09/ 22/ 2005
by Steve Strauss
Q: What am I obligated to do as far as employee benefits go?
A: From the noble (the desire to make a difference) to the mundane (just to get health insurance), work means different things to different people. While money will be the main way you compensate employees for a job well done, it is not the only way. Employee benefits involve more than just pay. By law, you are required to give employees only certain benefits, though they’re probably not what you think. You must:
- Pay them at least the prevailing minimum wage.
- Provide workers’ compensation insurance.
- Withhold and match FICA taxes.
- Pay unemployment taxes.
- Have employees work no more than 40 hours a week or pay overtime, unless they are exempt employees.
- Provide time off to serve in the military, on a jury or to vote.
You are not required to give employees benefits such as:
- Bonuses
- Health insurance
- Paid vacations
- Sick leave
- Retirement plans
- Stock options
- Life insurance
- Christmas, New Year’s or other legal holidays off
While you are not required to offer such benefits, if you want to create a place where people want to work, you will want to provide some or all of the benefits listed above.
The quality of your benefits package is definitely something employees will look at when deciding whether your business is a place where they would want to work. Since the quality of the employees you attract has a direct impact on the quality of your business (and the quality of your bottom line), offering a full benefits package is an important criteria to consider, albeit an expensive one. Here are your options:
Bonuses: Money is a mighty motivator. Offering bonuses, therefore, can be a valuable incentive. Bonuses can be structured in two ways. First, individual employees can be given benchmarks to hit, and a sliding-scale bonus can be offered as the employee hits each goal. Under the second system, goals for the entire business are communicated to all employees, and as the company hits these goals, a pool of bonus money is created.
Stock Options
Another trait shared by the great, most successful small businesses is that they often give employees a stake in the business: an ownership share. Descriptions of the three types of stock ownership plans are:
- With a stock option plan, your business would award the option to buy company stock at a specified price, and the employee then has a certain amount of time to exercise the option and become a part owner of the company.
- An employee stock ownership plan is a sort of retirement plan akin to a 401(k). Though in this case, instead of creating a diversified portfolio with an ESOP, the retirement funds are invested in the stock of the employer.
- An employee stock purchase plan allows employees to buy stock at a discount (usually around 15 percent). The employee can then either sell the stock for a profit or simply hold on to it.
Other retirement plans
For employers and employees, the most popular employer-sponsored retirement plan is the 401(k), since contributions are tax deductible for employers and tax deferred for employees. Participation is optional, though employees today know they need to fund their own retirement and usually appreciate the opportunity to do so. The question that you, the small-business owner, must answer is whether you can afford to match funds contributed by employees. It is expensive to match employee contributions dollar for dollar, even if the dollars are tax deductible.
Investments made by the 401(k) contributions can be made by employees or by the plan administrator. With a 401(k), however, remember that the more options you give your employees, the more expensive administration will be. Expect administration costs to be at least $1,000 a year as reports must be filed with the IRS, the Department of Labor, plan participants and so forth.
To set up a 401(k) plan or some other tax-deferred retirement plan (SEP IRAs, KEOGHs, etc.), you need to speak with a financial planner or your accountant.
In part 2 of this series tomorrow, learn about employee benefits as they relate to health insurance, holidays and sick leave.
