Small Business Employee Benefits: What You Need To Know and Why It Matters

Offering competitive employee benefits can help small businesses attract top talent.

But how do you build an outstanding benefits package? Whether you’re navigating healthcare options, trying to decide on retirement plans, or considering which perks will resonate with your employees, we’ll walk you through what you need to know.

Here’s why employee benefits matter, and how you can structure yours to support your team and grow your business.

What are employee benefits?

Employee benefits are non-wage compensation provided to employees in addition to their regular salary. They can include health insurance, retirement savings plans, vacation days and even perks like gym memberships or paid volunteer days. These benefits play a critical role in boosting workplace satisfaction and employee well-being.

For small business owners, building an effective employee benefits package isn’t just about ticking boxes. It’s about providing tangible value to employees, showing them they’re appreciated, and fostering a positive, productive work environment.

Why is offering benefits important for small businesses?

1. Attracting talent.

Small businesses often compete with larger corporations for skilled professionals. Offering competitive benefits levels the playing field and allows you to stand out as an employer of choice.

2. Retaining employees.

Strong benefits packages play a crucial role in improving employee retention. Employees are more likely to stay with a company that offers healthcare, retirement plans and flexible perks that align with their needs. Reducing turnover saves recruitment and training costs in the long run.

3. Boosting productivity.

Happy employees are more motivated and productive. Offering benefits that support both physical and mental well-being ensures a healthier workforce capable of performing at its best.

4. Enhancing your reputation.

A well-rounded benefits package builds a strong employer brand. Word travels fast in tight-knit communities, and your investment in your employees establishes your company as a reputable, compassionate place to work.

What benefits do small businesses offer their employees?

There are different types of employee benefits. Let’s break them up into categories.

Legally required benefits.

Certain benefits are required by law, and failing to offer them could lead to penalties or legal challenges. Some legally required benefits depend on your businesses’ number of employees.

Social Security and Medicare. Employers are required to withhold and match contributions from employees’ paychecks.

Unemployment insurance. Employers must contribute to state and federal unemployment insurance programs to support employees during job loss.

Workers’ compensation. This insurance provides financial support to employees injured on the job. Workers’ comp is mandatory in most states, regardless of company size, with a few exceptions.

COBRA (Consolidated Omnibus Budget Reconciliation Act). Employers with 20+ employees must offer continued coverage after job loss or events like divorce or childbirth, lasting 18 – 36 months depending on the situation. Smaller employers should note that some states offer “mini-COBRA” for businesses with fewer than 20 employees.

Affordable Care Act (ACA). Businesses with 50+ full-time employees must provide affordable healthcare under the Affordable Care Act. Companies with fewer than 50 employees aren’t required to offer health insurance, but might consider doing so to remain competitive.

Local government requirements. California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico require employers to provide employees short-term disability insurance.

Health benefits.

High healthcare costs can create significant stress for employees. And when workers are sick or managing chronic conditions, businesses may lose productivity.

Employee health benefits cover both physical and mental health, addressing the full spectrum of well-being.

Group health insurance plans. These plans not only support employee well-being, but also provide tax savings for businesses.

Medical flexible spending account (FSA). This allows employees to use pre-tax contributions for eligible healthcare expenses. Both employers and employees can contribute, offering significant tax savings.

Health reimbursement arrangement (HRA). This account is fully funded and owned by the employer, providing employees with funds to cover eligible healthcare expenses. It also offers tax savings benefits.

Health savings account (HSA). HSAs allow employees to use pre-tax funds for qualified medical expenses, similar to an FSA or HRA. Both employers and employees can contribute to the account. However, unlike FSAs and HRAs, an HSA is employee-owned and functions as an investment account that earns tax-free interest over time.

Vision and dental insurance. Offering vision and dental insurance shows employees that you value their health and well-being beyond the legal requirements. They’re also competitive benefits that can set your small business apart.

Mental health and wellness programs. Small businesses can offer mental health programs like access to counseling services or employee assistance programs (EAPs) to support their teams. Wellness initiatives such as mindfulness workshops or stress management sessions can also promote overall mental well-being.

Financial benefits.

Financial security helps employees feel peace of mind, allowing them to focus on their work without worrying about the future. By providing strong financial benefits, employers help their teams plan ahead with confidence.

Retirement plans. Retirement plans, like a 401(k), help employees build a secure financial future, making it easier to save for life after their careers. Employer matching contributions can further enhance these savings, providing an added incentive to invest in retirement.

Paid time off (PTO). PTO, which includes vacation, sick leave and personal days, ensures employees can take necessary breaks to recharge or handle personal matters without financial stress. It promotes better work-life balance and overall well-being.

Life insurance. Life insurance offers employees peace of mind by providing financial security for their loved ones in case of unforeseen circumstances. It’s a safeguard that supports families during challenging times.

Flexible spending accounts (FSAs). FSAs allow employees to set aside pre-tax dollars for eligible expenses like medical bills or childcare. This benefit helps reduce financial strain and makes managing expenses more affordable.

Fringe benefits.

Fringe benefits are optional perks that employers offer to attract and retain talent. While not legally required, fringe benefits can enhance employee satisfaction and differentiate your company from competitors. Examples include:

• Wellness programs (such as gym memberships)
• Tuition reimbursement or student loan assistance
• Flexible working arrangements (hybrid or remote work)
• Professional development opportunities
• Paid volunteer days
• Childcare
• Commuter benefits

What does a typical benefits package look like for a small business employee?

A realistic benefits package for a small business might include:

• Health insurance coverage, with options for dental and vision.
• A retirement plan such as a 401(k), with matching contributions (if possible).
• At least 2 weeks of paid time off (including vacation and sick days).
• Workers’ compensation insurance (mandatory).
• Optional perks such as wellness programs or flexible scheduling based on the company’s budget.
• A Flexible Spending Account, and a Health Savings Account/Health Reimbursement Arrangement.
• Social Security, workers’ compensation and unemployment insurance (required by law).

How much do benefits cost the employer?

While costs can vary, 2024 data from the Bureau of Labor Statistics provides the average benefits cost for private industry workers in establishments that employ under 50 people:

• Total benefit costs: $8.88 per hour worked
• Legally required benefits: $2.81 per hour worked
• Paid leave: $2.16 per hour worked
• Insurance: $2.05 per hour worked
• Retirement and savings: $0.83 per hour worked
• Supplemental pay: $1.03 per hour worked

For small businesses concerned about budget, keep in mind that not all benefits need to come with high costs. For example, offering flexible schedules or professional development is low-cost yet high-impact.

Additionally, many expenses are tax-deductible, and small businesses may qualify for tax credits for healthcare plans purchased through the Affordable Care Act marketplace.

How to offer a competitive benefits package.

Regardless of your budget, there are ways to design benefits that support your employees and set your business apart.

1. Start with research.

Try gathering feedback from your employees through surveys to understand their needs. You can also research benefits offered by competitors in your industry.

2. Leverage cost-saving options.

Consider partially employee-funded options like high-deductible health plans paired with Health Savings Accounts (HSAs). These can be a win-win for employees and employers.

3. Get creative with perks.

You can offer unique benefits like wellness stipends, subscription services (e.g. meditation apps), or paid volunteer days. These can enhance your employees’ overall experience without adding significant financial burden.

4. Educate your employees.

Ensure your team fully understands their benefits. Use onboarding sessions or guides to explain each program’s value (e.g., retirement matching or health insurance coverage).

5. Seek professional support.

Partnering with a benefits provider or HR consultant can simplify the process of identifying, negotiating and managing benefits.

6. Adapt and adjust.

Stay open to employee feedback and continually improve your offering to reflect their evolving needs and market trends.

What small business owners say.

Pair an HSA with a high-deductible health plan.

“Finding ways to provide competitive benefits without breaking the budget has always been a balancing act, but pairing an HSA with a high-deductible health plan (HDHP) has been a smart approach for us. HDHPs reduce monthly premiums, allowing us to stretch our benefit dollars while still providing good coverage.”

Marc Hardgrove, CEO
The HOTH

Gain insight from employee surveys.

“Twice a year we send out employee pulse surveys to get a sense of the morale of our team…the benefits we offer are always part of the surveys, and from this we’ve learned what our team values.”

Jared Brown, CEO
Hubstaff

Partner with local businesses for low-cost perks.

“I consider partnering with local businesses for discounts to offer competitive benefits on a budget to the employees. I also try to focus on providing low-cost perks like free food or movie tickets, and honestly, it helps me boost the morale of my valued employees without breaking the bank.”

Fergal Glynn, CMO
Mindgard

The Bottom Line

Think of employee benefits not as a cost, but as an investment in your business’s success. Offering the right combination of legally required benefits, competitive perks, and creative options helps small businesses attract top talent, reduce turnover, and stay competitive in today’s evolving job market.