Employee benefits play an important role in the lives of employees and their families, and they have a significant financial impact on your business. Consulting services cannot be competitive employers if they don't develop a comprehensive benefit program. However, if not managed, an employee benefit program can quickly eat up a small firm's profit.

Comprehensive Benefits

A comprehensive employee benefits program can be broken down into four components: legally required benefits, health and welfare benefits, retirement benefits, and perquisites.

Legally required benefit plans are mandated by law and the systems necessary to administer such plans are well established. These plans include social security insurance (FICA), worker's compensation insurance, and unemployment compensation insurance (FUTA).

Health Benefits

Health and welfare benefits can be viewed as benefits provided to work in conjunction with statutory benefits to enhance employees' financial security. Health and welfare plans are perhaps the most visible of all the benefit program components. They include medical care, dental care, vision care, short-term disability, long-term disability, life insurance, accidental death and dismemberment insurance, dependent care, and legal assistance.

When purchasing a health and welfare plan, select an insurance professional whose clientele is made up primarily of small businesses. In fact, if you can find one in your area, select one that is used and recommended by other consultants. Your insurer needs to be aware of the special problems that face small businesses, especially in your trade. Generous plans that look attractive and logical today may become a financial burden for your growing company. Remember that it is much easier to add benefits than it is to take them away.

Medical plans are usually the greatest concern of employers and employees. There are essentially two kinds of traditional medical plans. Major medical plans cover 100 percent of hospital and inpatient surgical expense as well as a percentage (typically 80 percent) of all other covered expenses. Comprehensive medical plans cover a percentage (again, generally 80 percent) of all medical expenses.

In both plans, the employee is usually required to pay part of the premium, particularly for dependents, as well as a deductible. A comprehensive medical plan is typically less expensive because more of the cost is shifted to the employee. Any plan you design should include features for containing costs.

As an alternative to a traditional medical plan, an employer may contract with a Health Maintenance Organization (HMO) to provide employees with medical services. The main difference between a traditional medical plan and an HMO is that the traditional plan allows employees to choose their medical providers while HMOs often provide medical services at specified clinics or through preferred doctors and hospitals. HMOs trade this flexibility for lower costs that are often passed on to the employees through reduced or eliminated deductibles or lower rates.

Retirement Benefits

Retirement plans are established to help ensure that employees are able to maintain their accustomed standard of living upon retirement. Retirement benefit plans basically fall into two categories: defined contribution plans, which provide employees with an account balance at retirement, and defined benefit plans, which provide employees with a projected amount of income at retirement.

Retirement benefit plans are either qualified or unqualified plans. A plan is qualified if it has met certain standards mandated by law. It is beneficial to maintain a qualified retirement plan because contributions are currently deductible, benefits earned are not considered taxable income until they are received, and certain distributions are eligible for special tax treatment.

Of the various qualified plans, defined benefit plans, 401(k) plans, and profit-sharing plans are the most popular.

Defined Benefit Plans

A defined benefit plan promises participants a benefit specified by a formula in the plan. The focus of a defined benefit plan is the retirement benefit provided instead of the contribution made. Plan sponsors must contribute to the actuarially determined amounts necessary to meet the dollar amounts promised to participants. Generally, benefits begin at retirement and are paid over the remainder of the employee's life, so a defined benefit plan guarantees a certain flow of income at retirement.

401(k) Plans

In a 401(k) plan, participants agree to defer a portion of their pretax salary as a contribution to the plan. In addition, the sponsoring employer may decide to match all or a portion of the participant deferrals. The employer may even decide to make a profit-sharing contribution to the plan. As the employee works, the money he sets aside from his paycheck accumulates. After he reaches age 59½, he is allowed to start withdrawing money from the account. The 401(k) plans are popular because they allow employees the ability to save for retirement with pretax dollars and they can be designed to be relatively inexpensive.

Profit-Sharing Plans

A profit-sharing plan is a defined contribution plan in which the sponsoring employer has agreed to contribute a discretionary or set amount to the plan. Any contributions made to the plan are generally prorated to each participant plan account based on compensation. The focus in a profit-sharing plan, and in defined contribution plans, is on the contribution. What a participant receives at retirement is a direct function of the contributions. Profit-sharing plans are favored by employers because they allow employers the ability to retain discretion in determining the amount of the contribution made to the plan.

Insurance

Group life insurance is a benefit employees have come to expect in many regions and trades. Such insurance is usually a multiple of an employee's salary. Be aware that an amount of insurance over a legally specified amount is subject to taxation as income to the employee.

Recent legislation provides that employers who maintain medical and dental plans must provide certain employees the opportunity to continue coverage if they otherwise become ineligible through employment termination or other causes. In addition, new rules state that if a firm's health and welfare plan discriminates in favor of key employees, the benefits to those employees are taxable as income. Talk to your plan administrator about current laws and requirements.

Perqs

Perquisite benefits, or perqs, are any other benefits an employer promises, such as a company automobile or truck, professional association or club membership, paid tuition, sabbatical, extra vacation, expense account, credit cards, or financial counseling services.