What Are Employee Benefits? A Complete Guide for Businesses
What are employee benefits? Employee benefits are the compensation, protections, services, and workplace advantages employees receive in addition to their regular wages or salary. Common employee benefits include health insurance, retirement plans, paid time off, life and disability insurance, dental and vision coverage, and programs that support employees’ financial, physical, and emotional well-being.
For employers, employee benefits are more than a collection of insurance policies. A well-designed benefits package can help a business recruit qualified people, retain valuable employees, protect its workforce, manage taxes, improve productivity, and compete with larger organizations. The right package should reflect the company’s budget, workforce, business goals, and legal responsibilities.
This guide explains what employee benefits are, how employers use them, and the major types of employee benefits available to businesses and their employees.
Important: Benefit requirements and tax treatment depend on the employer’s size, location, plan design, and other facts. Employers should work with qualified benefits, tax, and legal professionals before implementing or changing a plan.
What Are Employee Benefits and How Do They Work?
Employee benefits are forms of direct or indirect compensation provided outside an employee’s base pay. Some are paid entirely by the employer, some are employee-paid, and others use shared contributions. Certain benefits may receive favorable federal or state tax treatment when they satisfy applicable rules.
Benefits generally fall into four groups:
- Health and protection benefits, such as medical, dental, vision, life, and disability insurance.
- Retirement and financial benefits, such as 401(k) plans, profit-sharing contributions, financial education, and equity compensation.
- Time, family, and well-being benefits, such as paid time off, parental leave, employee assistance programs, and wellness support.
- Legally required or conditionally required benefits, such as workers’ compensation, unemployment insurance, Social Security and Medicare contributions, and—in applicable situations—FMLA leave, COBRA continuation coverage, or Affordable Care Act requirements.
The U.S. Bureau of Labor Statistics measures employer-provided benefits as a major component of employee compensation. Employers can also review the Department of Labor’s Benefits and Leave overview and Emergent Financial Group’s guide to the core components of an employee benefits package.
How Do Employers Use Employee Benefits?
Employers use employee benefits to accomplish several business objectives.
Recruit and retain employees
Compensation is not limited to salary. Health coverage, retirement contributions, paid leave, and other benefits can materially affect how candidates compare job offers and whether current employees stay. A smaller business may not match a large company’s salary budget, but it can still compete by offering a thoughtful combination of high-value benefits.
Protect employees and their families
Medical, life, disability, accident, and critical illness benefits can help employees manage financial risks that might otherwise cause serious hardship. Benefits may protect both the worker and eligible family members.
Improve productivity and engagement
Employees who can obtain care, take appropriate leave, address mental health concerns, and plan for retirement may be better positioned to focus at work. Programs such as telehealth, employee assistance, and financial education can also reduce practical barriers to getting help.
Manage compensation and taxes
Many qualified benefit programs may offer tax advantages to the employer, employee, or both. However, tax treatment is benefit-specific and depends on compliance with the Internal Revenue Code, ERISA, nondiscrimination rules, reporting obligations, and plan documents. Employers can learn more in EFG’s article on tax-advantaged workplace benefits and the IRS Employer’s Tax Guide to Fringe Benefits.
Build a benefits strategy around the workforce
The best package for a five-person contractor may be different from the best package for a 20-person medical office. Employers can vary plan structure, employer contributions, waiting periods, voluntary options, and communications based on workforce needs—within applicable legal limits. EFG’s small-business employee benefits guide provides additional planning context.
Types of Employee Benefits
There is no single package that includes every possible benefit. The following list covers the principal categories employers commonly consider, including traditional insurance, retirement programs, voluntary benefits, workplace perks, and legally required programs.
1. Medical and Group Health Insurance
Medical insurance helps employees pay for eligible healthcare services, such as physician visits, hospitalization, preventive care, prescriptions, laboratory services, and emergency care. Employers may offer a traditional fully insured group plan, a level-funded plan, a self-funded arrangement, or—in qualifying situations—SHOP coverage.
The employer may pay all or part of the premium, while employees pay their share through payroll deductions. Plan value depends on more than the premium; employers should also examine deductibles, copays, coinsurance, provider networks, prescription coverage, and out-of-pocket limits.
đź‘ŤLearn more: Standard Group Health Insurance: What Small Business Owners Need to Know
👍External resource: U.S. Department of Labor—Health Plans and Benefits
2. Health Reimbursement Arrangements, Including ICHRA and QSEHRA
A health reimbursement arrangement, or HRA, is an employer-funded arrangement that reimburses employees for eligible medical expenses under the plan’s rules. Two important small-business designs are:
- Individual Coverage HRA (ICHRA): Employers reimburse eligible employees for individual health insurance premiums and other permitted medical expenses. There is no general federal annual contribution cap, although affordability and other rules may apply.
- Qualified Small Employer HRA (QSEHRA): Eligible small employers that do not offer a group health plan may reimburse qualified medical expenses up to annually indexed federal limits.
HRAs can help an employer establish a predictable contribution while giving employees access to individual-market choices.
đź‘ŤLearn more: What Is an ICHRA and How Can It Boost a Company Benefit Portfolio?
👍External resource: IRS—Health Reimbursement Arrangements
3. Dental Insurance
Dental benefits commonly cover preventive services, such as exams and cleanings, and may share the cost of fillings, crowns, oral surgery, and other basic or major services. Orthodontic coverage may be included or offered separately. Employers can subsidize the premium or make dental coverage available as an employee-paid voluntary benefit.
đź‘ŤLearn more: 18 Employee Benefit Examples to Consider Offering
👍External resource: Healthcare.gov—Dental Coverage in the Marketplace
4. Vision Insurance
Vision benefits may help pay for routine eye exams, glasses, contact lenses, and discounts on other vision services. Vision plans are typically lower-cost ancillary benefits and may be employer-paid, employee-paid, or funded jointly.
đź‘ŤLearn more: Core Components of an Employee Benefits Package
👍External resource: U.S. Department of Labor—Health Plans and Benefits
5. Prescription Drug, Telehealth, and Care Navigation Benefits
Prescription drug coverage is usually integrated into a medical plan, but formularies, pharmacy networks, prior authorization rules, and specialty-drug provisions vary. Telehealth provides remote access to certain medical or behavioral health services. Care-navigation or advocacy services can help employees find providers, understand bills, and use their coverage more effectively.
đź‘ŤLearn more: Hidden Benefits Employees Actually Use but Employers Forget
👍External resource: Health Resources and Services Administration—Telehealth
6. Health Savings Accounts
A health savings account, or HSA, is an individually owned, tax-advantaged account available to eligible individuals covered by a qualifying high-deductible health plan. Contributions may come from the employer, the employee, or both. Funds can be used for qualified medical expenses, unused balances can carry forward, and the account remains with the employee after leaving the employer.
đź‘ŤLearn more: The Complete Guide to Health Savings Accounts
👍External resource: IRS Publication 969—HSAs and Other Tax-Favored Health Plans
7. Flexible Spending Accounts
A flexible spending account, or FSA, lets an employee set aside pre-tax money for eligible expenses, subject to plan and federal rules. Common versions include a healthcare FSA, a limited-purpose FSA for certain dental and vision expenses, and a dependent care FSA. Unlike an HSA, an FSA is generally employer-established and is subject to use-it-or-lose-it rules, although a plan may permit an allowed carryover or grace period.
đź‘ŤLearn more: What Are Tax-Advantaged Workplace Benefits?
👍External resource: IRS Publication 969—Flexible Spending Arrangements
8. Retirement Plans
Employer-sponsored retirement benefits help employees save for the future. Common plans include traditional and Roth 401(k) plans, Safe Harbor 401(k) plans, profit-sharing plans, SIMPLE IRAs, SEP IRAs, pension plans, and cash balance plans. Employers may offer matching, nonelective, discretionary profit-sharing, or other contributions depending on the plan.
Plan selection affects cost, administration, contribution flexibility, employee eligibility, nondiscrimination testing, and how much owners and employees may contribute.
đź‘ŤLearn more: Types of Retirement Plans for Small Businesses
👍External resource: IRS—Types of Retirement Plans
9. Profit Sharing and Employer Retirement Contributions
Profit-sharing plans allow employers to make discretionary retirement contributions under a written plan formula. Despite the name, a business does not necessarily need to show an accounting profit before contributing. A profit-sharing feature can be paired with a 401(k), and specialized allocation methods may help a business balance owner objectives with employee benefits while following testing and coverage rules.
đź‘ŤLearn more: Profit-Sharing 401(k) vs. SEP IRA
👍External resource: U.S. Department of Labor—Profit-Sharing Plans for Small Businesses
10. Group Life Insurance
Group life insurance pays a benefit to an employee’s designated beneficiary when the covered employee dies. Employers frequently provide a basic amount and allow employees to purchase supplemental coverage for themselves, a spouse, or eligible dependents. Accidental death and dismemberment coverage may also be included.
đź‘ŤLearn more: Why Small-Business Owners Need Life and Disability Insurance
👍External resource: U.S. Department of Labor—Employee Benefits Security Administration Resources
11. Short-Term and Long-Term Disability Insurance
Disability insurance replaces part of an employee’s income when an eligible illness or injury prevents the employee from working. Short-term disability generally addresses shorter absences after a waiting period, while long-term disability may continue for an extended period under the policy’s terms. Coverage definitions, elimination periods, benefit percentages, maximums, and exclusions matter.
đź‘ŤLearn more: Why Small-Business Owners Need Life and Disability Insurance
Strategically-Crafted Benefit Plans
👍External resource: Social Security Administration—Disability Benefits
12. Accident, Critical Illness, and Hospital Indemnity Insurance
These supplemental policies generally pay benefits directly to the insured after a covered event. Accident insurance may pay scheduled benefits for qualifying injuries and treatment. Critical illness insurance may pay a lump sum following a covered diagnosis. Hospital indemnity insurance may pay fixed amounts for qualifying admissions or days of confinement. These policies supplement major medical coverage; they are not substitutes for comprehensive health insurance.
đź‘ŤLearn more: 18 Employee Benefit Examples to Consider Offering
👍External resource: National Association of Insurance Commissioners—Consumer Insurance Resources
13. Paid Time Off, Vacation, Sick Leave, and Holidays
Paid time off, or PTO, allows employees to be away from work while continuing to receive pay. An employer may maintain a combined PTO bank or separate vacation, sick leave, personal day, and holiday policies. Federal law generally does not require private employers to provide paid vacation, but state and local rules may create paid-leave obligations. Written policies should address accrual, carryover, scheduling, payout, and applicable law.
đź‘ŤLearn more: 18 Employee Benefit Ideas to Consider Offering
👍External resource: U.S. Department of Labor—Vacation Leave
14. Parental, Family, Medical, and Caregiver Leave
Employers may provide paid or unpaid leave for childbirth, adoption, bonding, an employee’s serious health condition, caregiving, bereavement, or military-related needs. The federal Family and Medical Leave Act provides eligible employees of covered employers with job-protected unpaid leave for qualifying reasons. State or local laws and employer policies may provide additional rights.
đź‘ŤLearn more: Core Components of an Employee Benefits Package
👍External resource: U.S. Department of Labor—Family and Medical Leave Act
15. Employee Assistance Programs and Mental Health Support
An employee assistance program, or EAP, may offer confidential counseling, crisis support, referrals, and help with family, legal, financial, or substance-use concerns. Mental health benefits may also be included through the medical plan, teletherapy, behavioral health networks, or dedicated well-being vendors.
đź‘ŤLearn more: Hidden Benefits Employees Actually Use but Employers Forget
👍External resource: U.S. Department of Labor—Mental Health and Substance Use Disorder Benefits
16. Wellness Benefits
Wellness benefits may include health assessments, preventive-care incentives, fitness reimbursements, smoking-cessation support, nutrition coaching, chronic-condition management, or on-site programs. Employers should design wellness programs carefully because nondiscrimination, privacy, disability, genetic-information, and health-plan rules may apply.
đź‘ŤLearn more: Building a Benefits Strategy That Works
👍External resource: U.S. Department of Labor—Wellness Program Compliance Guidance
17. Education, Tuition Assistance, and Student Loan Benefits
Employers may reimburse tuition, pay for job-related training or professional licenses, offer scholarships, provide student loan assistance, or make qualifying matching retirement contributions tied to employees’ student loan payments. Tax treatment and annual limits depend on the program and current law.
đź‘ŤLearn more: What Are Tax-Advantaged Workplace Benefits?
👍External resource: IRS Publication 15-B—Educational Assistance
18. Childcare and Dependent Care Benefits
Dependent care benefits may include dependent care FSAs, childcare subsidies, backup care, referral services, on-site childcare, or flexible schedules. These programs can help employees manage work and caregiving responsibilities, but tax rules vary by benefit design.
đź‘ŤLearn more: Hidden Benefits Employees Actually Use but Employers Forget
👍External resource: IRS Publication 503—Child and Dependent Care Expenses
19. Commuter and Transportation Benefits
Qualified transportation benefits may help employees pay for eligible transit passes, commuter highway vehicle expenses, or parking, subject to federal rules and limits. Employers may subsidize these expenses or allow eligible pre-tax payroll elections. Some locations impose separate commuter-benefit requirements.
đź‘ŤLearn more: What Are Tax-Advantaged Workplace Benefits?
👍External resource: IRS Publication 15-B—Transportation Benefits
20. Financial Wellness Benefits
Financial wellness programs can include budgeting education, retirement guidance, debt-management resources, emergency savings, college-planning support, or access to financial professionals. A useful program should educate employees without pressuring them into unsuitable products or exposing private financial information.
đź‘ŤLearn more: Eight Tax-Advantaged Accounts to Consider
👍External resource: Consumer Financial Protection Bureau—Financial Well-Being Resources
21. Equity Compensation and Employee Ownership
Equity benefits give employees an opportunity to participate in the company’s value or growth. Examples include stock options, restricted stock, restricted stock units, employee stock purchase plans, phantom equity, and employee stock ownership plans. Each structure has different tax, securities-law, valuation, vesting, and ownership implications.
đź‘ŤLearn more: What Are Employee Stock Options?
👍External resource: U.S. Securities and Exchange Commission—Employee Stock Options Plans
22. Voluntary Benefits
Voluntary benefits are offered through the workplace but paid partly or entirely by employees. Examples may include supplemental life and disability coverage, accident insurance, critical illness insurance, hospital indemnity insurance, legal services, identity-theft protection, pet insurance, and other specialty products. Group access or payroll deduction can make benefits more convenient, but employees should still understand coverage limitations and costs.
đź‘ŤLearn more: Core Components of an Employee Benefits Package
👍External resource: National Association of Insurance Commissioners—Consumer Insurance Resources
23. Flexible Work and Workplace Perks
Flexible schedules, remote or hybrid work, compressed workweeks, home-office support, meals, recognition programs, professional memberships, and employee discounts can add value to the employee experience. These perks are not substitutes for foundational protection benefits, but they can help an employer tailor the package to its culture and workforce.
đź‘ŤLearn more: What Are Employees Looking for in Employee Benefits?
👍External resource: IRS Publication 15-B—Fringe Benefits
24. Long-Term Care and Other Specialized Insurance
Some employers offer access to long-term care insurance, caregiving support, identity protection, legal plans, or other specialized benefits. Long-term care insurance may help pay for eligible services when a person needs assistance with activities of daily living or has a qualifying cognitive impairment. Suitability, underwriting, portability, exclusions, and premium stability should be reviewed carefully.
đź‘ŤLearn more: Why Long-Term Care Insurance Can Be Essential
👍External resource: U.S. Department of Health and Human Services—Long-Term Care Information
25. Legally Required and Conditionally Required Benefits
Not every employer is subject to the same requirements. The following programs and protections may apply based on location, number of employees, hours worked, plan sponsorship, or other facts:
- Social Security and Medicare: Employers generally withhold employee payroll taxes and pay the employer share as required by federal law.
- Workers’ compensation: State programs generally provide benefits for qualifying work-related injuries and illnesses. Georgia employers should review the State Board of Workers’ Compensation.
- Unemployment insurance: Employers may owe federal and state unemployment taxes that fund eligible unemployment benefits. Georgia guidance is available through the Georgia Department of Labor’s employer resources.
- FMLA leave: Covered employers must provide eligible employees with qualifying job-protected leave under the Family and Medical Leave Act.
- COBRA continuation coverage: Applicable group health plans must generally offer qualified beneficiaries the option to continue coverage after certain events. See the Department of Labor’s COBRA continuation coverage guidance.
- Affordable Care Act employer provisions: Applicable large employers may be subject to employer shared-responsibility and reporting requirements. See the IRS employer shared-responsibility overview.
- Learn more from EFG: What Employers Must Insure: A Guide to Employee Benefits
- External resource: U.S. Department of Labor—Benefits and Leave
Are Employee Benefits Required by Law?
Some benefits and payroll-funded programs are required, while many familiar benefits are voluntary under federal law. A private employer is not generally required by federal law to provide paid vacation, paid holidays, a retirement plan, dental insurance, or vision insurance. However, workers’ compensation, unemployment insurance, payroll taxes, state and local leave laws, and federal rules such as the FMLA, COBRA, ERISA, and ACA may apply depending on the circumstances.
Even voluntary benefits can create legal obligations once offered. Plan documents, employee communications, eligibility rules, fiduciary responsibilities, privacy standards, tax rules, nondiscrimination requirements, notices, and reporting should all be reviewed.
How Should an Employer Choose an Employee Benefits Package?
A practical benefits review should answer the following questions:
- Who is in the workforce? Consider employee count, ages, locations, wages, family coverage needs, employment status, and anticipated hiring.
- What does the business want to accomplish? Identify whether the priority is recruiting, retention, owner tax planning, cost control, protection, or a combination.
- What can the employer contribute consistently? A benefit is more sustainable when current and future costs have been modeled.
- Which risks matter most? Health, income interruption, premature death, retirement readiness, and employee turnover may require different solutions.
- How much choice do employees need? A traditional group plan, defined employer contribution, voluntary benefits, or tiered package may serve different workforces.
- What administration is required? Enrollment, payroll, notices, plan documents, reporting, billing, claims support, and employee education all affect the experience.
- How will success be measured? Review enrollment, employee feedback, utilization, renewal changes, recruiting results, and total employer cost.
Conclusion: Employee Benefits Should Support People and Business Goals
Employee benefits are a central part of total compensation. The strongest packages do not simply copy what another employer offers. They combine the right health, protection, retirement, leave, and voluntary benefits for a specific workforce—and communicate those benefits clearly enough for employees to use them.
For a small business, that might mean a traditional group health plan, an ICHRA, dental and vision coverage, disability insurance, a Safe Harbor 401(k), or a carefully selected combination. The goal is to create a sustainable program that protects employees while supporting the employer’s recruiting, retention, and financial objectives.
Employers should compare the full package rather than selecting each benefit in isolation. For example, a lower-premium medical plan paired with employer HSA contributions, telehealth, disability coverage, and strong employee education may be more useful than a more expensive plan employees do not understand.
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Frequently Asked Questions About Employee Benefits
What are employee benefits in simple terms?
Employee benefits are compensation and workplace advantages employees receive in addition to wages or salary. Examples include health insurance, retirement plans, paid leave, life insurance, disability coverage, and wellness support.
What are the most common employee benefits?
Common employee benefits include medical insurance, dental and vision coverage, retirement plans, paid time off, life insurance, disability insurance, and voluntary benefits. The mix varies by employer size, industry, location, and workforce needs.
Why do employers offer employee benefits?
Employers use benefits to recruit and retain employees, protect workers and their families, improve engagement, support tax-efficient compensation, and compete for talent.
Do small businesses have to provide health insurance?
Federal ACA employer shared-responsibility provisions generally focus on applicable large employers, but other federal and state rules may still apply to small businesses. Small employers that choose to offer coverage must follow the rules governing the selected plan.
Are employee benefits taxable?
Some benefits may be excluded from an employee’s taxable income when they meet federal requirements, while others are fully or partly taxable. The answer depends on the type of benefit, plan design, amount, recipient, and applicable tax rules.
Can employees pay for their own benefits?
Yes. Benefits may be employer-paid, employee-paid, or cost-shared. Voluntary benefits are often largely employee-paid through payroll deduction, while employers commonly contribute toward medical coverage or retirement plans.
What is the difference between benefits and perks?
Benefits generally provide financial protection, healthcare, retirement savings, paid leave, or other substantive compensation. Perks are usually additional conveniences or cultural advantages, such as meals, discounts, flexible schedules, or recognition programs. The terms are sometimes used interchangeably.
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