FTE receives a federal
premium tax credit or cost-sharing subsidy for
coverage purchased through a health insurance
Marketplace. In 2020, the employer penalty is $2,320
per FTE divided by 12, excluding the first 30 FTEs.
In addition, if an eligible employer offers health
insurance that is not considered affordable or does
not provide minimum value, the penalty for each
month is $3,480 divided by 12, for each FTE receiving
a premium tax credit, up to a maximum of $2,570 per
FTE, excluding the first 30 FTEs, divided by 12.
Health insurance provides minimum value if it pays
for at least 60% of covered health care expenses for
a standard population. Health insurance is affordable
when the cost of coverage is no more than 9.56% of
an employee's family income.
Employers with more than 200 full-time employees
that offer health insurance must automatically enroll
new full-time employees, subject to a waiting period
of no longer than 90 days.
Traditional health insurance plans
Under a traditional plan (also known as a fee-for-service or
indemnity plan), you, as the employer, contract with an insurer to provide
health insurance benefits for you and your employees (and often for your
employees' dependents as well). A typical plan will reimburse claims as a
percentage of the normal and customary charge for a given procedure in a
particular region. The plan typically pays either the medical provider
directly, or reimburses the employee after he or she pays for the medical
A covered employee generally must pay a deductible before
benefits become payable by the insurer. The higher the initial deductible, the
lower the insurance premium. This is because the covered employees are taking
on a larger portion of the insurance risk by paying the higher amount, and
saving the insurance company the costs of processing smaller claims.
HDHPs are plans that require employees to cover a greater
share of their service provider costs in return for lower premiums. HDHPs are
often paired with a tax-advantaged savings option, such as a health savings
account or health reimbursement account, to help employees manage the higher
Preferred provider organizations (PPOs)
A PPO is actually a network of doctors and/or hospitals that
agree to provide medical services for specified fees. The PPO may be sponsored
by a particular insurance company, by one or more employers, or by some other
type of organization. PPO physicians provide medical services to the
policyholders, employees, or members of the sponsor(s) at discounted rates. In
return, the sponsor(s) attempts to increase patient volume by creating an
incentive for employees or policyholders to use the physicians and facilities
within the PPO network.
A point-of-service plan combines elements of both a
traditional plan and a PPO. The employee can choose whether to see an in- or
out-of-network service provider; however, should he or she choose to go outside
of the network, higher costs will typically apply.
Health maintenance organizations
HMOs generally will offer a lower-cost option for you, the
employer, as well as for your employees. Costs are reduced because the HMO
typically restricts the doctors a patient can see to those within its provider
network. A primary care physician coordinates care for the patient among other
participating providers. However, in limited circumstances--as set out by the
HMO--participants can generally go out of the provider network, and the HMO may
still pick up the cost.
HMO doctors are typically paid a set fee per patient. This
fee is paid whether a patient actually seeks treatment or not. Doctors in the
HMO network handle all procedures and tests. Thus, the HMO is able to control
the entire spectrum of tasks necessary to keep a patient well. In theory, the
HMO is also able to control costs by giving doctors incentives to keep costs
low. A doctor has no financial incentive to conduct unnecessary tests (the
doctor will receive the preset fee and no more), so it is up to the doctor to
help control patient costs.
This benefit has grown in popularity among small businesses.
Dental insurance is really more of a co-payment plan than an actual insurance
plan. This is because, typically, there are annual limits of a few thousand
dollars on the amount of benefits an individual may receive under the plan
(unlike health insurance, which may have a lifetime limit of several hundred
thousand to millions of dollars for benefits paid).
Nonetheless, dental insurance is highly valued by employees,
because dental procedures are often among the most expensive medical charges an
individual will incur in a given year.
Paying insurance premiums
Whatever type of health plan(s) you select, it's fairly
typical for an employer to pay a portion (or all) of the employee cost of the
plan. If an employee also wants to cover his or her family, the additional cost
is often paid for entirely by the employee.
Group term life insurance
Group term life (GTL) insurance is another popular benefit
offered by more and more small businesses.
Typical GTL plans offer employees insurance in either a set
amount (e.g., all employees receive $10,000 of insurance, regardless of income
level) or an amount based on their salary level (e.g., each employee receives
insurance equal to two times current salary).
GTL benefits are tax free up to $50,000 of coverage
(assuming that the benefits are provided under a policy that qualifies as GTL
insurance for tax purposes). If you provide employees with more than that
amount of coverage under a qualifying GTL policy, your employees must pay taxes
on the amount of the premium attributable to insurance coverage in excess of
$50,000. However, the amount of additional income recognized by employees as a
result of employer-provided GTL coverage in excess of $50,000 is typically very
small (especially for younger employees). Therefore, the additional taxable
income should not, by itself, be a disincentive for providing higher amounts of
GTL coverage for your employees if you're so inclined.
Short-term and long-term group disability insurance
A disability plan is designed to provide an employee with an
income stream should he or she become disabled.
Short-term disability plans provide benefits (usually a
fixed percentage of the employee's salary) for a set number of days (typically
180). After that period of time, assuming the employee is still disabled,
long-term disability insurance (if available) kicks in, and the employee
receives benefits under that program until he or she is no longer disabled.
Typically, under a group plan, these benefits are fixed and
not adjusted for inflation (in contrast, individual policies often offer an
inflation rider). And if an employer pays all or a portion of the premium for
disability coverage, then the portion of the benefits paid to employees that is
attributable to the employer's contribution is considered taxable income.
Currently, you're required to purchase disability insurance
if your employees are located in California, Hawaii, New Jersey, New York,
Puerto Rico, or Rhode Island (Source: SBA.gov).
Though not an insurance plan per se, a cafeteria plan can
offer employees a way to pay their portion of insurance premiums with pretax
dollars. If you implement a cafeteria plan as part of your business's benefits
program and the plan satisfies certain requirements, employees can elect to
forgo a portion of their salary and have that money instead go to pay for their
premium payments, without the amount being included in their taxable income.
Employees save money because their taxable income is
reduced, yet benefits remain the same. The employer's payroll taxes are reduced
as well, because the employees are receiving lower salaries than they were
before the cafeteria plan was implemented.
In order for a plan to qualify as a cafeteria plan under the
Internal Revenue Code, it must satisfy certain requirements. In addition, an
employer that has established a cafeteria plan is required to annually file a
Form 5500 tax return for the plan.
Required employee benefits*
All employers must pay in whole or in part for certain
legally-mandated benefits and insurance coverage including:
- As an employer, you must pay Social Security taxes at the
same rate paid by employees (the current rate for Social Security is 6.2%
for employer and employee, plus an additional 1.45 percent each for Medicare).
High-income employees (single filers who earn more than $200,000 and joint
filers who earn more than $250,000 per year) have to pay an additional 0.9%
Medicare tax. Unlike the regular Medicare tax, employers will not need to match
this additional amount.
- Employers generally must also pay unemployment tax to help
fund the Federal-State Unemployment Insurance Program. This program provides
unemployment insurance benefits to eligible employees who lose their job
through no fault of their own. States administer their own laws to determine
worker eligibility. Depending on your state regulations, you may owe just a
federal unemployment tax, a state unemployment tax, or both. For more
information, visit the Department of Labor Employment and Training
Administration web site, www.doleta.gov. That site also
provides a list of links to state unemployment tax agencies.
- Workers' compensation insurance, which pays a benefit to
employees who are injured at work or get sick from job-related causes, is
governed by the individual states. For more information, visit your state's
Division of Workers' Compensation. You can see a list of state divisions at the
Department of Labor's
- While regular vacation leave is not a required benefit,
private employers with 50 or more employees and all public employers are
required to provide leave under the Family and Medical Leave Act (FMLA). This
provides 12 weeks of job-protected, unpaid leave during any 12-month period to
eligible, covered employees for reasons including birth and childcare,
immediate family care, or care for the employee's own health condition.
- Companies who had 20 or more employees on more than 50
percent of its typical business days in the previous calendar year are subject
to COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985). COBRA
provides continuation of health coverage at group rates for former employees,
retirees, spouses, former spouses, and dependent children.