When should I start offering employee benefits in my business?
Since the pandemic started in March 2020, we’ve seen record numbers of people starting their own businesses—up 51% over the 2010-2019 average (U.S. Census Bureau, 2021).
applications to start new businesses in 2021, a new record.
Source: U.S. Census Bureau, 2022.
Many wanted to get away from the corporate environment (breathing down each other’s necks across cubicles while touching the same buttons on the vending machine).
Some were furloughed and used this as their accelerant to do what they’ve always wanted to do: Be their own boss.
We’ve seen many of these small businesses thrive and look to grow through hiring.
Unfortunately, the small business boom coincided with a labor crisis (Society for Human Resource Management, October 2021).
Employees just weren’t available, and many businesses were competing with large corporations for both pay and benefits. Often, small businesses missed out on top tier candidates and left positions unfilled for months.
Many small businesses do well enough to offer a fair wage but offering benefits seems daunting and out of reach.
How can benefits become more accessible to these emerging companies? How can we allow them to compete with bigger institutions for talent?
How does a small business get started with employee benefits?
Employee benefits are various types of non-wage compensation provided to employees in addition to their normal wage.
Benefits range from simple programs such as holiday pay and paid time off to more complex offerings such as medical insurance or a 401(k).
For some programs, monitoring PTO for example, you can get setup with nothing more than a tracking mechanism. Others require the use of a licensed broker to help guide you through options.
How do I know if my business is ready to offer employee benefits?
To have employee benefits such as medical, dental, vision, short-term and long-term disability, and life insurance, you first must have an employee.
An employee is someone that is a W-2 worker that is not a direct relative to the owner.
So, even if your business is just you and your best friend Dave, congratulations! You’re eligible to offer benefits!
Can I, as a business owner, participate in my business’s benefits program?
For the business owner to participate in the benefits offered, they must meet participation requirements for each benefit plan.
For example, if your W-2 employee does not wish to take the benefits that you offer, then you cannot participate in the benefit yourself.
If you want a robust group medical plan with all the bells and whistle but your employee doesn’t want it or can’t afford it, then you can’t have it either.
What challenges will I face when I choose to offer benefits?
Employee participation
As mentioned above, participation in the benefits is always a challenge for small businesses and is something to plan for when looking at a benefits package.
For example, when offering medical insurance, you typically need to have 75% of eligible employees on your plan for the carrier to accept your group (this can vary by carrier, state, and group size).
If you have employees who waive your plan because they are on a spouse’s plan, they are designated as an eligible waiver, and they will not count towards the participation requirement.
Do you employ younger adults still on their parent’s plan? Another eligible waiver.
In this example, if you have 10 employees and two of them are on a spouse’s plan, you must reach 75% participation of the remaining eight employees.
Getting a sense of who is interested in obtaining health insurance through your company is a good place to start. Then you don’t hype up the new medical plan, just to find out you were missing participation, and everyone now gets nothing.
Mandatory contributions and expenses
Each group medical insurance program includes minimum contribution requirements the employer must contribute toward premiums.
Of course, you can always contribute more than the minimum, but it’s important to know what is required as you start to budget for it.
In general, you can expect to pay 50% for the base plan offering for the employee-only premium.
For example, if you have enough employees to offer more than one plan type, you can have a base plan that would generally consist of a lower premium and a more robust plan with a higher premium.
In general, you can expect to pay 50% for the base plan offering for the employee-only premium.
Your required contribution will be based on the premiums for the base plan only, and that same dollar amount would then be the minimum required contribution for any other plans that are offered.
If your employee has a spouse or children they’d like to add to the plan, that will be at their expense unless you otherwise designate in your plan documents that you will contribute for family members as well.
Changes to participation and expenses
When budgeting for health insurance for your business, it’s important to factor in ALL eligible employees.
Oftentimes we see an employer try to improve the contribution rate because they know a limited number of participants will be on the plan. But as employee’s lives change (get married, get divorced, spouse loses a job, they have child), they can elect to go on your medical plan and now you’ll be required to contribute for them as well.
It’s also important to leave room for increases in premium each year.
If you are a small group (under 50 employees), your premiums will be age-based. Even if your state allows for composite rating, the composite rate is still determined by the ages of participants. Each year as your employees age, your premiums will increase with them.
Other expenses may arise as you look to stay compliant.
Getting the appropriate documents created to follow the Department of Labor policies will likely come at a cost.
PCPs and Section 125 SPDs, COBRA administration, reporting and technology fees, and other compliance and HR fees are typical and may be ongoing depending on your company’s size, and it’s important to ask about these when planning your budget.
Eligibility requirements
Offering benefits is great, but you’ll want to give thought as to who will be eligible for those benefits.
You offer benefits as an attraction and retention tool, which means you want to attract and retain the right kinds of employees.
If you have both full-time and part-time workers, you may not want to offer benefits to part-time workers because you want to incentivize employees to move into full-time. You may also want to reward your full-time employees because they are much harder to replace.
You may also want to consider what an appropriate waiting period for eligibility will be. Offering benefits on the first day can be dangerous if you have someone taking a job just to get benefits with the intention of using them, only to leave you shortly after starting.
A typical waiting period for employee benefits is 30 to 90 days, with 90 days being the longest you can have.
90 days is the longest waiting period you can have for employee benefits eligibility.
Ongoing management of employee benefits and ERISA issues
Once you have benefits in place, your business has HR duties of managing the enrollment and termination of employees on your benefits plans.
You should have a process for handling hires and departures because if you miss any deadlines, you could be staring down a fine from the Department of Labor or paying for a terminated employee’s benefits without knowing it.
Most business owners offering benefits for the first time don’t realize that you now fall under Employee Retirement Income Security Act (ERISA) guidelines.
As Spiderman was told, “With ERISA comes great responsibility.”
(Okay, that was a stretch, but ERISA is no joke.)
Fines from the Department of Labor can be devastating if you are deemed out of compliance.
Having proper guidance on things such as compliance and human resources, appropriate documentation such as a Summary Plan Description and a signed Premium Conversion Plan, and a posted Summaries of Benefits and Coverage can help you stay out of harm’s way.
Whether you fall under COBRA administration or your state’s Continuation of Benefits guidelines, you may be required to extend the availability of your employee’s benefits after they’ve left your company.
If proper notice is not provided within the required amount of time (typically 30 days), then you can expect to be fined if you are reported.
What are my options for alternative employee benefits?
There are plenty of alternatives to common employee benefits if your business isn’t ready to take on that challenge.
Self-funding or level funding
Strategies such as self-funding or level funding may be appropriate for your group if you have a need for medical insurance, but your claims are lower than most of your peers.
Managing claims costs in your business can reduce premium expenses, and if you are self-funded you are taking the “community” out of your costs for insurance.
This is not always going to benefit the business so having a sound strategy for ongoing management of your plan is key to its success.
Individual Coverage Health Reimbursement Account (ICHRA)
Want to contribute but can’t afford the minimum requirements? Individual Coverage Health Reimbursement Account (ICHRA) might be an option for you.
ICHRA is a program that allows you to contribute a fixed dollar amount to all eligible employees. If the employee purchases their own individual health insurance through a state exchange, they can use those dollars to reimburse them for medical expenses.
This is more budget friendly to the business but may not always solve the needs of your employees. You can also expect to pay a per-employee fee for the ongoing management of their account.
How can I get support for my employee benefits?
Offering a well-rounded selection of benefits gives your employees confidence and security to be their best at home and at work.
From compliance to communications, at North Star, you have access to all the tools and support needed to develop a tailored benefits solution aiming to increase employee retention while reducing your workload.
We provide personalized support to employers of all sizes and in various industries, so you can find the solution that fits you and your employees.
For more information about our offerings, visit our Employee Benefits resource page or reach out to our team.
We can’t wait to help you accelerate your dream into a growing, long-lasting business!
Download to learn more about the employee benefits at North Star Resource Group.
Get more financial wellness tips in your inbox!
Author: Chase Brakke, CEPA®, DIA, DIF
Chase leads our disability insurance, property and casualty insurance, and employee benefits divisions, ensuring clients have a customized protection strategy for their specific individual, family, and business needs.
Chase is heavily involved in his community as a member of the board for BestPrep, a non-profit providing Minnesota students with financial literacy skills