How Much Can Your Business Expect to Pay for Its Employee Benefits Program?

In today’s hyper-competitive job market, employee benefits plans are an indispensable tool for snagging (and retaining) talented employees by differentiating your business from competitors.

Additionally, employee benefits can improve your bottom line by engaging employees and improving their productivity, wellbeing, and work-life balance. Offering a robust benefits program to your employees is crucial because it shows them you are invested in their overall health, job satisfaction, and even their future.

But designing a great employee benefits program isn’t going to be cheap. The reality is that you need to find a way to provide your employees with the best workplace possible in a financially tenable way.

Employee benefits programs can get expensive quickly; both in terms of the money required to pay for them and the work hours needed to set up, maintain, and administer them. Additionally, benefits are consistently getting costlier year over year. In fact, over the last five years, the costs associated with benefits have increased an average of 5-7% percent per year.

In 2021 and onwards, that increase could be exponentially higher due to the COVID-19 pandemic. Employees will be more likely to use mental health services, days off, seek vaccinations, and take advantage of voluntary benefits such as mental health and wellness programs.

To help you get a clearer picture of how much you can expect to spend on your benefits program and determine how to invest your benefits budget, we’ll break down the average costs of several types of benefits, outline the factors that will influence their cost, and talk about saving money while retaining the overall quality of your program.

An Employee Benefits Program: What Is It?

First, let’s define what an employee benefits program is before diving further into how much it will cost and how to get the most out of your budget. There are two types of benefits that go into a plan; mandatory and voluntary benefits.

Mandatory benefits include Social Security contributions, workers compensation insurance, unemployment insurance, and under certain state and local laws, paid sick leave.

Almost all other benefits, such as health insurance, pension programs, paid-time-off benefits, or other, unique benefits are entirely voluntary and are determined by the employer, or more accurately, by the market.

What Affects the Cost of Your Employee Benefits Program?

It’s difficult to determine what your benefits program could cost without sitting down with an expert and discussing your unique needs. However, in general terms, the cost of your health and employee benefits program will depend on two prominent factors; the size of your business and the breadth of your plan.

Firstly, the size of your business and how many employees will be receiving benefits will be the most important component determining how much you’ll have to pay for your plan. The second biggest factor will be the quality of the plan. The more coverage and benefits a plan has, the more you’ll have to pay per employee.

Now that we have the broad strokes covered, let’s dig deeper into what an employee benefits plan may cost by breaking down how much businesses pay on average and how much specific coverages can cost.

How Much Do Employee Benefits Cost on Average?

We can use statistics gathered by the U.S. Bureau of Labor to get a good idea of what various employee benefits cost on average.

In June 2021, the bureau reported that employer costs for civilian workers averaged $38.91 per hour. Wages comprised about 69% of that number, which means that benefits made up 31% of total compensation.

This fits into lecturer Joe Hadzima’s basic model for calculating the cost of salary plus benefits, which usually totals “in the 1.25 to 1.4 times base salary range.” Thus, an employee who makes $100, 000 a year could cost the company $125,000 to $140,000 once benefits are calculated.

However, this only gives us an insight into the lump sum that businesses are paying for benefits. To help you better understand how much your plan will cost, let’s break down how much some of the most popular and necessary benefits will cost:

Health Insurance

Health insurance will typically be the most expensive part of your benefits plan. According to the Kaiser Family Foundation, employers pay an average of $7,188 for single and $20,576 for family coverage annually. The deductible (the amount you need to pay before the coverage kicks in) is also considerable, averaging out to about $1,655 for covered workers.

Naturally, the cost of your health insurance benefit can vary wildly from the national average. Still, in most cases, you can expect to pay between $5,000 and $30,000 annually, depending on how much participation you ask of your employees.

Workers Compensation

Workers compensation insurance covers medical expenses and lost wages for employees that are injured on the job. The actual formula for calculating the cost of worker’s comp is fairly complicated, and it includes your payroll, class codes, and X-Mods. These are classifications that represent benchmarks for how risky your industry and circumstances are. If you want to learn more about these classifications and calculate your worker’s comp insurance cost, you can use our helpful calculator.

Companies that are low-risk, such as law firms, accountants, tech startups, or other office-based organizations, will have to pay relatively low premiums, usually in the range of $300 per employee, per month. However, businesses operating in high-risk industries, such as construction, can expect to pay ten times as much.

Disability Insurance

Disability coverage kicks in if an employee is unable to work due to a non-work-related illness or injury. The employer can pay for the coverage, share the cost with the employee, or simply offer access to group coverage.

Purchasing disability insurance as an individual policy is prohibitively expensive. Setting up a group policy will significantly reduce the cost on a per-employee basis, allowing coverage to be purchased for several thousand dollars. However, only 25% of U.S. employees have access to disability insurance benefits through their employer. This low percentage makes adding disability insurance an excellent way for your benefits plan to stand out.

Life Insurance

Life insurance benefits can help replace your employees’ income if they pass away. Adding life insurance as a group coverage is an attractive option for both the company and employees, since it’s relatively inexpensive, costing a few hundred dollars annually.

Secondly, the first $50,000 of a group life policy is not taxable for the employees. This is why larger companies often cover their employees with life insurance equal to their annual salary.

Retirement and Employee Stock Purchase Plan

Employers will typically match their employees’ contributions to their retirement fund up to a certain point. The most common percentage employees will put towards their retirement is 2-6% of their salary.

Additionally, if you sponsor and manage your employees’ retirement plans, they’ll be able to get considerably better returns and save more in tax-free or tax-advantaged accounts.

However, retirement plans aren’t the only way to take care of your employees’ future. Many employers, especially startups, will offer their employees an option to purchase a certain amount of stocks at very reduced prices (sometimes at 10% of the market value).

If your company is successful and manages to go public, this could allow employees to make a very nice profit once they end up selling their stocks.

Contributions to FICA

FICA is an acronym for Federal Insurance Contribution Act, and it sets regulations related to Social Security or Medicare taxes. FICA contributions are mandatory and will be equally shared by the employer and the employees. Both parties will have to pay around 7.65% of the salary each.

Unemployment Insurance

If you lose your job without a good reason, and you meet your state’s requirements, unemployment insurance will cover a part of your income for a certain period of time.

Under the Federal Unemployment Tax Act (FUTA), employers are responsible for providing and paying for unemployment insurance for their employees. The price range is typically 0.5-1.5% of the salary.

Other Voluntary Benefits

You may decide to offer other “quality of life” benefits such as a gym membership, yoga classes, mental health benefits, PTO, pet insurance, daycare, or a whole host of other programs designed to offer a better workplace to your employees.

The nature of these programs can vary significantly depending on your company and workforce, so it’s hard to determine how much such benefits could cost. However, the value they could bring to your employees could make them well worth whatever the cost may be.

It’s important to pick and choose the benefits you offer carefully. For instance, in the latest Staples Workplace Survey, 1,549 employees were asked about their preferences for benefits.

The study asked the participants to separate the perks and benefits into several categories and here is how they responded to each:

Benefits most likely to convince existing employees to stay:

• Regular remote work: 17%
• Employee discounts: 11.9%
• Flexible hours: 9.2%
• Paid insurance premiums: 9%
• Streaming subscriptions: 7.8%
• Financial assistance with professional certifications: 7.6%

Benefits employees consider must-haves:

• Flexible hours: 40.2%
• Paid insurance premiums: 33.6%
• Paid family leave: 29.2%
• Regular remote work: 26.4%
• Financial assistance with professional certifications: 26.3%

Benefits employees considered nice to have but not essential:

• Employee discounts: 42.7%
• Free coffee and snacks: 42.3%
• Streaming subscriptions: 42.2%
• Gym membership reimbursement: 35.1%
• Onsite fitness classes: 30.3%
• Company car, laptop, or phone: 30.2%

Benefits that motivated the surveyed employees the least:

• Free e-readers and e-books: 37.1%
• Time off to volunteer: 26.3%
• Onsite daycare: 25.9%
• Daycare reimbursement: 25.3%
• Onsite fitness classes: 21.7
• Student loan paydowns: 20.7%

For a full list of what counts as fringe benefits, you can check out the IRS’s Fringe Benefit Guide and Publication 15-B.

Why Offering Employee Benefits Is Worth It

Obviously, benefits packages cost a lot of money and take serious time and effort to put together. However, in today’s competitive job market, an employer cannot afford to not offer employee benefits coverage.

The first argument for offering a considerable benefits package is the fact that employees really, really want them. If you want to attract and retain the best talent to help take your company to the next level, then a strong employee benefits package is crucial.

It can also make the process of getting top-tier talent on board much easier for your recruiters.

In a study conducted by the Society of Human Resource Management (SHRM) 92% of employees indicated that they consider employment benefits as crucial for their overall job satisfaction. And job satisfaction isn’t just a feel-good vanity metric, it’s a crucial factor for both the productivity and retention of employees. In fact, in the same study, almost 30% of employees cited benefits as the main reason they started looking for a new job.

Employee benefits also help keep high-level employees reimbursed adequately without raising their salaries to prohibitive levels. Employees who have good health insurance, a steadily growing retirement fund, and options to buy stock will be happy to accept these tax-advantaged options over higher salaries.

How to Reduce the Cost Of Employee Benefits Programs Without Sacrificing Quality

The first thing to consider when trying to keep costs down is what coverage you’ll want to include in your program. Be sure to analyze your program regularly and ask for employee feedback, because often, there are expensive perks that your employees don’t really want or use.

Additionally, it could be a good idea to share some of the costs with your employees by allowing them to contribute. Insurance companies will typically require employees to pay a minimum amount of the premium.

Inviting employees to contribute is beneficial in two ways. Firstly, you’ll be able to get them a group deal on the coverage they couldn’t get as individuals. Secondly, suppose the employees have a financial stake in the plan. In that case, there will be less abuse and frivolous claims, ultimately reducing the cost for everyone.

However, once you agree on the percentage your employees will contribute, you should stick to it for at least a year. Insurers will see frequent changes as a sign of instability, and it may reflect poorly on your premiums.

Once you’ve decided on what benefits and policies you want to have in your plan, it’s a good idea to look into reducing their costs.

Educating your employees on how to select and use their health care and retirement benefit options could lead to considerable savings. This holds especially true for businesses with younger demographics that might not yet be 100% clear on how their benefits work and how to get the most out of them. It’s also a good idea to talk to your plan provider and see if they can provide training or guidelines for your employees.

Additionally, wellness plans are becoming a crucial part of any good employee benefits plan. Creating and offering services to encourage employees (and their families) to stay healthy can keep your insurance costs low.

Providing employees with free or heavily discounted vaccinations, cancer screens, and mental health hotlines can preclude potentially expensive claims. Adding in services that promote wellness, such as a free gym membership, yoga classes, and company-wide fitness events can also lead to a healthier and happier workplace.

For larger businesses that employ more than 100 people, it may be wise to look at alternate financial models for their benefits plan. Using an Administrative Services Only (ASO) plan could lead to significant cost reductions.

In this arrangement, the company only purchases the administrative service from the insurer while funding the insurance itself. ASO will allow companies greater control over their benefits and give them better control of their cash flow by only paying for claims when they happen, without paying a premium to the insurer.

If you’d like to learn more about structuring your employee benefits program to offer a high-quality package for your employees while reducing the overall cost, don’t hesitate to reach out to one of our employee benefits specialists at any time.