How to calculate employee benefits: an easy to follow guide [2024]

Employee benefits constitute a significant portion of total compensation costs and play a pivotal role in attracting, retaining, and motivating talent. By accurately assessing benefit costs, organizations can budget effectively, ensuring financial stability while offering competitive packages that meet employee needs.

Here is an easy-to-follow guide on how to tackle employee benefits calculations.

Key takeaways

• Employee benefits, ranging from healthcare to wellness programs, are critical for attracting and retaining talent.
• Understanding the financial implications of benefits, including budgeting and cost calculations, is essential for effective management.
• The size of a company influences benefit offerings, administration complexity, and compliance obligations.
• Prioritizing employee benefits demonstrates a commitment to employee welfare, fostering a positive work culture and organizational success.

Importance of employee benefits

Employee benefits play a pivotal role in attracting and retaining top talent. These perks go beyond the basic salary and encompass a range of offerings such as healthcare accounts, wellness options, flexible working hours, paid time off, and professional development opportunities.

Attracting talent

The primary role of benefits is to serve as an incentive for attracting prospective employees. In a competitive job market, candidates often evaluate the overall compensation package, including benefits, before making the final decision. A robust benefits package signals to potential hires that the company values their well-being and is invested in their long-term success. This can significantly enhance the employer brand and make the organization more appealing to top-tier talent.

Retaining the best employees

Employee benefits are also crucial for retaining the best employees. Employees will seek assurance that employers care about their holistic needs, not just their work output. Comprehensive benefits contribute to employee satisfaction by providing a sense of security and support. For instance, access to healthcare and wellness programs can alleviate stress and improve overall well-being, leading to higher job satisfaction and productivity.

Fostering loyalty

Benefits directly impact employee loyalty. When employees feel appreciated and supported by their employer, they are more likely to develop a sense of allegiance to the organization. By offering benefits that align with employees' needs and values, organizations can foster a sense of belonging and commitment among their workforce. This, in turn, reduces turnover rates and cultivates a loyal talent pool, which is crucial for long-term organizational success.

Common types of employee benefits

Employee benefits can be categorized into two main types: mandatory benefits, which are legally required, and voluntary benefits, which are offered at the discretion of the employer. Here's an overview of common types of employee benefits.

Mandatory benefits

Employers are legally required to provide certain mandatory benefits to their employees. These benefits are essential for compliance with federal and state regulations and play a crucial role in ensuring employee welfare. The mandatory benefits include:

• Social Security – Employers are required to withhold Social Security taxes from employees' wages and contribute an equal amount. Social Security provides retirement, disability, and survivor benefits to eligible individuals.
• Medicare – Employers must withhold Medicare taxes from employees' wages and also contribute to the Medicare program. Medicare provides healthcare coverage for individuals aged 65 and older, as well as some younger people with disabilities.
• Unemployment insurance – Employers are required to pay unemployment taxes to fund state unemployment insurance programs. These programs provide temporary financial assistance to eligible workers who lose their jobs through no fault of their own.
• Workers' compensation – Most states mandate that employers provide workers' compensation insurance to cover medical expenses and lost wages for employees who suffer work-related injuries or illnesses.
• Family and Medical Leave Act (FMLA) – Employers with 50 or more employees must provide eligible employees with up to 12 weeks of unpaid, job-protected leave for certain family and medical reasons, including the birth or adoption of a child, caring for a family member with a serious health condition, or the employee's own serious health condition.

Voluntary benefits

Voluntary benefits, also known as fringe benefits, are additional perks or coverage options that employers can offer, which employees can choose to enroll in or opt out of based on their individual needs and preferences. Voluntary benefits include:

• Healthcare benefits – Apart from mandatory health insurance, employers may offer additional healthcare benefits such as dental, vision, and mental health coverage.
• Retirement plans – Voluntary retirement plans like 401(k) or pension plans allow employees to save for retirement with contributions from both the employee and employer.
• Paid time off (PTO) – This includes vacation days, sick leave, and holidays, which provide employees with time away from work while still receiving compensation.
• Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) – These accounts allow employees to set aside pre-tax dollars for medical expenses not covered by insurance.
• Life and disability insurance – Employers may offer life insurance policies or disability coverage to protect employees and their families in case of unexpected events.
• Employee assistance programs (EAPs) – EAPs provide support services such as counseling, legal assistance, and financial planning to employees facing personal or work-related challenges.
• Professional development – Some employers offer opportunities for ongoing training, tuition reimbursement, or career development programs to help employees enhance their skills and advance their careers.

Lifestyle benefits

Lifestyle benefits encompass a wide range of offerings designed to support employees in various aspects of their personal lives, promoting overall well-being and work-life balance. These benefits often go beyond traditional compensation and address employees' physical, mental, and emotional health, as well as their personal interests and needs. Here are some examples of lifestyle benefits that organizations can offer:

• Lifestyle Spending Accounts (LSAs) – LSAs allow employees to set aside pre-tax funds for various lifestyle expenses, such as health and wellness activities, childcare, commuting costs, or continuing education.
• Wellness programs – Wellness programs can include initiatives such as gym memberships, fitness classes, smoking cessation programs, nutrition counseling, and stress management workshops. Employee wellness program's ROI can be significant, provided your plan contains perks that aim to promote healthy lifestyles and prevent health issues.
• Flexible working arrangements – Flexible working arrangements, such as telecommuting, flextime, and compressed workweeks, allow employees to balance their work and personal lives better. This flexibility can help reduce stress, improve morale, and increase productivity.
• Child care assistance – Child Care assistance programs, such as on-site daycare facilities, subsidies for childcare expenses, or backup childcare services, help employees manage their parental responsibilities while maintaining their careers.
• Elder care support – Recognizing that many employees also have responsibilities for aging relatives, some companies offer elder care support services, such as information resources, counseling, or assistance in finding caregiver support.
• Financial wellness programs – Financial wellness programs provide employees with resources and guidance on budgeting, debt management, retirement planning, and other financial matters. These programs can help alleviate financial stress and improve employees' overall well-being.
• Employee discounts – Employee discount programs offer discounts on goods and services from various vendors, including retail stores, restaurants, travel agencies, and entertainment venues. These discounts can help employees save money on everyday expenses and leisure activities.
• Paid volunteer time – Some companies offer paid time off for employees to volunteer with charitable organizations or participate in community service activities. This benefits the community and fosters a sense of purpose and fulfillment among employees.
• Personal development opportunities – Personal development benefits, such as tuition reimbursement, skills training workshops, and mentoring programs, support employees in expanding their knowledge and skills, advancing their careers, and achieving their personal and professional goals.

If you want to cut costs while providing flexible benefits at scale, Forma offers a wide selection of Pre-tax spending accounts. 

The results of these calculations are further modified by factors such as employee type, employee number, and employer contributions to benefit schemes. Let’s examine these factors.

How to calculate employee benefits: a step-by-step guide

If you want to learn how much benefits cost per employee, this guide is for you. Let’s go step by step:

1. Identify benefits offered – Make a list of all benefits provided to employees, including healthcare, retirement plans, paid time off, and any other perks or allowances.
2. Gather cost information – Collect detailed information on the costs associated with each benefit. This may include insurance premiums, administrative fees, employer contributions, and any other expenses incurred to provide the benefit.
3. Choose a cost-allocation method – Some of the available methods include:some text
   • Cost per employee
   • Cost per covered employee
   • Cost per hour worked
   • Cost proportional to salary
4. Calculate total benefit costs – Use the chosen cost allocation method to calculate the total cost of providing benefits to employees. The formula for this calculation depends on the chosen allocation method. For example:
   • For the per employee method:
     Total Benefit Costs = Total Cost of Benefits / Number of Employees
   • For the per covered employee method:
     Total Benefit Costs = Total Cost of Benefits / Number of Employees Enrolled
   • For the per hour worked method:
     Total Benefit Costs = Total Cost of Benefits / Total Hours Worked
   • For the proportional to salary method:
     Total Benefit Costs = (Total Cost of Benefits / Total Salary) * Employee's Salary
5. Account for employer contributions – Include any employer contributions towards employee benefits, such as matching contributions to retirement plans or subsidies for healthcare premiums.
6. Consider tax implications – Be mindful of the tax implications associated with employee benefits. Some benefits may be tax-deductible for the employer, while others may be taxable income for employees.
7. Factor in administrative costs – Account for any administrative costs associated with managing employee benefits, such as HR personnel expenses or third-party service fees.
8. Review and adjust regularly – Regularly review and update benefit costs to reflect changes in benefit offerings, employee demographics, or market conditions.
9. Communicate with employees – Clearly communicate the value of employee benefits to staff. Provide transparent information on the costs associated with benefits and how they contribute to overall compensation.
10. Track and monitor expenses – Maintain accurate records of benefit expenses and monitor budgetary trends over time. This can help identify opportunities for cost savings or adjustments to benefit offerings.

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The results of these calculations are further modified by factors such as employee type, employee number, and employer contributions to benefit schemes. Let’s examine these factors.

1. Type of employees

Here is how different types of employees impact benefits cost calculation:

Full-time employees

Full-time employees typically receive the full spectrum of benefits offered by the employer, including healthcare coverage, retirement plans, paid time off, and other perks. When calculating benefits for full-time employees, the costs are usually based on their regular working hours or salary. Employers may contribute a fixed percentage or amount towards each benefit for full-time staff.

Part-time employees

Part-time employees may be eligible for some benefits, but the extent and level of coverage may differ from full-time employees. Employers often prorate benefits for part-time staff based on the number of hours worked or their proportional employment status compared to full-time employees. Calculating benefits for part-time employees requires adjusting costs to reflect their reduced hours or contributions.

Contract workers

Contract workers, also known as independent contractors or freelancers, typically do not receive traditional employee benefits from the hiring organization. Instead, they are responsible for their own benefits, including healthcare, retirement savings, and insurance. Employers do not usually factor contract worker benefits into their calculations, as these individuals are not considered regular employees.

Temporary employees

Temporary employees may or may not be eligible for benefits, depending on the duration and terms of their employment. Some employers offer limited benefits to temporary staff, such as access to certain wellness programs or paid time off, while others may not provide any benefits at all. Calculating benefits for temporary employees involves considering any benefits they may receive and adjusting costs accordingly.

Seasonal employees

Seasonal employees are hired for specific periods of high demand, such as holiday seasons or peak production times. Like temporary employees, seasonal workers may receive limited or no benefits, depending on company policies. Employers may need to adjust benefit calculations for seasonal employees based on their duration of employment and the benefits offered during their tenure.

2. Number of employees

The size of a company significantly impacts various aspects of employee benefits, including:

Cost considerations

Larger companies often benefit from economies of scale, allowing them to negotiate better rates with benefit providers and spread costs over a larger employee base. Smaller companies may face higher per-employee costs due to limited bargaining power and resources.

Diversity of benefits

Larger companies tend to offer a wider range of benefits to attract and retain talent, including healthcare, retirement plans, wellness programs, and more. Smaller companies may offer a more limited selection of benefits due to budget constraints.

Administrative complexity

Managing employee benefits can be more complex for larger companies with a larger workforce and multiple locations. They may require dedicated HR personnel or specialized software to handle enrollment, compliance, and communication effectively. Smaller companies may have simpler administrative processes but may still need help in ensuring compliance with regulations.

Flexibility and customization

Smaller companies often have more flexibility to customize benefit packages to meet the unique needs of their employees. They can adapt quickly to changing employee preferences or market conditions. Larger companies may have standardized benefit offerings across departments or locations, which can limit flexibility but may ensure consistency and equity among employees.

Legal and regulatory compliance

Compliance with labor laws and regulations related to employee benefits can be more challenging for larger companies operating in multiple jurisdictions. They may need dedicated legal and compliance teams to ensure adherence to regulations such as the Affordable Care Act (ACA) or the Employee Retirement Income Security Act (ERISA). Smaller companies may have fewer legal resources and may rely on external consultants or legal services for compliance support.

3. Employer contributions to benefit schemes

Employer contributions to benefit schemes vary widely depending on the type of benefits offered, each with its implications for budgeting.

Healthcare benefits usually entail significant employer contributions due to the rising costs of healthcare services and insurance premiums. Employers often cover a substantial portion of healthcare premiums to make healthcare more affordable for employees.

Retirement plans, such as 401(k) or pension schemes, typically require employer matching contributions. These contributions can vary based on factors like employee tenure, salary levels, and company policies. Employers may match a percentage of employee contributions, up to a certain limit, as part of their retirement benefits package.

FSAs and HSAs also involve employer contributions, albeit indirectly. Employers may offer to match a portion of employees' contributions to these accounts, providing additional funds for medical expenses while reducing employees' taxable income.

Wellness programs, including gym memberships, counseling services, or smoking cessation programs, may involve employer subsidies or fully covered expenses. These contributions aim to promote employee health and well-being, leading to reduced healthcare costs in the long term.

Tips on budgeting for employee benefits

Here are five tips on how to optimize your employee benefits spending.

Tip #1: Assess return on investment (ROI)

Measure the effectiveness of your benefit programs by assessing their ROI. Analyze metrics such as employee retention rates, productivity levels, absenteeism rates, and healthcare utilization patterns. Determine whether the benefits achieve their intended outcomes and adjust your budget accordingly.

Tip #2: Forecast future costs

Estimate how benefit costs may change over the upcoming budget period. Consider factors such as anticipated changes in healthcare premiums, retirement plan contributions, and employee enrollment levels.

Tip #3: Explore cost-saving measures

Identify opportunities to reduce benefit costs without compromising the quality of benefits provided. This may include negotiating better rates with benefits vendors, implementing wellness programs to promote employee health and reduce healthcare costs, or offering high-deductible health plans paired with health savings accounts to lower premiums.

Forma’s benefits platform helps you reduce benefits spending while offering quality perks that your employees will love.

Tip #4: Evaluate benefit plan design

Assess the design of your benefit plans to ensure they align with your organization's goals and budget constraints. Consider options such as adjusting coverage levels, exploring alternative insurance providers, or implementing employee cost-sharing strategies.

Tip #5: Prioritize benefits

Determine which benefits are most important for attracting and retaining talent within your organization. Allocate resources accordingly to prioritize key benefits while managing costs effectively.

Final thoughts

Understanding and effectively managing employee benefits is paramount for businesses. By offering competitive benefits packages, companies can attract and retain top talent, fostering a positive work environment and increasing employee satisfaction and loyalty.

Proper management of benefits also ensures compliance with legal requirements and helps businesses navigate complex financial considerations.

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How to calculate employee benefits: Frequently asked questions

Why does calculating the cost of employee benefits matter?

Calculating the cost of employee benefits is crucial for financial planning and strategic decision-making. Accurate cost calculations help businesses allocate resources effectively, ensuring a sustainable benefits program that attracts and retains talent while managing costs.

How to calculate the total cost of employee benefits?

To calculate employee benefits' total cost, first list all benefits like health care and retirement plans. Collect data on costs, including premiums and employer contributions. Choose an allocation method, such as per employee. Apply this method to calculate each benefit's total cost. Include administrative expenses. Regularly review and update these costs to ensure they reflect current offerings and employee demographics, adjusting as necessary to maintain accuracy.

How do you calculate the value of benefits?

Calculating benefits' value involves assessing perspectives of both employer and employee. Employers gauge benefits' value by comparing the cost of benefits to the gains in employee attraction, retention, and productivity, including savings in recruitment and turnover costs. From the employee's viewpoint, value is measured by the benefits' monetary worth and their impact on the overall compensation package, considering aspects like healthcare, retirement contributions, paid time off, and professional development. Comparing these benefits against industry standards and preferences helps determine their perceived value, offering insights into their effectiveness and appeal.

How to calculate the value of lifestyle benefits?

The intangible benefits of lifestyle perks extend beyond financial value, significantly enhancing employee satisfaction, well-being, and life quality. Flexible schedules, remote work, and ample vacation time improve work-life balance, cutting stress and burnout. Such benefits signal employer care, boosting morale, job satisfaction, and work engagement. Wellness programs and mental health support promote health, potentially lowering absenteeism and healthcare costs, boosting productivity. Moreover, attractive lifestyle benefits increase loyalty and retention, as employees value the supportive and health-conscious work environment provided.