Whether a business must legally offer employee benefits depends on its location and the total number of people it employs. Compliance is layered, distinguishing between legally required benefits and those an employer chooses to provide for a competitive advantage. Employers must navigate a complex framework of federal, state, and local regulations to determine their exact responsibilities.
Federal Benefits Employers Must Provide
All employers must comply with federal payroll tax and protection requirements, regardless of size. These mandated contributions fund essential programs for employees.
The Federal Insurance Contributions Act (FICA) requires employers to withhold and match taxes funding Social Security and Medicare programs. Businesses remit a combined rate covering both the employee’s and the employer’s share. Social Security provides retirement and disability income, while Medicare offers health insurance for individuals over age 65 or those with certain disabilities.
Businesses must also pay into the Federal Unemployment Tax Act (FUTA) to fund state unemployment insurance programs. FUTA taxes are paid entirely by the employer and are not deducted from wages. Additionally, all states require employers to carry Workers’ Compensation insurance. This coverage provides medical care and wage replacement for work-related injuries or illnesses, protecting both the employee and the business from liability.
Mandatory Requirements Based on Company Size
A company’s size dramatically increases its compliance burden by triggering federal benefit programs related to health coverage and job-protected leave.
Affordable Care Act (ACA)
The Applicable Large Employer (ALE) designation applies to businesses with 50 or more full-time equivalent employees. ALEs must offer Minimum Essential Coverage (MEC) to at least 95% of their full-time employees and dependents to avoid penalties. The coverage must meet Minimum Value (MV), covering at least 60% of the total allowed cost of benefits, and must be affordable. Affordability is determined annually by the Internal Revenue Service, often using safe harbors like the W-2 or Federal Poverty Line methods.
Family and Medical Leave Act (FMLA)
FMLA applies to private sector employers with 50 or more employees working within a 75-mile radius. Covered employers must provide eligible employees up to 12 weeks of unpaid, job-protected leave during any 12-month period. This leave covers reasons such as the birth of a child or a serious health condition. The employer must also continue the employee’s group health insurance coverage during the leave period.
Consolidated Omnibus Budget Reconciliation Act (COBRA)
COBRA generally applies to group health plans sponsored by employers with 20 or more employees. This law requires businesses to offer employees and their families the option to temporarily continue their group health coverage following qualifying events, such as job loss or a reduction in hours. The individual continuing coverage is typically responsible for paying the full premium cost plus a small administrative fee.
State and Local Mandates That Influence Compliance
State and local governments frequently expand benefit requirements beyond federal laws, often affecting smaller businesses exempt from federal size thresholds. Compliance depends on the specific municipality or state where an employee performs work.
Paid Leave Requirements
A growing number of jurisdictions require employers to provide paid sick leave, often applying to all businesses regardless of size. These laws specify how employees accrue time off, the purposes for which it can be used, and whether unused time can be carried over.
Several states have enacted Paid Family and Medical Leave (PFML) programs, typically funded through a mandatory payroll tax shared by the employer and employee. PFML offers paid time off for reasons like bonding with a new child or caring for a seriously ill family member, which is broader than federal FMLA.
Mandated Retirement Savings
Some states have created mandated retirement savings programs, such as the Secure Choice model. These programs require businesses without an existing qualified retirement plan to automatically enroll their employees in the state-run option.
Penalties for Non-Compliance
Failing to meet mandatory benefit requirements exposes a business to significant financial risk from tax penalties and legal liability.
The Internal Revenue Service (IRS) imposes substantial fines for non-compliance with the ACA’s Employer Shared Responsibility Provisions. An Applicable Large Employer failing to offer Minimum Essential Coverage can face an annual penalty indexed to inflation, calculated against the total number of full-time employees.
Misclassification of employees as independent contractors to avoid payroll obligations carries substantial tax penalties related to FICA and FUTA. Unintentional misclassification can result in liability for a percentage of unpaid FICA taxes and wages. Intentional misclassification leads to more severe consequences, including liability for 100% of FICA taxes, criminal fines, and potential imprisonment.
Violations of leave laws, such as FMLA or state-mandated paid sick leave, can result in lawsuits for back pay, lost benefits, and damages. The Department of Labor (DOL) can investigate and compel compliance, requiring the employer to restore the employee to their position and cover financial losses. State-level violations often compound this exposure, sometimes imposing daily fines.
Strategic Value of Voluntary Benefits
Providing voluntary benefits is a powerful strategic tool for managing talent, even when not legally required. Voluntary benefits are facilitated by the employer but typically paid for by the employee, often at a reduced group rate. Offering these perks enhances a company’s total compensation package, improving its ability to attract and retain skilled personnel.
Common voluntary offerings include supplemental insurance products like dental, vision, life, and disability coverage. These benefits are valued because they fill gaps in traditional medical coverage and address financial security. Access to a 401(k) plan, even without an employer match, is another voluntary benefit that supports long-term financial planning.
Smaller companies often manage the cost and complexity of offering competitive benefits by partnering with a Professional Employer Organization (PEO). A PEO pools employees from many small businesses, allowing them to access discounted rates on high-quality health plans and administrative support. Health Reimbursement Arrangements (HRAs), such as the Individual Coverage HRA (ICHRA), also provide a defined contribution model, allowing businesses to set a fixed budget while employees choose individual coverage.