Choosing Benefits for Your Small Business
A useful benefits package starts with two questions: what would employees value, and what can the business afford to keep offering?
Health coverage, retirement savings, and time off deserve a closer look before adding a long list of perks. The goal is a package employees understand and the business can maintain.
Set a budget and choose priorities
A short, anonymous survey can help employees rank options such as lower health premiums, retirement contributions, more paid time off, or flexible schedules. Ask about preferences without collecting personal medical or financial details.
Compare the full annual cost of each option. Include employer contributions, provider fees, payroll administration, and the cost of covering work during time off. A benefit that fits this year's budget should also make sense if enrollment increases or the business hires more people.
Compare health coverage beyond the premium
Two plans with similar premiums can leave employees with very different costs. Compare deductibles, out-of-pocket limits, covered prescriptions, provider networks, and the employer's share of the premium.
A health savings account, or HSA, can be part of the package when employees have HSA-eligible coverage and meet the other eligibility rules. Eligible contributions receive federal tax advantages, unused balances carry forward, and the account stays with the employee after a job change. A high deductible alone does not establish HSA eligibility.
Employer size also matters. A business that averaged at least 50 full-time employees, including full-time equivalents, in the prior calendar year is generally an applicable large employer under the Affordable Care Act. Full-time equivalents account for part-time hours, and related businesses may need to be counted together.
These employers face coverage and reporting requirements, including standards for affordability and the benefits covered. An employer payment can apply when the relevant coverage requirements are not met and at least one full-time employee receives a Marketplace premium tax credit. Smaller employers can still have obligations under the health plans they offer.
Choose a retirement plan you can fund
The employer's contribution commitment is as important as the account available to employees.
| Plan | Main budget and administration point |
|---|---|
| 401(k) | Employees contribute through payroll. Employer contributions depend on the plan design and can be required. Provider fees and ongoing administration also affect the cost. |
| SIMPLE IRA | Generally available to qualifying employers with 100 or fewer employees. The employer must contribute through a match or a contribution for eligible employees regardless of whether they contribute. |
| SEP IRA | Funded by the employer. Contributions can vary by year, but all eligible employees must be included. Most SEP plans require the same contribution percentage for each eligible employee. |
Each plan has contribution limits and eligibility rules; a higher limit does not necessarily make it the better fit.
Add benefits that fit the work
Dental, vision, life, and disability insurance may be worth comparing once the core package is clear. The policy determines what is covered, how much it pays, and any waiting periods or exclusions.
Tax treatment also affects what employees receive. Disability payments generally are taxable when the employer paid the premiums or the employee paid them before tax. Payments attributable to premiums the employee paid after tax generally are not taxable.
Flexible start times, occasional remote work, paid time off, and financial education are other options. Define who is eligible and how scheduling will work. A flexible schedule does not remove wage, overtime, or timekeeping obligations.
Check the tax treatment before promising a perk
A benefit is generally taxable compensation unless a specific exclusion applies. For example, gift cards generally belong in taxable wages even when the amount is small. Health, retirement, and other benefits each have their own rules.
Owners can also be treated differently from employees, particularly partners and S corporation shareholders who own more than 2%. The IRS's Employer's Tax Guide to Fringe Benefits explains these distinctions.
Review the package each year
Compare enrollment, total cost, and employee feedback before renewal. Explain what the business pays, what employees pay, and when they can enroll or make changes. Benefits are easier to use when those details are clear.