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Mandatory Benefits: What Employers Need to Know
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Benefits Administration

Mandatory Benefits: What Employers Need to Know

One-Minute Takeaway

  • If your business has employees, and not just independent contractors, you’re legally required to provide certain benefits.
  • Almost all employees are entitled to social security benefits, Medicare, federal unemployment insurance, state unemployment insurance, and worker’s comp.
  • Businesses with 50 or more employees must provide health insurance.

According to federal law, employers must provide certain benefits to their employees. It’s important to understand your responsibilities for a few reasons. First and foremost, non-compliance can be a very serious problem, incurring steep fees and even legal problems. What’s more, an attractive benefits package can boost employee retention rates. Here’s what you need to know about mandatory benefits.

What Are Mandatory Benefits?

If your company has employees –not just independent contractors – you’ll need to provide them with several types of statutory benefits. Some benefits are only mandatory for companies over a certain size, while others are required for all employers. In almost all cases, eligible employees are entitled to:

  • Social Security, which supports disabled and retired workers and their dependents
  • Medicare, which pays health costs for retired workers and people with long-term disabilities
  • Federal unemployment insurance, which supports workers who have lost their jobs under certain circumstances
  • State unemployment insurance, for employees who have been laid off
  • Worker’s compensation, which pays for medical costs and lost income of workers injured on the job

Certain employers must also offer additional benefits, like FMLA and health insurance.

While you have a legal obligation to offer some types of insurance, employers can also offer voluntary benefits, or fringe benefits. Going above and beyond the legal minimum can make a big difference in terms of your team’s job satisfaction.

Social Security and Medicare

Social Security and Medicare benefits function in similar ways. Employers and employees pay for these benefits throughout the employee’s career, so funds will be available when the worker reaches a certain age. Employers and employees split these payments equally. Self-employed workers pay the entire amount, leading to a much higher tax burden.

For Social Security, employers and employees each pay a 6.2% tax on up to $160,200 of employee earnings.

For Medicare, employers and employees each pay a 1.45% tax on all employee earnings.

Federal and State Unemployment Insurance

The details of unemployment insurance vary from state to state. However, all states must follow certain federal guidelines. In most areas, employers pay both federal and state unemployment taxes if a) they pay annual employee wages of $1,500 or more, or b) employees worked for them on any day of at least 20 weeks in the calendar year, including non-consecutive weeks. However, the laws are slightly different in some U.S. states.

Businesses across the country pay a federal unemployment tax (FUTA) of 6% of the first $7,000 of each employee’s annual wages. This rate may go down if you participate in state unemployment programs as well.

In most cases, unemployment benefits to workers are available if the person lost their job through no fault of their own. 

Workers’ Compensation Insurance

Workers’ comp protects employees who are injured at work or due to work-related activities. It typically covers medical costs and lost wages due to time they spend recovering. Like most other types of insurance, the details of workers’ comp vary from state to state. Texas is the only U.S. state that doesn’t require private employees to provide this kind of insurance.

Even outside of Texas, businesses may or may not need to offer workers’ comp. This often depends on the size of your company. In Missouri, for example, employers with four or fewer employees do not legally need to provide workers’ compensation insurance.

FMLA Requirements

Many businesses are covered by the Family Medical Leave Act (FMLA). Your organization is legally required to provide FMLA benefits if:

  • It’s a federal organization, like the U.S. Postal Service.
  • It’s a public agency.
  • It’s a school board, elementary school, or secondary school. (This applies to both public and private schools.)
  • It’s a private-sector employer that employs at least 50 employees during 20 or more workweeks in the current or previous calendar year.

Under FMLA regulations, eligible employees can take up to 12 weeks of unpaid, protected leave in a given 12-month period for certain medical or familial reasons. Common reasons include the birth or adoption of a child, a serious health condition that leaves them unable to work, and caring for an immediate family member who has a serious health condition.

FMLA mandates that employers continue to provide other benefits, like health insurance, during the employee’s leave of absence. Additional regulations describe how and when the employee needs to notify their employer and which employees are eligible for leave. For example, an employee must work for their employer for at least 12 months before they qualify for FMLA benefits. These regulations are extremely nuanced, and it’s a good idea for covered employers to understand them in detail.

Health Insurance and the ACA

For small businesses, health insurance isn’t always mandatory. But under the Affordable Care Act (ACA), businesses with 50 or more full-time employees must provide health insurance.

To stay compliant, your health insurance options need to meet certain additional requirements. For example, coverage must extend to the employee’s dependents. That includes their biological and adopted children, but not their spouse, stepchildren, or foster children. If you offer group insurance, it must be available to all similarly situated employees. For example, it’s ok to offer insurance to full-time employees and not to part-time employees. However, it would be discriminatory and therefore illegal to deny insurance based on the employee’s age, gender, or genetics.

Is Disability Insurance Mandatory?

Employers are legally required to provide short-term disability insurance in five states: California, Hawaii, New Jersey, New York, and Rhode Island. The exact rates and guidelines are different in each state.

In other states, employers can still offer short-term disability insurance as a fringe benefit. Short-term disability typically covers lost wages due to illness, injury, or pregnancy.

Penalties for Non-Compliance with Statutory Benefit Laws

If employers don’t provide mandatory benefits, they can face severe penalties. For example, if a business with 50 or more full-time employees fails to offer health insurance, the company faces a penalty of nearly $5,000 per employee per year.

Because mandatory benefits vary from state to state and based on the size of the company, different employers face different penalties. It’s important to research the laws in your area and confirm which details apply to your specific type of organization.

Plan Your Benefits Strategy

There’s more to providing benefits than just checking off boxes. Yes, it’s important to stay compliant – but it’s also important to appeal to talented workers. Whether you realize it or not, you approach to benefits fits into your overarching HR strategy. You can use Paycor’s Benefits Strategy Guide to come up with the plan that works best for your business.

Get Paycor’s Benefits Strategy Guide!