How Do Employee Benefits Work? A Complete Guide

Employee benefits are more than just a perk on top of your base pay. You should consider employee benefits a significant element of your compensation package. In fact, private-sector employers are allocating 29.5% of their total compensation costs to benefits alone, according to the U.S. Bureau of Labor Statistics March 2023 report.

But how do benefits work, and what are the most common types of employee benefits? Below, we’ll discuss some of the programs you may come across at your current company or during a job search.

What Are Employee Benefits?

Employee benefits are perks of working for your employer in addition to your annual salary or hourly wages. While employers may offer a variety of benefits, they’re typically divided into four main categories: insurance, retirement, time off and equity-based compensation packages. These may include performance or end-of-year bonuses, employee stock options and sales commissions.

Base salaries and wages do play a large part in employee satisfaction and retention. However, benefits are also important factors for many people when they’re deciding whether to pursue a job opportunity or stay in their current role.

How Do Benefits Work?

Before accepting a job offer, one of the first actions you might take is reviewing the employee benefits package. Some benefits, like paid time off (PTO) or remote working arrangements, may go into effect as soon as you’re hired.

Other benefits are only activated once you enroll. Sometimes, these open enrollment periods only take place during a certain time of the year. Enrolling in your company’s health benefit insurance plans, for instance, may only be possible during a specific time. However, if you are just starting a job, you may be able to sign up for benefits and insurance if this counts as a qualifying life event. Other examples of these life events that could make you eligible to enroll or change your benefit elections include getting married or divorced or you need to add a dependent to your plan.

Be sure to carefully evaluate your company’s benefits plan to understand when you can take advantage of certain benefits.

Mandatory Vs. Discretionary Employee Benefits

Employee benefits are categorized as either mandatory or nonmandatory. Employers are required by law to provide mandatory employee benefits. Examples of government-mandated benefits include:

• Workers’ compensation insurance
• Medicare and Social Security contributions
• Unemployment insurance
• Family and medical leave, according to the Family and Medical Leave Act (FMLA)
• Disability insurance
• Health insurance coverage, according to the Affordable Care Act (ACA)

Nonmandatory (or discretionary) benefits, on the other hand, aren’t a requirement. These benefits are made available at the discretion of employers. Companies often offer some discretionary benefits to attract potential job candidates. These benefits may also improve the overall satisfaction of current employees.

Examples of discretionary, employer-sponsored benefits include:

• Retirement plans, like 401(k)s
• Paid time off
• Dental and vision insurance
• Caregiver assistance
• Student loan assistance
• Flexible or remote working arrangements

10 Types Of Employee Benefits

Employers may offer a combination of mandatory and nonmandatory benefits to employees. Below are some of the most common employee perks you may encounter. 

1. Health Insurance Coverage

Under the Affordable Care Act (ACA), companies with 50 or more full-time employees are required to provide health insurance coverage. Only full-time employees typically qualify for an employer-sponsored health insurance plan. 

The health insurance policy your company offers compared to other organizations can also vary. Some policies may only cover your personal medical expenses, while others may cover your partner, spouse or entire family.

The amount you pay for your insurance premium, in addition to any out-of-pocket expenses or deductibles, also depends on your company’s policy. Some employers may provide complete health insurance coverage. When deciding whether to enroll in an employer’s health insurance plan, consider the present-day health needs of you and your family. You also might want to think about any potential future medical expenses.

2. Retirement Accounts

Employer-sponsored retirement plans, particularly 401(k)s, are also a common employee perk. A 401(k) allows participating employees to contribute up to $66,000 in 2023 (or $73,500 if you’re 50 or older). This contribution limit is higher than other types of retirement accounts, like individual retirement accounts (IRAs).

Another benefit of signing up for a 401(k) with your employer is that many companies offer employer matching. Some companies may even match your contributions dollar-for-dollar up to a certain amount of money. Employer matching and the other benefits of opening a 401(k) are important to consider when saving for retirement. 

401(k) plans aren’t the only retirement accounts that employers offer. Other types of employer-sponsored retirement plans you may encounter during your job search include:

• Payroll Deduction IRA
• Savings Incentive Match Plan for Employees (SIMPLE) 401(k)
• SIMPLE IRA
• Simplified Employee Pension (SEP) plan
• Salary Reduction Simplified Employee Pension Plan (SARSEP)
• Employee Stock Ownership Plans (ESOPs)

3. Life Insurance Coverage

In the event that an employee passes away, life insurance provides some financial stability to the employee’s family. Depending on your life insurance policy, your family could receive up to 1 year of your salary to cover living expenses. This will also cover any debts, bills, funeral and burial costs.

If you’re interested in life insurance coverage, you’ll typically sign up through your company’s human resources department. You’ll have to name one or more beneficiaries – typically, your spouse, children or siblings. Your company may also offer different types of policies, such as term or whole life insurance. You’ll want to determine which option meets the financial needs of your beneficiaries, too.

4. Paid Time Off

Paid time off (PTO) is one of the best employee benefits that helps support a healthy and fulfilling work-life balance. PTO is also a benefit that varies widely among companies and organizations. Essentially, PTO is any amount of time employees can take off from work with pay. The amount of time you have to use for PTO, and what qualifies as PTO, is determined by your employer.

Types of PTO that companies commonly offer include:

• Vacation time: This PTO is often classified as compensated days away from work, usually for an extended period of time. Most employers establish the number of days that employees can take off as vacation time. For example, employers might provide 20 days, or 4 weeks, of paid vacation time to full-time employees.
• Sick time: Sick time is a predetermined number of hours, days or weeks that employees can take off from work with pay. However, most employers want employees to use sick time when they are truly sick or require a personal day. So, you can’t usually use sick days for something like a 10-day family trip.
• Unlimited PTO: Some employers offer both vacation and sick time, while others simply offer unlimited PTO. This type of time off doesn’t come with a predetermined amount of time an employee can take off. The time off is “unlimited,” within reason, so you can use it for vacation time, sick time or personal days away from work.
• Accrued PTO: Some companies may start off their employees with a certain amount of PTO – let’s say, 10 days. The longer the employee works at the company, the more time off they’ll accumulate. PTO can be accrued hourly, weekly, monthly, quarterly and so on. While the employee might only start off with 10 days of PTO, they earn more as time passes. 

5. Dental And Vision Insurance

Companies typically offer dental and vision insurance coverage separate from your regular health insurance. Employer-sponsored dental insurance typically covers standard appointments, including regular exams, cleanings and X-rays. Some dental insurance options may cover more significant procedures, like surgeries and orthodontic services.

Similarly, vision insurance through your employer will likely cover routine eye exams as well as the cost of glasses and contact lenses. Like dental insurance, your employer-sponsored vision insurance may also cover more complex ocular procedures.

The extent of the coverage employees have under dental and vision insurance depends on the policies their employer selects. Whether you have deductibles, co-pays or family coverage depends on the dental and vision insurance providers. 

6. Health Savings And Spending Accounts

Many employers will offer the option for employees to open savings or spending accounts specifically for health care expenses. One of the biggest advantages of these accounts is that your contributions are pretax dollars, meaning the funds are exempt from taxes.

Your employer may provide a few account options for you to choose from. Some of the most common health care savings and spending accounts are outlined below.

Health Savings Account (HSA)

An HSA is a type of savings account opened in conjunction with a high-deductible health plan (HDHP). HSAs help employees pay for eligible medical expenses, and the money you or your employer contribute isn’t taxed. Plus, the money in your HSA has the potential to earn interest over time. Or, you can use it to grow any of your investments.

An important note on HSAs is that employees have ownership over their personal accounts. While your employer can make or match contributions, they don’t own HSAs. 

Health Reimbursement Account (HRA)

An HRA is a type of health spending account that your employer owns. Essentially, employers contribute up to a certain amount of money that employees can use to cover eligible medical costs. These expenses may include dental and vision care, medications and over-the-counter treatments.

Your employer decides the types of health care costs the HRA covers. They also determine whether unused funds from one year roll over into the next.

Flexible Spending Account (FSA)

An FSA is another type of health spending account that your employer owns. Depending on the account specifics, both you and your employer may be able to make contributions to the FSA. Unlike an HSA where untouched funds may roll over to a new year, FSAs often have a “use it or lose it” policy.

Employers will sometimes provide a grace period for employees to use the remainder of the funds in their FSA. Be sure to read and understand your policy’s rules before enrolling.

7. Disability Insurance

Disability insurance covers employees who can no longer work due to a disability or illness. This can entail short- or long-term leave from work. Companies may provide disability insurance to financially support employees who get sick, become disabled or are living with a disability.

Disability insurance covers a wide variety of conditions that can prevent employees from working. These conditions include, but aren’t limited to, common injuries, chronic pain and mental health struggles.

8. Family And Medical Leave

Companies with 50 or more employees are required by the Family and Medical Leave Act (FMLA) to allow employees to take up to 12 weeks of unpaid family and/or medical leave without losing their job. Many companies today will offer fully paid parental and sick leave, allowing employees to manage their new life-altering circumstances without the burden of missing a paycheck.

Common reasons to take family or medical leave include:

• The birth or adoption of a new child
• A serious health condition that makes you unable to perform your job duties
• Caretaking responsibilities for a family member with a serious health condition
• A family member being called in for active duty or other military-related responsibilities

Everyone should seriously consider this benefit, especially if you plan to grow your family or are already managing chronic health conditions.

9. Remote Employment Options

Remote work became a necessity during the COVID-19 pandemic. Thousands of corporate offices closed down in favor of employees working remotely. Now, many employers are recognizing the importance of flexible working arrangements to current employees as well as potential job candidates.

10. Miscellaneous Reimbursement Benefits

Top employers understand that investing in their employees’ personal and professional growth is key to fostering a loyal and motivated workforce. You may find employers offering reimbursements for:

• Professional development
• Gym memberships
• Tuition
• Commuter costs

Remote or hybrid workplaces may offer an ongoing reimbursement for internet costs or an onboarding stipend to help set up your home office.

FAQs About Employee Benefits

Do you still have questions about how employee benefits work? We address some frequently asked questions below.

Can I change my benefits after I enroll in them?

In some cases, you can make changes to your employee benefits by reaching out to your human resources department. This is usually the case if you want to increase your contributions to a 401(k) or an HSA.

If you want to make other changes, like opting in or out of a health insurance policy, you might have to wait until the open enrollment period at your company. Open enrollment only comes around once a year, so make sure you’ve done your research on whether making these changes is right for you.

Do some benefits come out of my salary?

HSA contributions, 401(k) contributions and health insurance premiums are examples of employee benefits that typically take money out of your paycheck.

What benefits should I enroll in?

Your personal situation and needs should be the determining factors in the employee benefits you decide to enroll in or take advantage of. Opening a 401(k) with a participating employer is a great way to start saving for retirement – especially if they offer employee matching.

Employer-provided health, dental and vision insurance coverage might also be easier – and more affordable – to access than other health care options.

The Bottom Line

On top of salary or wages, benefits give current and future employees additional incentive to work for a company. Employee benefits can provide comprehensive health insurance coverage, boost your retirement savings and enable you to take paid time away from work.

If you don’t understand your employee benefits or want to make changes, reach out to your human resources department. It’s always a good idea to get an in-depth perspective from a benefits expert so you can make the most of your employee benefits.

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