The benefits of benefits -- For your employer and your company

Closely held and family businesses are responsible for a large percentage of the current and projected job growth in this country. This is due partly to the increased education of small business owners by accounting firms, law firms, the government and others. This process has increased these small business owners' awareness about how to create a desirable workplace and attract and keep valuable employees.

As a result, more small employers than ever have established 401(k) employee benefit plans. They have also taken a hard look at other employee benefits programs. Smaller businesses are learning how to design their plans to keep costs down and employees happy.

Cost considerations

Large companies still usually provide richer benefit programs than small companies. The main reason is cost: the larger the company, the smaller the per-employee benefit costs. Consequently, large companies can provide extra benefits, such as dental and vision coverage, which can be too costly for small businesses. But many large companies also tend to provide benefits that overlap with employees' spouses' benefits and sometimes provide benefits to all employees regardless of whether they need or want them.

Small companies typically must be frugal with their benefits dollars. At the same time, employees expect at least a basic package of core benefits from their employer. In recent years, many small businesses have designed benefit packages to give employees maximum choice and flexibility while controlling cost.

Who pays for insurance benefits?

Every employer has a different view of how extensive employee benefits should be. Some businesses cover all of their employees with medical, group term life and disability insurance. Other employers provide few or no benefits with company funds but allow employees to pay for selected benefits with their own pre-tax money. This is done through the use of a cafeteria plan.

When providing core benefits, many small businesses ask employees to share part of the cost. This can eliminate overlapping coverages, and save the employer money that could be better used elsewhere -- perhaps on other benefits.

It can also help to educate employees about the increasing costs of their benefits. For example, a common approach is to provide single coverage for medical insurance and charge an additional cost for family coverage. An employee whose spouse is covered elsewhere will probably opt to not pay for family coverage. Then, the dollars that would have been used for family coverage for all full-time employees, can be redirected to pay for other benefits.

Cafeteria plans

Similar to 401(k) plans, cafeteria plans allow employees to elect to defer a portion of their income. This election is generally offered at the beginning of the year and may not be amended unless circumstances change either in the plan or for an employee (such as the birth of a child or a change of marital status). Any money deferred into the plan must be used in that same year or it reverts to the employer.

The deferred pay is not subject to FICA or Medicare tax, and the employee does not pay income tax on the amount used to pay for non-taxable benefits, such as medical, disability, dental and vision insurance. Employees may also want to choose dependent care assistance through the cafeteria plan if it is offered.

There are conditions that could exclude some employees from cafeteria plan eligibility. The owners of the business, as well as their families, will have to stay out of the plan if they or their family own more than 2 percent of the company if it is an S corporation, or 10 percent if it is a partnership or a limited liability company taxed as a partnership. In addition, the employer may also exclude new, part-time or union-affiliated employees.

Administration

Effective administration of the plan is key. Mistakes in plan administration can be costly. If your program is not well understood by your staff who administer the plan, or if they are too busy with other responsibilities, you will need to hire someone to make this his highest priority. You can also outsource your human resource functions to an outside consulting firm.

Communication and administration

An important part of having satisfied employees is to effectively communicate their benefits program to them. For an authoritative, impartial voice, it is often helpful to have an outside consultant explain the plan to employees and answer any questions they may have. Getting the information from an independent source (such as a representative of the provider) is often critical to overcoming the distrust sometimes inherent in workers.

Explore the options

Whether you are looking to offer new benefits or revise your current plan, we would be pleased to help get you started on reviewing the wide range of benefit programs available to closely held and family businesses. It is possible to devise a program that is beneficial to both your employees and your company. Please call us with any questions or to set up an appointment to discuss ways you can benefit from an effective employee benefits program.

Melvin J. Van de Ven, CPA, CVA, is a partner in the certified public accounting firm of Schott & Van de Ven in Cape Girardeau. He can be reached by email at mvandeven@schottvandeven.com.