Developing Strong Fringe Benefits

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by Mike DuBose

Advertising for, selecting, training, and maintaining an outstanding employee workforce is a significant, time consuming, and costly process. When employees leave, companies lose all of the time, resources, and effort spent training them. Thus, one of the small business owner’s goals in building a great company is to reduce staff turnover and do everything within reason to keep existing employees happy. Happy employees also produce at higher levels and are more efficient and effective. Our companies’ goal is to create a positive, productive, fun work environment with good salaries and fringe benefits where employees won’t even think about leaving while also following our mission to improve lives. It simply costs too much to lose an employee and start the process over with new hires. We have a very low turnover rate, and I believe that some of our actions, care, and support for our team have resulted in our increased employee happiness levels.

While salary may not be the most important thing an employee looks for in a job, it is still a major factor in employee retention. I think the turnover rate for employees in some fast food restaurants must be every two weeks! Some small business owners inaccurately think they should pay the lowest possible salary to all employees in order to maximize profit. After all, payroll and fringe benefits are usually the major expense items within a small business budget. However, remember the old adage: “You get what you pay for!” Good fringe benefits can act as a selling point to entice higher-quality employees to work for your company over another one. And great employees are essential to becoming a great company. Steven Strauss notes: “And 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 criterion to consider, albeit an expensive one.”

After 25 years in the business sector, I have determined that all small business owners should pay their employees well. We pay at the industry standard, if not higher. There are websites that provide salary data according to zip code, but these salary recommendations range from those given by small companies with a few employees to companies with thousands of employees. Use these sites as a guide only. You can also check what your competitors are paying by asking friends and acquaintances in the field.

Although paying your employees well is important, don’t make any rash decisions on salary. Think carefully about how much the position should pay and base salaries according to performance, not relationships or loyalty. In the past, I raised salaries of some employees too rapidly, only to regret it later when the company took a dip in revenues. You can always distribute bonuses when the company is doing well and then take a more conservative approach when business is on a downswing.

I also recommend that you encourage employees to voice concerns about anything in the company, including issues such as salaries and fringe benefits. If you keep communication lines between management and employees open, you will detect dissatisfaction early on instead of being surprised by employees suddenly submitting their resignations out of the blue. Conducting anonymous annual and ongoing surveys can help pinpoint employees’ dissatisfaction and possible solutions.

The second part of your program should include incentives for employees to produce at high levels and help the company save money whenever they can. Including employees in the development of the company budget (and giving frequent updates) is another way to keep employees cost-conscious. We also provide annual bonuses and informal profit sharing where employees earn extra money if the company does well financially.

The third part is the employee’s fringe benefits package. At our companies, each employee receives mandatory (required by law) and optional fringe benefits that the company and/or the employee pay for such as social security (FICA), state unemployment (SUTA), federal unemployment (FUTA), Medicare, retirement, and a variety of insurance coverage such as medical, prescription, accident, vision, dental, life, disability, and health savings programs.

It is my hypothesis that a comprehensive fringe benefits package will result in higher employee retention. Again, there is no magic formula, but a very good fringe benefits package is a part of our corporate strategy to reduce turnover and thus save time and money.

Each employee will be interested in different fringe benefits and sometimes this may be impacted by age. For example, an older employee may be more interested in the fringe benefits that address medical care, disability, and retirement. The younger employees may focus more on vacation time and less on medical insurance that they rarely use. The key is to provide a balanced package that addresses all ages and needs. However, fringe benefits need to be considered in your budget (since all of this will impact your company’s bottom line), and you have a choice of phasing in benefits over time or setting up a strong program from the beginning. I recommend that you carefully consider the benefits your company needs and then secure bids for the services. However, carefully compare both quality and quantity with cost when making your decision. Don’t allow costs to be the sole factor driving your decision.

Until 2002, I was the primary coordinator for our benefits program. I contracted different pieces of the fringe benefits program to various firms (i.e., the worker’s comp insurance policy went to one company, medical insurance was assigned to another agency, retirement to a bank, etc.). This was time-consuming and added another item to the list of distractions keeping me from leading my company into the future.

A manager in our company who had previously been employed by a large, private non-profit recommended that I consider outsourcing our human resource and fringe benefit services to a firm called Administaff. The employee (and his former employer) were very pleased with their services. I had heard of companies that would provide turnkey human resource and fringe benefit services, but had no experience with this sort of agency. I was reluctant about considering this possibility since I felt like it would be expensive and I would lose control of our human resource services.

To prepare for a bid for outsourcing our human resources, I conducted an analysis that showed my company was paying about 21 percent of total payroll for a variety of mandatory and optional fringe benefits for employees. This excluded items like paid time off and retirement benefits.

I recommend that you do a similar analysis on your business to determine the true costs of your fringe benefits. By conducting informal, non-scientific surveys amongst acquaintances, I learned that: (1) private non-profits were paying about 20 percent for their benefits, (2) for-profit companies were allocating about 25 percent, (3) hospitals were running more than 30 percent, and (4) school districts were averaging 30-32 percent. Our existing benefits package was pretty good, but it still lacked key items for employees such as disability and life insurance.

I determined that for a few percentage points more in my payroll budget, Administaff could provide our company with a great benefits package and perform most of the organizational and administrative work. Years later, I can say that the decision was one of the best I have ever made as a small business owner and would highly recommend it to others. By joining up with Administaff, our companies’ 50 employees were lumped in with 80,000 others from thousands of companies when seeking benefits. Administaff is like a broker of services that searches the marketplace for the best services and insurance at the lowest price. When they negotiate with vendors such as United Healthcare, they are bringing 80,000 employees to the table. Consequently, they become a sales agent between agencies like United Healthcare and my company. I am cautious about recommending contractors until I have thoroughly reviewed and used their services, but after five years, I truly view Administaff as a valued partner.

Administaff charges each of our companies a set percentage of the payroll. The more employees (the larger the payroll) you have, the smaller the percentage that will be charged. They also became a formal co-employer with our companies. I still recommend that you take bids to ensure that the company you select to provide your benefits is the best option for your needs. However, if you are a small company, you will have to pay extraordinary prices for disability insurance. As Jan Norman notes, “Small businesses usually are at a disadvantage when it comes to pay rates, fringe benefits, and opportunities for advancement within the company.” When your employees are included in a huge pool of employees like Administaff’s, they become eligible for all sorts of benefits like those available to huge companies with more than 500 employees. The disadvantage of joining up with a company like Administaff is that your small company (which may have less than 50 employees) will fall under the guidelines of larger companies that have stricter guidelines and laws (for example, adhering to the Family Medical Leave Act).

Let’s examine some of the benefits that our employees receive from Administaff to help in you select the benefits that your company will offer to your employees. (Keep in mind that you may decide to go with other companies to provide your benefits.) Remember that costs may vary, but these are what we were paying as of October 2008.

Direct Deposit of Paychecks: Administaff handles the deposit of each employee’s paycheck into his or her personal bank account directly from our company’s checking funds on the 15th and last day of every month. Employees no longer have to run to the bank to make deposits and the money is readily available on the same day. The detailed paystub is e-mailed to each staff member and the money is taken out of our company account on the same day it is transferred to the employee. We control the amount of money each employee receives and maintain a formal and structured process for implementing this activity.

Required Company Fringe Benefits: As of 2008, federal and state governments require small businesses to pay certain taxes and insurance as follows:

  • FICA or Social Security: This retirement tax equates to the company paying 6.25 percent of each employee’s gross salary, up to a ceiling of $90,000. Employees pay a matching 6.25 percent from their funds. If you are self-employed or have a sole proprietorship, your rate will run about 15 percent.
  • Medicare: This tax is 1.45 percent of each employee’s gross salary and has no ceiling.
  • SUTA or State Unemployment Tax Act: SUTA supports a pool of funds administered by state government to provide unemployment benefits when employees are laid off for good cause. Rates in South Carolina average 3.3 percent up to a ceiling of the first $7,500. However, this rate varies according to the business you are in, your employment history, past unemployment claims, and other factors.
  • FUTA or Federal Unemployment Tax Act: Combined with the SUTA, this tax of .8 percent supports the federal funds for unemployment.
  • Worker’s Compensation: Worker’s compensation pays for certain benefits if an employee is injured on the job. Employers are required to maintain worker’s compensation insurance, which is issued by private insurance companies through a policy. Pricing is based on your company’s annual payroll. Our worker’s compensation is covered through the rate we pay Administaff. However, most small businesses will pay an average of about $1,000 for an annual policy. This rate is based on payroll and your business activities. For example, if you owned a tree cutting company where employees were exposed to many dangers that may result in more claims, your rate would be higher than that of our low-risk company, which has never filed a workers’ compensation claim. After each year you have had the policy, an audit is conducted by the issuing insurance company to determine your true payroll based on your federal payroll reports, your current year’s premium is adjusted, and the next year’s payment is calculated.

These taxes have to be paid monthly or quarterly. As a warning to the wise, pay taxes accurately and on time; otherwise, you may face stiff penalties or even an audit.

Health Insurance: There are a wide variety of insurance carriers in the marketplace. Administaff partners with United Healthcare, which is one of the largest insurance providers in the nation. As with most insurance agencies, your employees will have to select one plan, which usually begins on the first day of the calendar year, amongst themselves. Most insurance providers lock your company and employee base into that plan for one year or until your contract renews (usually on December 31st of each year). There are several basic types of insurance:

  • A Participant Provider Option (PPO) allows you to choose from physicians within a preselected network. You do not need a referral and can go directly to specialists.
  • A second type is a Health Maintenance Organization (HMO) and requires that you stay within the preselected list of physicians. Most HMOs have gatekeeper physicians. If you need to see a specialist, the gatekeeper must make a written referral within the insurance company’s preselected list of medical doctors. Most HMOs are more expensive than other options, but will usually pay most of your bill with lower or no co-pays; whereas, PPOs require some type of individual or family deductible with co-pays.
  • A third type will allow you to visit any physician and the insurance company will only pay 80 percent.

We decided to pay for the employee’s portion of the medical and other insurance (unless the employee had insurance from other sources or declined the coverage for a higher salary). The company pays about $350 to $400 per month toward each employee’s insurance, but that includes medical, life, disability, vision, dental, and other coverage. We selected a good mid-range coverage policy, but the employee can elect to pay extra for a lower deductible or expanded coverage beyond what the company pays. If an employee wishes to add children to the policy, there is an additional $300 charge. Family coverage (children and a spouse) runs about $725 monthly on top of what the company pays for the employee. The fewer claims filed by your employees, the lower the company’s rate.

As the company, you will only pay for the employee’s share of the coverage and that is the amount you will want to include in your budget. Any additional coverage is picked up by the employee.

Our plan requires a $30 co-pay at a physician’s office, a $60 co-pay to see a specialist, and $100 co-pays for the emergency room. Employees can go to any physician or hospital that accepts our insurance. Be cautious when selecting medical insurance since there can be all sorts of ceilings, deductibles, and coverage. Before selecting an insurance provider, ask several of your employees to go online and determine if the doctors and specialists they currently use accept the insurance you are considering. And be sure to watch out for sucker deals where companies are selling what they refer to as “discount” insurance plans! These cheap plans do not provide insurance, but rather give participants a list of dentists and physicians that will offer discounts.

Prescription Card: This allows the employee to take prescriptions to an approved drugstore, which bills the insurance company directly. Each company has its quirks and understanding them is important to maximizing your use of the prescription plan. Co-pays for other plans vary, but our insurance plan runs on tiers of $10, $35, or $60 for each prescription. Review coverage for common drugs and medical supplies when making your assessment and make sure that most drugstores are accepted within the plan. You may be required to go through preselected drugstores or the carrier’s mail-in services. In assessing coverage, I always look for major drugstores such as Wal-Mart, Walgreen’s, and Kroger to be accepted.

Dental Insurance: Our policy covers 100 percent of preventative and diagnostic dental work like teeth cleanings and X-rays, 50 percent of orthodontic work such as braces, and 80 percent of most other dental services. Of course, as with most policies, there are limits on the procedures covered.

Life and Accidental Insurance: Each employee receives a complimentary life and accident policy based on their salary (which pays out a minimum of $15,000 and a maximum of $50,000). Employees can purchase additional insurance at their expense.

Vision Insurance: If the employee chooses from a preselected list of optometrists, eyewear centers, or ophthalmologists, there is $15 co-pay for an annual eye exam. The plan pays up to $130 for frames and $45 to $95 for lenses.

Disability Insurance: Disability insurance is very expensive. Many pre-existing conditions are not covered or there is a waiting period before the coverage kicks in. Our company-paid disability insurance is administered by CIGNA through Administaff and offers both short and long-term disability coverage for full-time employees. The short-term coverage starts after the 15th day of disability and pays for up to six months at a rate of 60 percent of basic weekly earnings or a maximum of $2,308 a week. The long-term disability coverage starts after six months of continuous disability and pays 60 percent of basic monthly earnings or up to $10,000 per month for salaried employees. Coverage lasts up to age 65.

Educational Assistance: Through this unique benefit, Administaff helps pay for employees’ professional and personal development. Reimbursement up to $500 per year is available to each employee for continuing education courses. Undergraduate and graduate course expenses are also reimbursed up to $1,500 per year. All courses must be approved prior to enrollment to qualify for reimbursement; however, Administaff approves most courses and other professional development requests in a timely fashion. In addition to educational assistance, Administaff has an excellent, structured training program for employees that can be taken both online and in person.

We have taken this commitment to personal and professional development further in our companies by creating the “Live and Learn Club.” Employees read a book that the Professional Development Committee and I select, then meet twice to discuss it for at least one hour each meeting. They turn in a review of the book as a group and each writes a personal review for his or her own reference. The reward for participating is the knowledge gleaned from the book and a cash bonus added into each participant’s paycheck.

Retirement: This is an important benefit for employees desiring to save for the future. Some of our younger employees do not take advantage of this offer, but nearly all employees approaching or exceeding 40 years old are active participants. There are all sorts of pre-tax retirement plans out there. If you have a sole proprietorship, you may want to consider the Simplified Employee Pension Plan (SEP), since it is easy to set up and is geared toward smaller operations. Other 401(k) plans are more complex. Check with your CPA on the best plan for your business since there are restrictions and guidelines that must be followed.

I like our self-directed plan where the company matches employees’ 401(k) contributions on a graduating scale up to 5 percent of the employee’s salary. Thus, if an employee’s salary is $30,000 and that person was to put $1,500 into our IRS approved plan, the company will match the employee contribution of $1,500 for a total of $3,000 tax free funds. The employee controls the account and decides which stocks or funds they wish to purchase. It is like a yearly $1,500 tax-free bonus. Employees 50 or more years old may contribute additional amounts up to $5,000 for a catch-up retirement program as part of new federal guidelines. Of course, there are many restrictions on and penalties for taking the money out of the retirement account prematurely. Administaff’s retirement division handles all the complex paperwork for this program and uses a fund specialist to select the stocks for us to choose from. Employees take their funds with them when they leave the company.

Paid Time Off (PTO): Unlike some organizations that separate their sick and personal leave, we combined both types into one amount. Employees earn up to 160 hours (four weeks) of PTO each year. They can carry over up to 60 hours of unused leave from one year to the next. Management encourages them to take most of their leave to prevent burnout. As president of the company, I usually also grant the week of July 4th and the last two weeks of December off to give employees some extra time with their families. Though I could push them to work during this slow time, I need to send a message that I care about them and allow them to recharge for the next year. Thus, employees usually receive six to seven weeks off each year for personal and sick leave if they have worked for a full year with the company. This is a very liberal policy. We determined that the average time off for state government is about 15 days per year (three weeks) and most for-profit companies allowed about nine days per year (about two weeks). However, we have a great bunch of employees and this is a small token of our appreciation for all their hard and smart work!

Extended Illness Benefit (EIB): Most organizations do not provide this coverage, but we choose to. This benefit is primarily directed toward employees who have a major medical condition or are in an accident (and is not to be confused with the Family Medical Leave Act or FMLA). Employees earn up to 160 hours (four weeks) of EIB to use in the event of a major illness or accident that is covered under company policy. EIB is available after the employee has exhausted all PTO. This leave is rarely used since it is more emergency-focused.

Company Paid Holidays: In our research, we determined that the average holiday allocation for state government was 12 days and for for-profits it was eight days. We allowed our Employee Liaison Committee to select 12 company paid holidays, including:

  • New Year’s Day
  • Thanksgiving Day
  • Martin Luther King Day
  • Day after Thanksgiving
  • Good Friday
  • Christmas Eve
  • Memorial Day
  • Christmas Day
  • Independence Day
  • Day after Christmas
  • Labor Day
  • Employee’s Birthday

If an employee wishes to work during a holiday or has a different religious preference, we provide flexibility.

Travel: Traveling these days can be very expensive. When reimbursing employees for mileage, we match what South Carolina state government pays their workers. We prefer employees to use their own vehicles for travel to avoid the high costs of insuring company-owned vehicles.

Health Savings Account (HSA) or Flexible Spending Account (FSA): Employees may request that up to $250 per month ($3,000 per year) be taken out of their paychecks as a pre-tax deduction. These funds may be used to pay for expenses that our insurance may not fully cover such as orthodontic work, physician and prescription co-pays, emergency room visits, etc. However, the amount deducted must be used by the end of the year for legitimate health expenses or the employee will lose the contribution under IRS guidelines. Since this annual deduction of up to $3,000 is not taxed, depending upon your tax bracket, its true value may be closer to $4,000.

Informal Dress Policy: Employees in some of our companies visit with customers in the field and rarely deal with clients in our corporate headquarters. Therefore, we have a casual dress policy at our headquarters that not only saves employees money on dry cleaning but also creates a more relaxed environment. This policy was well-received by the employees and costs the company nothing. They each maintain a set of professional clothes in their offices in case a customer suddenly announces they want to meet or is in our convention center for another meeting and wants to say hello. As another small token of our appreciation, we allow our employees to leave a half hour early on Friday to avoid the rush hour traffic. Policies like these don’t cost the company a lot of money but pay off by showing employees how much you care about them. “The great thing about innovative policies is that employees appreciate them almost as much as anything else you offer, yet the policies may not cost nearly as much as those other, expensive benefits packages,” Strauss says.

Flexible Time Schedule: We allow employees some flexibility to adjust their daily work schedules to address concerns like childcare. We also permit team leaders to allow comp time during intense work periods.

Profit Sharing: We have an informal profit-sharing program where I (as the company’s owner) will allocate some of my profits to employees when the company does well.

Other Benefits: Administaff provides other benefits through their partners such as discounts for car loans; automobiles; car, home, life, and other insurance; and computers. They have also provided invaluable assistance in helping us develop our policy and employee manuals so they adhere to federal and state law and have flown in experts to assist the company in addressing crises. This is a great service since I do not have to employ expensive human resources experts.

The most attractive part about our relationship with Adminstaff is that the partnership has reduced our time and costs spent on accounting and administrative functions since they coordinate almost all paperwork.

There you have it: everything you wanted to know about fringe benefits and salaries but were afraid to ask! Salary and fringe benefits will be your greatest expense in the small business budget, so you want to get the most for your money while saving wherever possible. Hopefully, this chapter will help you develop better budgets, keep your employees, and best of all, keep you out of jail!