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Employee Benefit Plans: What's Law and What's Optional

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Employee Benefit Plans: What's Law and What's Optional

By Caron_Beesley, Contributor
Published: May 7, 2009 Updated: April 15, 2011

Whether you are looking to hire employees for the first time or are already an established employer, you must face the reality that your business is now a collective effort and only as good, or successful, as the team that staffs it.

Employee benefit programs are the cornerstone of the American work place. If you can’t offer your employees the basics, you may as well hang up your recruitment and retention hat and continue as a one-man band.

Yet, knowing where to start compiling a comprehensive benefits program for your small business can be overwhelming. You must be able to understand and comply with the laws that govern employee benefits. You also have to be able to choose healthcare insurance providers, select retirement benefit plans, and institute softer benefits such as employee incentive programs.

As way of an introduction, here is an overview of the basic employee benefits that the law requires you to provide, as well as guidance on setting up a more comprehensive plan.

Required Benefits vs. Optional Benefits

You may be surprised to know that what are often perceived as required employee benefits, such as vacation leave benefits, are not actually mandated by federal law.

Here is a breakdown of what you are required to include in your employee benefit program and what you are not:

1. Required Employee Benefits

All employers must pay in whole or in part for certain legally mandated benefits and insurance coverage including the following:


  • Social Security

As an employer, you must pay social security taxes at the same rate paid by employees (the current rate for social security is 6.2% for employer and employee, plus an additional 1.45% each for Medicare). eHow offers a great step-by-step explanation on How to Calculate Weekly Payroll Taxes; How to Calculate Employer Payroll Contributions; and How to Deduct Social Security Payments.

You can also get information here from Business.gov on how to file an employer W-2 form, how to hire employees not covered by social security, and more employee benefit information.

  • Unemployment Insurance

Unemployment insurance is mandated at the state level, so the law is going to be different wherever your business is located. You can find out what law applies in your state on Business.gov here. If you are required to pay this tax in your state you’ll need to register your business with your state’s workforce agency.

  • Workers Compensation

Commonly known as 'disability benefits', workers compensation provides benefits to workers disabled by occupational illness or injury. Again, this insurance is mandated differently by each state. Currently, you are required to purchase disability insurance if your employees are located in any of the following locations: California, Hawaii, New Jersey, New York, Puerto Rico and Rhode Island. If you employ workers in states other than these, you have the option of providing private insurance to your employees.

  • Family and Medical Leave

While regular vacation leave is not a required benefit, employers with 50 or more employees are required to provide leave under the Family and Medical Leave Act (FMLA). This provides 12 weeks of job-protected, unpaid leave during any 12-month period to eligible, covered employees for reasons including birth and childcare, immediate family care, or care for the employee’s own health condition.

These resources provide employers with information on how to comply with FMLA.

  • COBRA Benefits

Companies who had 20 or more employees on more than 50 percent of its typical business days in the previous calendar year are subject to COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985). COBRA provides continuation of health coverage at group rates for former employees, retirees, spouses, former spouses and dependent children. Read more about Handling Employee Layoffs as a Small Business Owner and COBRA.

2. Optional Employee Benefits

You’ll notice that the list of required benefits does not include much of what the average employee today would expect from a competitive benefits program. Benefits such as healthcare insurance, life insurance, retirement plans, diverse leave policies, etc. combine to make a comprehensive benefit plan that is often considered an integral part of a total compensation package for many employees.

Now that you know what you are required to provide by law, take the time to understand what optional employee benefits makes sense for your business economics as well as your current and future employee needs.

There are a range of resources in Business.gov’s Small Business Employee Benefits Guide that help explain the types of health and retirement plans that your business might consider and provide tips on setting up an employee benefits plan.

Other Resources

Message Edited by CaronBee on 05-07-2009 07:59 AM

About the Author:

Caron Beesley


Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley


My advice for all small business owners is to include the cost of providing such benefits when seeking to employ someone to see if it's affordable for your business. Accurate budgeting is essential here.
Offering the legal minimum should be affordable for all small businesses and will also help with employee retention. As your business grows you might want to consider enhancing the employee benefits you offer to attract talented individuals.
Keep in mind, what is mandatory and what is optional benefits also varies from state to state. If you are an employer, it is best to check with local state agencies. With more and more workers needing long term care in the future, long term care insurance cost should be an optional benefit also.
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I have a friend whose mom lives in New York and is in her early 60's.  She is still a couple of years away from qualifying for Medicare.  She has been recently working for a church but has been notified that she will be laid off shortly.  The church said that she will not be granted COBRA benefits (I don't know if it is because the number of employees fall below the threshold that requires COBRA to be offered - she was  told that it was because churches are exempt from this requirement). Unfortunately, she also found out that she has breast cancer and really needs COBRA benefits to reasonably pay for all of her medical costs.  She is concerned that she can not find reasonable medical insurance since she has a pre-existing medical condition. Questionsa) Can someone verify that churches are exempt from providing COBRA benefits? b) Is there any way that she can get COBRA benefits?c) What alternatives does she have to get reasonable medical insurance given that she already has cancer and needs treatment?

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