Employers often feel that navigating employee benefits is confusing, stressful, and difficult. And it’s no wonder—there are many approaches to setting up benefit programs and conflicting information is available at every turn. In this comprehensive guide, we’ll show you how the right tools and expert guidance can simplify everything and give you the information you need to navigate employee benefits with confidence.
What are employee benefits?
Employee benefits are programs employers offer to their employees to support their health, well-being, finances, and work-life balance. Some employee benefits are offered voluntarily, while other ones are provided in compliance with local, state, or federal laws and regulations. Employers may provide benefits to full-time employees only, or they may choose to provide partial or full benefits to part-time employees as well.
Typically, employers purchase benefits packages from third-party providers, who may also oversee some of the logistics of benefits management. Less formal benefits, such as lifestyle or workplace ones, may be provided directly by an employer or their vendors. Benefits include all forms of compensation outside of wages and/or salary. For employees, they are generally an important part of assessing a job offer since they represent significant financial savings and sometimes benefits that improve their day-to-day work life.
How much do employee benefits cost?
The exact cost of employee benefits depends on factors such as the number of employees, your industry, and the exact benefits you choose to provide. But generally speaking, employee benefits are expensive. An employee’s salary or wages represent only about 70.3 percent of their total cost to the company, while the other 29.7 percent in expenses comes from the cost of employee benefits.
Those numbers are simply averages—some industries and employers pay a significantly higher portion of their costs toward providing employee benefits. Benefits cost employers an average of $13.02 per hour each employee works. The majority of benefits costs come from employer contributions to insurance (health insurance, for example). Less costly but still significant are benefits like paid time off (PTO), retirement funds or matching programs, and supplemental pay (such as overtime pay and bonuses).
What are the different types of employee benefits?
There are many types of employee benefits—so many, in fact, that understanding the possibilities can be quite overwhelming! We’ve gathered the many types of employee benefits into categories for your review.
Health insurance
Health insurance is one of the most common employer-provided benefits. It’s also one of the more costly components of employee benefits, in part because healthcare costs are rising. In this category, we’re including not only traditional health insurance but also supplemental insurance plans like dental insurance and vision insurance and lower cost alternatives like level-funded plans and HRAs. Employees want low deductible health plans, and employer assistance with health insurance premiums is also a nice perk.
Health benefits, particularly high-quality health insurance with telehealth options, mental health care, and employer contributions to premiums or HSAs are in great demand among employees. Since public options are limited and self-paying is costly, 86 percent of employees who are in the private sector in the US get health insurance from their employers.
The Affordable Care Act (ACA) created a set of employer-shared responsibility provisions that require employers of a certain size to help employees access health insurance. Large employers (those employing 50 or more people) must provide health insurance to employees and their dependents or pay a penalty to the Internal Revenue Service (IRS). This provision (sometimes called an employer mandate) does not apply to supplemental health insurance, such as dental and vision insurance.
If you’re offering health insurance for the first time, here are some of the options available to you:
HMO (Health Maintenance Organization): HMOs require employees to use a network of providers and choose a primary care doctor who manages their care. They typically have the lowest premiums and out-of-pocket costs.
Best for: Employees who want lower costs and don’t mind staying in-network.
PPO (Preferred Provider Organization): PPOs offer more freedom—employees can see any provider, with or without a referral, but save more when they stay in-network. Premiums and out-of-pocket costs tend to be higher.
Best for: Employees with complex health needs, specific doctor preferences, or frequent travel.
POS (Point of Service Plan): POS plans combine elements of HMOs and PPOs. Employees need referrals to see specialists but can go out-of-network for a higher cost.
Best for: Employees who want a balance of flexibility and affordability.
HDHP (High-Deductible Health Plan) + HSA: These plans have lower premiums and higher deductibles, encouraging employees to be cost-conscious about their care. Paired with a Health Savings Account (HSA), employees can set aside tax-free dollars for medical expenses—now or later.
Best for: Younger or healthier employees who rarely visit the doctor and want to save on premiums.
HRA (Health Reimbursement Arrangement): HRAs like ICHRAs and QSEHRAs are employer-funded accounts that reimburse employees for qualified health expenses, including individual plan premiums. They’re flexible, but require some admin lift.
Best for: Small businesses that want to offer tax-free reimbursement where employees choose their own health plans instead of traditional insurance.
Level-Funded Health Plan: A level-funded plan blends the predictability of traditional insurance with the cost-saving potential of self-funding. Employers pay a fixed monthly amount that covers claims, stop-loss insurance, and admin fees—any unused claims funds may be refunded at year’s end. We found that customers saved nearly 20% in premiums when they went with a Gusto Level Funded health plan.
Best for: Growing businesses that want more control over costs without taking on full self-funding risk.
PEO (Professional Employer Organization): A PEO pools multiple small businesses together to access big-company benefits at better rates. It also handles HR admin and tax responsibilities.
Best for: Startups that want to offer competitive benefits without building out an HR team.
Individual Health Insurance Marketplace + ICHRA: Another option is to guide employees to states’ individual health insurance marketplaces established under the Affordable Care Act (ACA) or to Gusto partners, like Stride, who is an official partner of HealthCare.gov with all the same plan and prices—but make it simple to find the right plan.
Best for: Employers with tight budgets.
Retirement benefits
We define financial benefits as employee benefits that have a direct, positive financial benefit for employees. These are several ways employers may provide financial benefits to their employees:
As more states roll out retirement mandates, offering financial benefits like a 401(k) or IRA is becoming not just a perk, but a necessity. Our research shows that workers in states with auto-enrollment IRA policies are 20% more likely to save for retirement, showing how access drives action. While state-sponsored IRAs can be a helpful starting point, they typically offer lower contribution limits and fewer features than employer-sponsored 401(k) plans. Fortunately, small businesses may qualify for federal tax credits that can help offset the cost of offering a 401(k), making it a win-win for both employers and employees.
Gusto offers a range of flexible retirement plans to fit different business needs and team sizes:
Traditional 401(k): A traditional 401(k) allows employees to contribute pre-tax dollars toward retirement, with optional employer matching. Employers can customize vesting schedules, eligibility rules, and contribution limits.
Best for: Growing businesses that want to offer a robust, flexible retirement plan.
Safe Harbor 401(k): A Safe Harbor 401(k) meets specific IRS requirements that automatically satisfy annual nondiscrimination testing, which is often a concern for small businesses. Employers must make mandatory contributions, but in return, they get peace of mind and simplified compliance.
Best for: Small businesses with highly compensated employees who want to ensure everyone can contribute the maximum amount without IRS testing hassles.
Solo 401(k): Designed specifically for self-employed business owners with no employees (other than a spouse), a Solo 401(k) allows for higher contribution limits by combining employee and employer contributions.
Best for: Sole proprietors looking to reduce taxes and maximize retirement savings.
Financial benefits
We define financial benefits as employee benefits that have a direct, positive financial benefit for employees. These are several ways employers may provide financial benefits to their employees:
Matching benefits. Employers may match an employee’s retirement contributions or charitable donations.
Performance-related rewards, such as spot bonuses, annual bonuses, or sales commissions.
Emergency employee financial assistance programs can step in with a grant to help employees experiencing a temporary financial crisis.
Stock options, access to managed retirement accounts, or an employer-managed pension. Some employers may offer retirement planning assistance through a financial advisor.
Life insurance provides financial compensation for an employee’s next of kin to cover burial and other expenses in case of their death. It is particularly important for employees who are their family’s main financial provider.
Best for: Well-established employers who are positioned—and willing—to invest in employee retention.
Lifestyle benefits
Lifestyle benefits are lower-cost benefits that employers can offer to improve employee quality of life. In contrast to health insurance and sick pay, these benefits are nice to have but not essential. Still, it’s little things like these that make employers stand out. Catered meals, free laundry service and delivery, an on-site gym or free gym membership, and retreats or travel rewards are just some of the lifestyle benefits employers might offer. These perks could be offered through complimentary wellness programs or in the form of reimbursement for certain lifestyle expenses.
Some employers also help working parents by offering on-site childcare, childcare subsidies, or a dependent care flexible spending account (DCFSA) to help parents afford childcare. This is important because the high cost of childcare contributes to a lower labor participation rate among women. Other employers offer more flexible spending accounts (FSAs) to help pay for eligible health care expenses or commuter benefits to cover things like transit and parking. All three these benefits you can get directly through Gusto if you already use us for payroll.
Best for: Employers who want to boost morale and stand out with low-cost perks that make work-life feel more rewarding.
Time off
According to a recent survey by Forbes Advisor, 31 percent of employees value mandatory PTO, yet employers don’t rank it as a priority, not listing it among their top five benefits. Clearly there’s a disconnect here between what employers think their teams want and what their teams actually need, providing an opportunity for small businesses to improve their employees’ job satisfaction.
When referring to leave, it’s a broad category that can refer to vacation time, sick days, mental health days, bereavement leave, and adoption or parental leave. Federal law does not require employers to provide PTO for vacations, sick days, jury duty, parental leave, or many other reasons an employee may be forced to or choose to miss work. The only federal requirement regarding parental leave comes from the Family and Medical Leave Act (FMLA), which requires that employers provide up to 12 weeks of unpaid leave in case of a serious medical concern or the birth or adoption of a child.
Short-term disability insurance also comes into play here because it provides employees with paid time off outside of normal paid sick leave in case of an accident or disabling event. Many employers offer disability insurance to help employees navigate medical leave without being forced to take unpaid medical leave through the FMLA.
Best for: Employers who want to support employee wellbeing, reduce burnout, and stay competitive in today’s hiring market.
Development benefits
These perks help employees further their education and career success by covering the cost of continuing education, such as courses, degrees, and certifications. According to a study by the Pew Research Center, 44 percent of adults who are employed are extremely or very satisfied with their opportunities for training and developing new skills.
Employers may also offer employees student debt repayment assistance. Today, the average federal student loan debt of $37,850, making student loan assistance a desirable perk.
Best for: Employers who want to invest in their team’s long-term growth and show they’re serious about career advancement.
Taxes and required benefits
These benefits may go unnoticed by employees, but they’re still important as they contribute to many of the safety net provisions we take for granted. Employers are legally required to pay taxes that contribute to employees’ Social Security, unemployment insurance, and healthcare assistance programs such as Medicare and Medicaid.
Employers and employees split the cost of those taxes. Self-employed people and business owners must pay them entirely themselves, without employer assistance. Depending on state law, some companies may also be required to pay for workers’ compensation insurance for their employees.
Best for: All employers.
Why provide employee benefits?
Candidate attraction and hiring
Simply put, candidates both expect and depend on the benefits they receive from their employers. Purchasing health insurance without assistance from an employer is confusing and expensive, especially for people who need to insure both themselves and their dependents.
Most employers provide health insurance and paid sick leave for full-time employees, though, so offering these benefits doesn’t necessarily provide a company with a competitive edge in candidate attraction. Going beyond the basics by offering high-quality health insurance, lifestyle benefits, or financial benefits (e.g., a robust bonus structure) can help your organization attract well-qualified and in-demand talent.
Employee retention
When employees enjoy and take advantage of the perks you offer, the idea of leaving their position and losing out on those benefits becomes a real deterrent. If money is no object, of course, any benefit plans you provide can be replaced. But money is a limiting factor for most people, and the idea of switching to an unfamiliar health insurance provider or missing out on a generous employee retirement contribution matching program means that staying in the same job matters.
Employee quality-of-life
At the end of the day, it’s best to evaluate employee benefits by assessing how well they support employee quality of life. Because that’s what they want to keep when they decide to stay at their job, and it’s the prospect of better options that leads them to take the leap and explore a new position. Get feedback from your employees to assess which benefits are most important to them, so you can use that information to shape decision-making going forward.
Legal/compliance
As previously mentioned, employers are legally obligated to provide certain benefits due to local, state, and federal regulations. These account for a certain portion of all employee benefits packages. (Just a disclaimer here—we aren’t tax experts or attorneys, so consult your tax or legal professionals when making operational decisions.)
What are the challenges of employee benefits?
Cost burden
Benefit plans are expensive, and affording them can be particularly challenging for small business owners. Still, because some types of employee benefits are required by law, there are limits to how much employers may limit the benefits they offer.
Legal compliance
Complying with laws and regulations when it comes to employee benefits is challenging because countries, states, and even cities have different rules for the benefits employers must provide. This presents a difficult situation for all companies, but most of all for large companies that operate or maintain employees in many different locations. Remote work also presents its own challenges; even if a company only technically operates in two states, it may find itself responsible for providing benefits required by another location where an employee works remotely, even on a temporary basis.
Benefits management
The more types of benefits a company offers, the more management and oversight are needed by business owners (or their human resources support, if they have it) to avoid waste and keep programs up-to-date. It can become steadily more expensive, both in terms of upfront cost and in the labor hours required to keep systems up and running. Many companies are moving toward automating certain portions of the benefits management process in order to cut costs.
Confusing for employees
It’s not just complicated for managers. Employees also find their benefits packages confusing on the receiving end. This is a problem because it is a huge waste of money on the part of the employer to pay for benefits that employees don’t utilize. It’s also a shame because employees deserve to get the most out of their employee benefits. This is why hiring a third-party vendor that specializes in benefits management can provide value to take these logistics off of business owners’ plates.
How to choose the best benefits package for your employees
Evaluate your budget. While we encourage you not to cut costs in this area, it’s reasonable to approach benefits selection with your budget in mind. Start with allocating your budget to those benefits that are legally required, like workers’ compensation, retirement benefits or medical insurance (for large employers). Then move on to benefits that are voluntary but employees would appreciate. That includes flexible work, or a profit-sharing plan), professional development, student loan repayment, or tuition reimbursement would be examples of this.
Look for scalable and customizable benefits. We’ve already discussed how poor employee participation in benefits wastes time and money. The best benefits program will adapt to your employees’ needs and allow you to easily make changes when things develop. A scalable benefits manager can help your business remain agile.
Find a program with an easy employee interface. To eliminate confusion about which benefits are available and how to enroll, look for a benefits manager that provides a user-friendly system for employees to interact with. For example, Gusto has an app for employees who receive their benefits from Gusto to check on their benefits and paycheck status easily using a phone or tablet.
Think outside the box. There’s no need to limit your benefits program to traditional benefits. In fact, many much-loved employee benefits are reasonably low-cost and don’t require the expense and set-up of a formal benefit. You may want to consider how you can increase employee satisfaction by improving the work environment or how you can offer fringe benefits, such as tickets to events or discounts on services.
Research available vendors. Do your current benefits partners provide employees with the best possible service? Are you paying a reasonable market price for your benefits packages? Even if you’re satisfied with your current vendors, it can’t hurt to do some research about the other options available. You may find a better deal.
At the end of the day, employee benefits are all about supporting your employees as complex, well-rounded humans with many interests, challenges, and strengths. So which employee benefits should you choose? Use your employees as a guide. What do they need? What would benefit them most? When you ground your benefits selection in your employees’ needs, you can’t go wrong, and Gusto can help you choose the best package for your business.
