Starting Up: A Benefits Package Can Reel In Talent

By DIANA RANSOM

When Chris Larsen and John Witchel, co-founders of Prosper, a peer-to-peer online lender in San Francisco, sat down with three employees around Larsen's kitchen table to build the now year-and-half-old web site, benefits were the last thing on their minds. The staffers were all working for stock options at the time.

"At that point, it was a very risky venture," says Larsen of the start-up. "We weren't really paying salaries let alone benefits." But once Prosper started to, well, prosper, he says, the company "started attracting a bigger variety of folks." New employees, he found, "want to take a risk and hit a homerun like everyone else, but they needed to not also have to worry about their livelihood."

So about six months before the site's launch in February 2006, Larsen began offering his employees, who then numbered about 15, the option to participate in a group health plan. Today, at just under 50 employees, Larsen now offers a 401(k) plan, two weeks of paid vacation and maternity leave in addition to stock options. "It's definitely a process," says Larsen. But, he adds: "It's also about being frugal and communicating that we're in this together."

For small-business owners just starting up and looking to add staff, benefits such as medical and dental coverage may be just the edge you need to attract and retain stellar employees. While you want to supply the best benefits, it's a smart idea to be selective and sparing when possible.

Here are a few questions to ask yourself as you weigh the costs of offering benefits:

Do you really need to offer benefits?

By law, you're obligated to withhold income tax and half the load of Social Security and Medicare taxes from your nonhousehold employees' paychecks. You're also required to pay the other half in addition to both federal and state unemployment tax, when applicable. Additionally, you must provide worker's compensation insurance. If you have more than 50 employees, under the Family and Medical Leave Act, you're obliged to provide up to 12 weeks of unpaid, job-protected leave to eligible employees for the birth or adoption of a child or if a serious illness befalls an employee or a family member.

But offering employees health, retirement, dental, vision and life insurance coverage generally isn't required. "It's a judgment call," says John Foley, a partner at the Benefit Consulting Group in Northfield, Ill. "An employer's job is not to supply everything, but in order to get the people you need, you need the benefits."

Some smaller firms have been able to get by covering the brunt of employees' individual health-care plans rather than getting a group policy. Until recently, Phillip J. Ryan of law firm Ryan, Ryan & Landa went this route. But the first question he'd always hear during interviews with prospective hires was: Do you offer health insurance? "If it is someone who you want to come with you," he says, "it's hard to say 'find a plan first and then we'll help.'" With nine employees, the Waukegan, Ill.-based law firm is set to begin a group health plan this month complete with dental and vision coverage.

What's the competition doing?

Figuring out how your business measures up to competitors especially if you are worried about attracting and retaining quality employees is critical, say human-resources and benefits consultants. Knowing what the competition is doing allows you to set benchmarks and "prevents offering a benefit level that is too costly," says Kerry Finnegan, head of the small-business health benefits segment at Mercer in Chicago. Otherwise, "you may be wasting money," he says.

If you're in a situation where top-tier employees are few and far between, consider offering inexpensive benefits such as flexible work schedules or continuing education classes, suggests Marie Schram, director of human resources at LMI Consulting, a government consulting firm in McLean, Va. Little rewards such as Monday morning bagels and donuts as well as pumping in fresh coffee everyday could help perk up employees, she says.

How much are you willing to pay?

You will, undoubtedly, want to offer your employees the gamut of benefits. But realistically, "when you are just starting out, a brand new company has to be judicious and conservative," Schram says.

Health care, alone, is a huge expense. According to a recent employer benefits survey from the Kaiser Family Foundation and Health Research and Educational Trust, the average premiums for health insurance coverage at smaller firms in 2007 rose 5.5% to $4,553 for singles and $11,835 for families. And the employer portion for smaller firms, on average, amounts to $3,992 and $7,599, respectively.

Take a conscientious look at how much you are really willing to pay for employee benefits. To get clients thinking about the costs, Foley presents an example: If you have a company with 50 employees in Chicago you are probably spending in the neighborhood of $350,000. Of that $350,000, he asks: "How much do you want to shoulder?"

Also, keep in mind that the costs will be recurring, says Finnegan from Mercer. If you have a bad year or if premiums skyrocket, will it still be affordable? "You don't want to offer a plan that you'll have to change dramatically in the future," he says.

What type of plan should you provide?

Jerry Ripperger, director of consumer health at the Principal Financial Group in Des Moines, Iowa, recommends protecting employees against catastrophes that may result in a loss of income or worse. Focus on health, long-term disability and life insurance. A growing number of small employers are setting up health-savings accounts or HSAs, which allow individuals with high-deductible health-insurance plans to pay for routine medical costs with their own pretax dollars.

Ripperger also suggests tapping the services of a benefits consultant or an insurance broker. This person can help you parse through the minutiae of health-care plans and bring to light benefits and even cost savings that you haven't considered. Be sure to ask around and get referrals, however, as no two brokers are alike.

How can you save?

To keep costs low, you might ask employees to share part of the health-care premium burden. Or, you can opt to provide so-called "voluntary" benefits, which employees pay for themselves. Figure out what's important to your staff, suggests Holly Lifkey, vice president of human resources at Society Insurance, a workers compensation firm in Fond du Lac, Wis. "Understanding what your employees want will help you target what you offer" and possibly limit the expenses you take on, she says.

Another way to control costs is by providing a minimum amount of coverage and allow employees to, say, "buy up" to richer plans. "It is a way to get benefits to employees without the employer paying for all of it," says LMI 's Schram. With life insurance, for example, many employers will cover two times a person's salary. If you want more, you then have the option to buy up to a certain amount of coverage on your own for yourself or a spouse.

But no matter which iteration of employee-benefit package you choose and there are many every business owner will want to do some soul-searching and thoughtful analysis before and during the benefits process. But at the end of the day, says Ripperger, the thing to keep in mind is "benefit plans are investments in employees." Choose wisely.