How much should your company spend on employee benefits?

Small businesses need to attract and retain great candidates, but struggle to match the benefits offered by larger outfits. Here’s how to prioritize

Woman talking to her optometrist

Employers competing for talent often want to offer vision care, but it can be too expensive for many small businesses. (Thomas Northcut/Getty)

“How much you spend depends on the demographics of your company,” says Chris Gory, the president of Insurance Portfolio Financial Services Inc., a Toronto-based independent insurance brokerage specializing in employee benefits coverage. “I work with a lot of startups where the average age is between 25 and 32. These employees tend to use a lot of paramedical treatments (massage, and chiropractic and acupuncture treatments, for example) and not as much prescription drug or disability coverage.

“Offering a robust benefits package is a good tool for attracting and retaining people, but it’s a commitment. A lot of companies are adamant about having 100% coverage in order to be competitive as employers, especially in industries where there’s a shortage of talent. But for new companies, I always suggest starting benefits at 80% coverage. The last thing you want is to implement a plan and then realize you can’t afford it and have to either scale it back or cut it out entirely. I had a client who implemented a benefits plan at 100%. After a year, he said, ‘I can’t afford it. I’m going to cut it back to 80%.’ He lost four staff members because of that. It’s not worth it. So I suggest starting with less and scaling up if you can afford to do it.

“You can offer 80% coverage for a cost to the business of about $80 per month for a single person or $185 to $200 for family coverage. If you insist on offering 100% benefits packages at the outset, then you’re looking at $110 to $120 for a single person and $210 to $250 for family coverage.

“To help keep your costs down, you may want to consider capping drug coverage at $10,000 and implementing a combined maximum for paramedical expenses. So, for example, if you offer $500 for combined paramedicals, employees can spend $400 on massage and $100 on physio. And once they’ve exhausted those maximums, their coverage is done for the year.

“Another option is to offer health-care spending accounts on top of 80% coverage. These work just like bank accounts: Employers contribute funds for each employee, and each employee can submit claims against the credit he or she has built up. This way, you don’t need to offer something like vision coverage, which is expensive, to everyone, but employees who need it can cover the cost from their spending account. It provides a lot of flexibility. In fact, smaller firms may want to forgo traditional benefits and use only such spending accounts. For them, a cost of $100 per month per employee, or a bit higher, seems to be the norm.”