Vacation, health insurance, vision and dental coverage, life insurance, tuition reimbursem*nt, and retirement savings programs are just a few employee benefits employers may offer. But what benefits are required by law? And do these requirements change for small businesses?
Understanding mandatory benefits laws will help you evaluate the most appropriate policy that satisfies employees and your bottom line.
This article addresses legally required employee benefits under U.S. federal law and select state-mandated benefits. Employers should review their obligations under state and local laws, which may provide additional mandated benefits.
What Are Statutory Benefits?
Statutory benefits are full-time employee benefits required by law. Employee benefits fall into two categories: those required by law (statutory benefits) and those an employer voluntarily offers. The U.S. Bureau of Labor Statistics states that “legally required benefits provide workers and their families with retirement income and medical care, mitigate economic hardship resulting from the loss of work and disability, and cover liabilities resulting from workplace injuries and illnesses.”
Federal statutory legal employee benefits for employers include:
- Social Security and Medicare
- Unemployment insurance
- Workers’ compensation insurance
- Family and Medical Leave Act (FMLA) protections
Let’s break down which employee benefits are required by law in more detail.
Social Security, Medicare, and FICA
By law, your employer must provide Social Security and Medicare, which are mandated employer-paid benefits. The Federal Insurance Contributions Act (FICA) is a federal payroll (employment) tax used to fund Social Security and Medicare programs, which provide benefits for retirees, disabled individuals, and children. The law states that employees and employers must contribute to these funds.
Employers must withhold Medicare tax at 1.45% of gross compensation and an additional 0.9% of compensation more than a threshold amount based on the employee’s filing status if an employee’s compensation exceeds $200,000 (there is no wage base for Medicare). Employers must also match 6.2% for Social Security up to the wage base and 1.45% for Medicare. Employers do not have to match the additional 0.9%.
Unemployment Insurance
Employers must contribute to unemployment insurance through payroll taxes at the state and federal levels to assist workers who lose their jobs. Unemployment insurance protects part-time and full-time employees who meet specific criteria and are separated from a company by providing income for a limited time. Employees separated due to mergers, layoffs, or without substantial proof of cause may file an unemployment claim with the state workforce agency to receive temporary benefits while looking for a new job.
Since individual states administer unemployment insurance, the cost of this insurance and the amount required for each employer varies from state to state. However, all states in the U.S. have some minimum requirements for unemployment insurance, and all employers must participate in their state’s program and carry at least the minimum required amount of coverage.
Workers’ Compensation Insurance
Workers’ compensation insurance provides financial support to people unable to work due to a workplace injury or illness. If an employee experiences an injury or illness due to their regular on-the-job duties, states mandate that employer-sponsored benefits include covering medical bills and a limited amount of income for the employee during the recovery period. While there are limitations, waiting periods, and varying amounts and types of coverage based for employers in different states, most U.S. states agree that employers should protect the health and well-being of their employees while on the job.
Employers looking to obtain workers’ compensation insurance can typically meet the state requirements in one of two ways:
- Self-insurance: The employer opts to pay directly for any medical bills and ongoing income for any employees who incur extended injuries or illnesses on the job, and the employer can demonstrate the financial resources to do so if a workplace injury or illness occurs.
- State-run insurance: The employer purchases an insurance policy from the state-run program that covers all their employees in the event of a work-related illness or injury.
- Private insurance: Almost all states allow employers to purchase an insurance policy from a private insurer. This allows the employer to obtain comparative quotes from multiple insurers and find the right coverage for their business.
Health Insurance
Make sure your business meets its standard employee benefits obligations. See how Paychex can help.
Some employers must offer health insurance to full-time employees or risk a potential assessment. Under the Affordable Care Act (ACA), applicable large employers (ALEs) risk a potential assessment if they do not offer adequate and affordable healthcare coverage to their full-time employees and dependents and at least one full-time employee receives an ACA premium tax credit. In general, ALEs are companies with an average of 50 or more full-time employees, including full-time equivalents, during the prior calendar year.
The “affordable” coverage threshold is adjusted annually for inflation, but the employee’s portion of premiums for individual health coverage should not exceed 9.12% of their income for plan years beginning in 2023. In order to meet the “adequate” standard of coverage, also known as the minimum value standard, the policy should provide access to a reasonable network of providers and specialists and should be designed to pay at least 60% of the total cost of medical services a plan will cover. The coverage should also meet minimum essential coverage requirements and minimum value.
Family and Medical Leave Act Protections
The Family and Medical Leave Act (FMLA) entitles eligible employees of covered employers to take unpaid, job-protected leave for specified family and medical reasons. Covered employers include private-sector employers with 50 or more employees and all public employers. The FMLA provides eligible employees with up to 12 weeks of job-protected, unpaid leave during a 12-month period for qualifying family and medical reasons and to handle qualifying difficulties, as well as up to 26 workweeks of unpaid, job-protected leave in a single 12-month period under Military Caregiver Leave. Qualifying reasons would include the birth of a child, dealing with a severe or chronic personal illness, or caring for an immediate family member with a severe or chronic illness.
Note: In addition to benefits under the FMLA, some states and local jurisdictions require paid/unpaid family or parental leave and/or paid/unpaid sick and safe leave. Employers must review their obligations under applicable state and local laws.
Disability Insurance
Disability insurance provides partial wage replacement for employees experiencing an illness or injury, outside of the workplace, which requires them to miss more than one week of work. While disability insurance is not a mandatory employee benefit, it is one of the legally required benefits for employers in the following states, as well as Puerto Rico:
- California
- Hawaii
- Rhode Island
- New Jersey
- New York
Disability insurance is structured similarly to medical coverage. Employers can choose to cover some or all of the cost of the policy for their employees, or they can pass the entire cost of the coverage along to the employee through payroll deduction. Once the coverage is in force, employees who experience a qualifying illness or injury must fulfill a mandatory waiting period before they start to receive benefits from the policy. Employers with employees in a state that requires disability coverage should review their obligations under existing state law.
What Qualifies as a Statutory Employee?
If a worker is an independent contractor — not an official employee — they must meet specific criteria to be classified as a statutory employee. The IRS identifies 4 categories of independent contractors who fall under the category of statutory employees, including:
- Drivers who distribute beverages other than milk, meat, vegetable, fruit, or bakery products; laundry; or dry cleaning
- Full-time life insurance sales agents who sell life insurance and/or annuity contracts, primarily for one life insurance company
- Home-based workers who use materials supplied by an employer and work on them based on specifications provided by the employer
- Full-time traveling salespeople who take orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments for an employer
If an independent contractor falls under one of these categories and additional criteria under Social Security and Medicare taxes, you must treat them as employees for certain employment taxes.
Employee Benefits Not Required by Law
Non-mandated employee benefits are at the discretion of the employer. These can include benefits such as paid vacation time, contributions to retirement savings plans, education assistance, wellness programs, and childcare assistance. Since today’s employees increasingly report that company-provided benefits are a significant consideration when evaluating job offers, many employers include these as a part of their basic benefits package to gain a competitive edge in recruiting and retaining a high-caliber workforce. In some states, employers must offer an employer-sponsored retirement plan or enroll employees in a state-sponsored retirement savings program.
Statutory (Mandatory) vs. Voluntary (Fringe) Benefits
What is the difference between statutory and voluntary benefits? While statutory benefits from employers are required by law and ensure certain protections for employees, voluntary benefits are considered compensation for services beyond the employee’s normal pay rate.
They can be made in the form of property, services, cash, or cash equivalents. Cash equivalents such as savings bonds can be turned into cash relatively quickly. Generally, fringe benefits are taxable to the employee, must be included as supplemental income on the employee’s W-2, and are subject to withholding and employment taxes. Examples of fringe benefits may include:
- Bonuses
- Vacation, athletic club membership, or health resort expenses
- Value of the personal use of an employer-provided vehicle
- Amounts paid to employees for moving expenses over actual expenses
- Business frequent-flyer miles converted to cash
Are You Required To Offer Part-Time Employee Benefits?
Some federal rules outline benefits requirements for part-time employees.
- Affordable Care Act (ACA): While most employers don’t consider an employee “full-time” for benefits qualification unless they work at least 40 hours per week, under the ACA, applicable large employers must, in general, offer affordable and adequate health insurance to any employees who average at least 30 hours per week, or at least 130 hours per month to avoid a potential assessment if at least one full-time employee receives a premium tax credit. Keep in mind that regulations provide two different methods of identifying full-time employees.
- Employee Retirement Income Security Act (ERISA): The “1,000 Hour Rule”: Even if part-time employees are not eligible for other benefits offerings, this provision of ERISA requires employers to allow any employees who complete 1,000 hours of service within 12 months to participate in any retirement plan offered to other employees.
- Executive Order 13706, Establishing Paid Sick Leave for Federal Contractors: If an employer accepts work as a federal contractor, that employer must provide paid sick leave to all employees, even those considered part-time.
When state and local laws enact higher minimum requirements than federal labor statutes, the higher state and local standards take precedence. So, it is essential to always check your state and local jurisdictions for additional requirements that may apply to part-time employees.
Do Small Businesses Have To Provide Statutory Benefits?
According to employee benefit law, small business owners have legal obligations to provide specific benefits for full-time employees, such as workers’ compensation and unemployment insurance. Depending on state and local laws, you may also be required to offer paid sick leave.
You may also be wondering: do small businesses have to provide workers with benefits like health insurance? The healthcare law requires certain organizations and parties to report providing health coverage to their employees, including:
- Health insurance companies
- Self-insuring employers of any size
ALEs must report on the health insurance coverage offered to their full-time employees.
Simplify Mandatory and Fringe Benefits With Paychex
While types of benefits such as paid time off, health insurance, and 401(k) plans are highly sought-after (and may help you attract and retain top talent), basic benefits can also be invaluable for employees. Ensure your business meets its obligations to provide assistance and compensation through Social Security, Medicare, unemployment, and workers’ compensation insurance.
