Employee Benefits 101

Looking for a way to attract talent and reduce employee turnover? Offering employee benefits is a great first step.

This article offers advice for our Canadian readers. Employee benefit information varies from country to country, so watch out for future posts on employee benefits 101 in the US and other countries.

The 3 Types of Employee Benefits

Which benefits model will be most practical for your company will depend on your business model and your recruitment aspirations. Read on to get an understanding of each.

Insurance

Insurance benefits include life and disability insurance. This coverage can be purchased by employees themselves, but often employers will offer life insurance, disability insurance, or both to employees as part of a group insurance plan (GIP). Because the employer is purchasing insurance on behalf of many employees, rates are generally lower due to the combined volume of coverage being purchased. Also, individuals who may not be otherwise insurable on their own dime are now eligible for coverage through a GIP.

Health Benefits

Health benefits include health insurance, dental care, vision, and prescription drug coverage. As with life and disability insurance, your employees can buy these items directly, but accessing them through an employer generally results in better rates. Plans vary depending on the provider and the level of coverage you select.

Lifestyle Benefits

Lifestyle benefits include a wide variety of things that you can choose to offer as an employer. Some examples include:

  • Amount of paid vacation time offered
  • Subsidized gym passes
  • Subsidized transit passes
  • Giving employees a day off on their birthday
  • Staff discounts on your products or services
  • Maternity leaves top-ups
  • Meal allowances
  • Company Car
  • Creative Titles

READ MORE: Learn how to build a business where employees want to work

Insuring Your Employee Benefits Plan

When you offer benefits, there are two ways you can manage the risk associated with the cost of providing these employee perks:

Insuring Risk

When you choose to insure the cost of offering benefits to your employees, you are choosing to enter into a contract with an insurance carrier. You will provide employee census data (name, age, sex, family status, etc.) and the insurance carrier will quote you a monthly insurance premium. Once the monthly premium is established and you have agreed to proceed, the insurer will collect the monthly premium and your employees will be eligible for coverage.

From here, the insurer takes on the risk associated with offering the benefits. If claims are higher than the premiums being charged, then the insurer will still be obligated to continue coverage. If, however, claims are low the insurer keeps the full premium payment regardless. The benefit to you is you know what your monthly expense is going to be making it easier to manage cash flow.

Self-Insuring Risk

Self-insurance is when you offer benefits to your employees without transferring the risk to an insurance carrier. This is generally done in the form of a Health Spending Account (HSA). There are providers who will administer these plans on your behalf for a fee.

In this setup, you establish an annual cash limit per employee and each covered staff member will be eligible to submit claims up to that amount. Say, for instance, that amount was $500 per year. How an employee decides to allocate this amount among approved services is up to them. Typically, the employer makes a monthly payment to the HSA provider. This monthly payment accumulates in an account, and your employee submits claims which are paid out of these funds. Once your employees reach their individual limits they are no longer eligible to have any more claims reimbursed until next year’s period. These limits reset once per year.  

If your staff submit a lot of claims, you will be required to top up the balance in the account. If, however, your employees make very few claims (which is more common than not), then you will be able to reduce your monthly account payment.

(Note: Generally, a business will not self-insure life or disability insurance.)

What Do Employee Benefits Cost?

The cost of your employee benefits depends on a number of factors, including:

  • The number of employees covered
  • The demographic makeup of your employees (age, sex, family status, etc.)
  • Your industry classification

 

Insurance companies aggregate information from across thousands of plans, pooling the data and claims experiences to arrive at their rates. These prices reflect the underlying risk associated with providing the insurance coverage. To get an accurate price, your employee census data needs to be provided to the insurer so they can build out a quote.

In addition to the price, you will also need to determine how much of the coverage you will be paying for and how much you expect the employee to pitch in. For example, you may choose to cover 50% of the cost while the employee would cover the other half by way of a payroll deduction. If you are in a competitive employment market, you may choose to cover 100% of the cost as a way of differentiating yourself from your competition. If so, be sure to market that fact along with the annual dollar amount your potential hires would stand to save each year.

How Do I Set Up Benefits?

The number of insurance carriers and the variety of coverages they offer can be difficult to sort through. The best way to set up a benefits program is to seek out the help of an insurance broker. An insurance broker will use his or her expertise to help you determine what is appropriate for your business.

A good insurance broker will take you through a needs assessment, establish a budget, and then help you build a plan that works for your business. He or she will then take your plan to several different insurance carriers to get quotes, present those quotes to you, and make a recommendation. Your insurance broker will earn a commission on the sale as compensation for their industry access and time invested in the process, as well as for ongoing support should you have questions or problems with the administration of your plan.

How Do I Find an Insurance Broker?

You can find a broker in a number of different ways, including:

  1. Search the Internet;
  2. Ask for a referral from a trusted advisor, like your accountant or lawyer; or
  3. Ask for a recommendation from your existing business contacts.

Offering benefits to your employees is a great way to attract and retain talent. It can be complicated and confusing at first, but don’t let that dissuade you from exploring your options. There are great resources online as well as helpful insurance brokers in your community. In the same way you expect your customers to rely on you for expertise in your industry, lean on the experts in employee benefits to help you make an informed decision.

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