Insurance

Employee benefits most useful for recruiting are health insurance, dental insurance and disability insurance. Free lunches can wait. (Credit: Rawpixel on Unsplash) Should a startup offer benefits to employees? This question cuts to the core of founders’ day one issues: cash burn, talent recruitment and company values. So what’s a startup to do? A recent article in The Wall Street Journal suggested that startups shouldn’t worry about employee benefits. I disagree. Startup employee benefits are important. I’m in a relevant spot to offer an alternative perspective: I’m the founder of a startup in the insurance business. Getting people the right insurance coverage, with a great experience, is our mission. So, of course our team has company-paid insurance benefits. Can’t fail our mission with our own team, right? But, even if your startup is working on Snapchat for cats, you should still provide your employees with essential insurance benefits. Here's why startup employee benefits are important. Benefits are more valuable to employees than you think. Benefits affect employee job satisfaction in a big way. MetLife’s annual study of employee benefits trends found that benefits are even more important than advancement opportunities and company culture in creating feelings of loyalty to the company. That’s a compelling insight for startups, where recruiting is a massive investment of founder time and early employees are mission critical. Benefits may not be as expensive as you think. OK, free Friday massages are as expensive as you think. But health and dental insurance are certainly more affordable for individuals and small businesses than they’ve been in recent years. A silver-level health insurance plan for a 30-year old costs, on average, less than $300 per month. Dental insurance will usually cost less than $10 per person per month. (A side note on dental insurance: I did research in my previous career at McKinsey that indicated that employee satisfaction per employer dollar spent is sky high for dental insurance. People really love dental insurance). It’s really just another cost of doing business. PandoDaily posed the question of whether startups should offer health insurance. One respondent put it bluntly: "If you can’t afford to hire someone with benefits, then you can’t afford to hire someone. It’s like going to a restaurant. If you can’t afford the tip, cook yourself." At my company, that’s exactly how we think about insurance benefits. You can stand out from the pack. Only 28% of businesses with fewer than 10 employees offer health insurance. If you can afford it (and there are ways you can, as discussed later on in this article), then your value proposition to potential employees just got that much more distinctive. How to offer startup benefits your employees will love So if you’re convinced that you should provide your employees benefits (and you should be!) then here’s what you should do. (This advice is aimed at the startup, that’s expanded beyond the founders but still has fewer than 10 employees). 1. Start with the basics. You want a healthy, happy team that won’t get financially rocked by the flu or an emergency room visit. That means you want to provide employees: health insurance, dental insurance and disability insurance. Retirement contributions, gym memberships, catered lunches and the like should all wait until you transition into a financially stable business. Also, they don’t deliver as much satisfaction bang for the employer buck as good healthcare coverage. For health insurance, you’ll want to get a solid, but not extravagant plan to keep costs in check. Most startup employees are relatively young and healthy – meaning they probably won’t be frequent visitors to the healthcare system. For them, a bronze or silver-level plan is appropriate (depending on the state, premiums will run $200-$300 per employee per month). Get a plan that makes people stick to a network (an HMO or EPO), which keeps your costs down. Disability insurance is also important, but often overlooked coverage. It replaces a portion of income if the insured person is unable to work due to injury or illness. It comes in two flavors: short-term disability (STD) and long-term disability (LTD). Short-term disability insurance is designed to kick in after paid sick days are exhausted. Typically, it replaces around 60% of the employee’s salary (up to $1,000 per week under most policies) for disabilities that last longer than 1 week, for up to 13 to 26 weeks. (Side note: pregnancy is considered a short-term disability so maternity leave is typically covered by STD benefits). Long-term disability insurance is designed to kick in after short-term disability benefits terminate. Typically, it replaces around 60% of the employee’s salary (up to $6,000 per month under most policies) for periods ranging from 2 years or until retirement age (in the event of permanent disability). Each type of disability insurance costs between 0.25 and 0.5 percent of total compensation. So if you can afford 0.5 to 1 percent of compensation in benefit spend, you can offer both. (Note that group LTD insurance is only available if your startup’s been in business for at least 2 years). If you can’t afford both types of disability coverage, go with LTD insurance, which beats STD insurance in terms of dollar for value. However, if you have mostly women on your team, STD insurance might make more sense because of the maternity coverage. (Side note: California, Hawaii, New Jersey, New York and Rhode Island have state-mandated disability insurance requirements. If you’re an employer in one of these five states, you should be aware of the requirements). 2. Manage expectations. Consider what you can sustainably afford for each new hire in terms of the benefit offering and employer/employee cost-sharing. Build it into the cost of each new hire and don’t change it, ever, unless you’re improving it. Avoid at all costs having to announce, "We used to cover 80% of your health insurance costs but now we can only afford to cover 70%. Sorry!" Nothing will get your employees grumbling by the water cooler faster than taking away benefits. (This is because of a human behavioral quirk called the endowment effect). It’s better to start conservatively and get better over time as your budget can absorb it. Announcing instead, "We used to cover 60% of your health insurance costs but now we’re going to cover 70%. Hooray!" will make you a hero. And if you’re wondering what’s the typical health insurance offering at small companies, we’ve included some benchmarks. 3. Take advantage of health insurance subsidies. Thanks to the Affordable Care Act, there is a subsidy available for small businesses that provide health insurance to their employees. To qualify, the startup must have fewer than 25 full-time equivalent employees, pay average annual wages below $50,000 and contribute 50% or more toward employees’ self-only health insurance premiums. If eligible, the startup receives a tax credit of up to 50% to offset the cost of the insurance. The tax credit is only available if the employer purchases a small group health plan from their state marketplace. For startups not eligible for the small business subsidy, shopping around for individual health insurance is also an option. Individual health insurance carries about the same cost, per person, as small group health insurance. So, a startup could have employees buy their own individual health insurance plan on their state marketplace and reimburse them for premiums. There are two advantages to this approach: 1) there’s often a broader choice of individual plans compared to small group plans and 2) individual employees might still qualify for individual health insurance subsidies, even if the business doesn’t qualify for the small business subsidy. This wouldn’t be an uncommon scenario for small startups, which have founders drawing minimal salaries (if anything) and highly-skilled employees earning market-rate compensation (and likely skewing average wages over the $50,000 cap for the small business tax credit). 4. Get a broker. Founders don’t have time to deal with the byzantine world of insurance benefits. Let a broker handle it for you. Best of all: there’s no extra cost to you. Brokers are compensated by the insurance company through commissions (which are already baked into insurance prices). They’ll run quotes, give you guidance and manage the paperwork for you. This is a no-brainer. Ask other small businesses and startup founders for a broker recommendation. So have we put our own advice into action? You bet. We’re paying for 100% of the premiums for employees’ individual health and dental plans. We went the individual route because, for the same cost, there are better individual vs. small group options in New York. We’re on high-deductible silver health plans because we’re a relatively young and healthy group. We have short-term disability insurance (which is required in New York). And we’ll sign up for a group long-term disability plan as soon as we’re eligible. Jennifer Fitzgerald is the CEO and co-founder of Policygenius, an independent online insurance marketplace making it easy for people to get the coverage they need.

Insurance

How Even a Startup Can Offer Employee Benefits

The Story Exchange

Insurance

How Even a Startup Can Offer Employee Benefits

The Story Exchange

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