EMPLOYEE BENEFITS AND SMALL BUSINESS
Employee benefits encompass a broad range of benefits – other than salary – that companies provide to their employees. Some of these benefits, such as workers’ compensation, social security, unemployment insurance, are required by law. The majority of benefits offered to employees, however, are bestowed at the discretion of the business owner. Such benefits which are commonly called “fringe” benefits, range from such major expenditures as paid holidays, health insurance, paid vacations, employee stock ownership plans (ESOPs), and profit sharing to more modest “extras” like bestowing performance awards and prizes, providing an employee lunchroom, or paying for a company picnic.
Employee benefits are an indirect means of compensating workers, but they can be quite important in fostering economic security and stability within the workforce. Insurance coverage, for instance, is often terribly expensive, so that company that offer medical and/or life insurance to employees as part of its benefits package is bestowing significant savings on those employees and their families. Companies, however, must be careful when putting together a compensation package for their workforce and prudence is especially important for the small business owner. Research has indicated that all the extras that firms have added to the basic compensation of their employees over the years, amount to a sizeable cost factor today.
Noting that financial “fringe benefits” can add up to a startling amount of money, small business firms are cautioned against adopting these fringe benefits too quickly and too freely. Some are almost mandatory if an organization is to compete effectively for personnel against other firms in the industry. Other fringe benefits, while perhaps desirable, should be postponed until a company is in a strong, healthy position.
Employee benefits are any kind of compensation provided in a form other than direct wages and paid in whole or in part by an employer, even when they are provided by a third party such as the government, which disburses social security benefits that have been paid for by employers. Employee benefits can be mostly easily divided into two categories: mandatory and optional.
Mandatory benefits are required by law. They serve to provide economic security for employees (and their dependents) who have ceased working because of retirement, unemployment, disability, poor health, or other factors. Notable mandatory benefits include: Medicaid; Basic Medicare; Public Assistance; Social Security Retirement; Social Security Disability; Supplemental Security Income; Unemployment Insurance; and workers’ compensation.
Optional benefits are those that an employer has the option of providing. These optional, or supplementary, benefits include such major compensation areas as insurance and tax qualified plans of deferred compensation. Such compensation programs are designed for the exclusive benefits of employees and their beneficiaries, and are subject specific Internal Revenue Service (IRS) regulations. Primary deferred compensation plans include 1) Pension Plans – established and maintained by employers and paid out to employees over a period of years after retirement; 2) Annuity Plans – paid out of annuity or insurance contracts; 3) Stock Bonus Plans – arrangement wherein employees are given stock in the company and receive money from appreciation in the value of shares and / or the dividends or income from that stock; 4) Profit Sharing Programs – plan in which business profits earned by the employer are shared with employees; 5) 401 (k) Plans – options that allows employees to deduct a portion of their pre-tax salary and invest it in a profit-sharing, fixed contribution, or stock bonus plan.
Optional benefits are handled in a variety of ways under the tax code. Some are fully taxable, but others are tax-preferred, tax-exempt, or tax-deferred, meaning that taxes are not incurred on the benefit until it is used. Optional benefits serve many of the same basic functions as mandatory benefits, but also include perquisites – known as “perks’ – only tangentially related to actual business. These perks can range from country club membership to use of a company car.
Fully taxable optional benefits include cash bonuses and awards; non-qualifying shock bonuses; non-qualifying stock ownership and profit-sharing programs; and severance pay. Tax-preferred benefits include life insurance; long-term disability insurance, and sickness and accident insurance. Tax-deferred benefits include 401(k) retirement plans; deferred profit-sharing plans; employee stock ownership plans (ESOPs); most types of qualified pension plans; stock bonus plans; and thrift savings plans.
Finally, tax-exempt benefits that companies may offer include cafeteria facilities and meals ; dental and vision insurance; dependent care; flexible spending accounts; free or discount club memberships; health insurance for employees and retirees; legal assistance; supplementary Medicare premiums; tuition reimbursement; and use of company car.
In addition, most companies offer time-oriented compensation packages that encompass paid vacations and holidays; paid sick days; flexible shifts; maternity and paternity leave; bereavement leave; jury duty; overtime; paid lunch; and sabbaticals. These time-oriented benefits, while optional, are among the most popular and widely used of the various non-salary compensation options.
A comprehensive benefit package, while expensive, can be an important and useful asset for a company. Indeed, while salary considerations remain paramount for many workers, an attractive benefits package can be a major factor when a prospective employee is weighing his or her options. A parent with two small children , for example, might well be willing to choose a lower-paying position with a company that offers a superior family health insurance package over a significantly higher paying one that does not provide good health insurance benefits for its employees and dependents.
One option that some companies have turned to is known as the “cafeteria plan” or “flexible benefit program”. Under this type of arrangement, employees are given a certain number of “credits” which they can use to choose, from a menu of possible benefits, the benefits that they most desire for themselves and their families. Each worker thus puts together his or her own individualized package of employee benefits.
Employee Benefits and Small Business
The entrepreneur who is launching a new business faces a daunting array of options when the time arrives to design a compensation package for his or her employees. As has been observed, benefits “are no longer merely the icing on the cake of cash remunerations, but a considerable part of it”. But before making any decisions as to the character and scope of an employee benefits package, the new small business owner needs to gain a familiarity with the various laws and regulations that apply to employee benefits. Given these myriad of factors, small business consultants commonly recommend that the owner(s) of a fledging small business enterprise utilize the services of a legal and accounting professionals when putting together their company’s benefits packages.
The small business owner should work to put together a fair and equitable package, but he or she should also remain mindful of business realities and the ultimate need to be a profitable enterprise. The intelligent entrepreneur will research typical compensation packages both in the geographic region and in the industry in which they will be operating. Newspapers, associations, libraries, and various municipal and state agencies all can be helpful sources of information in this regard.
Successful entrepreneurs also need to gauge their own expenses and business expectations (in terms of profitability, growth, debt, etc.) when pondering the character of the benefits package they will offer. Employee benefits can be a significant business cost, and if your profit margin is slim – or if you expect to operate in the red for your first few years of operation – then you need to be cautious.
Some fringe benefits – vacation days, for example – are practically mandatory in today’s business environment. But others, such as health insurance or pensions, can create an unacceptable burden on a new company. In addition, there are also some industries whose membership simply does not offer much in the way of fringe benefits for its workers, either because of narrow profit margins or the laws of supply and demand within the labor market.
In the final analysis, the benefits package that a new or growing company puts together should be predicated on a few very important factors: company size, and financial health, regional standards, employee benefits offered by competitors and workforce needs.
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