Guide to the American Benefits System for International Companies
Alex Margolin| Dec 08, 2020
A benefits package is a cost-effective way to attract prospective employees and to show current employees that the company cares about their well-being. It helps build a corporate culture and demonstrates company values effectively.
Research on benefits from the business world indicates that benefits are most effective when they address the needs and priorities of the prospective employees. A survey of employment trends of recent years demonstrates that 60% of employees take benefits into consideration when choosing a workplace. That means giving people an attractive benefits package can make or break a hiring decision.
For European companies looking to hire employees in America, creating the most effective benefits package often requires a paradigm shift away from the thinking that has helped them attract talent in Europe. When it comes to benefits expectations, Europe and the US are not just on different sides of the Atlantic. They are on different planets.
Europeans live in a world where health care is covered by the government and paid maternity leave is available without negotiations. European labor laws ensure generous paid time off and often require companies to contribute to employee retirement funds.
Americans rely on their employers to provide their health care and retirement plans. There are no US Federal laws regulating paid time off or family leave. Those are company benefits, and they are usually standardized for all employees to avoid accusations of discrimination between employees.
Not surprisingly, Europeans expect broad benefits packages laden with perks such as meal vouchers for lunch and gym membership. Americans are more concerned about paying for health care and prefer that employers invest more in better health plans than in perks like lunch plans. A particularly attractive health plan can give a company a real advantage over another company with a less attractive plan.
The American Health Care System
When choosing a health plan for the entire company, it’s important to consider a number of factors.
Health Care is a Benefit, not an Obligation (Most of the Time)
Under the Affordable Care Act, only employers with 50 or more employees are required to provide health care plans for their employees, and the employers only have to cover 60% of the costs of the plans for 95% of their workforce. Smaller employers are not legally required to provide health care at all. That’s why providing a plan is so important to so many American employees. Treating health care as a benefit rather than an obligation can increase employee loyalty, inspire trust, and decrease employee absences.
Adding Family Members to the Plan
Most health care plans allow an employee to extend coverage to a spouse and/or dependents. Some policies include dependent children in the plan automatically. Others charge a reduced fee to add family members. Many businesses cover 75% of the cost of adding additional family members to the plan so that whole families can be covered by the same plan. This is the standard practice in the American high-tech industry today.
Bundles are Cheaper
By bundling the number of policies purchased from a health care supplier, the company will get a better price than any individual would get from the same vendor, so the company can get more coverage for the money. That’s one reason offering a plan is better than offering vouchers to pay for their own plans. The second reason is to communicate that your company really wants what’s best for the employee, not just to fill a cash value.
Enrollment Must be High
In most cases, health care suppliers will demand a high level of enrollment, often around 50%, on the part of the employees in order to provide a group plan. That means the company has to choose wisely or lose one of its primary advantages. The only reason employees should opt-out is if they are already covered by a spouse’s plan. Many plans allow employees to add family members for a reduced price.
Plans Have Different Levels
Many plans have different levels, such as platinum, gold, and silver options. The differences will usually be in the amount of deductible and in total out-of-pocket charges the employee may have in the event of sickness. It’s important to either to offer a choice of levels or to choose the level that suits the make-up of your workforce. For example, younger and healthier people prefer plans with high deductibles because they only expect to use them in the event of an emergency. Older people prefer low deductibles because they see their doctors more often. It is also worth noting that most health plans do not include foreign travel, so additional arrangements will need to be made to cover employees who travel abroad.
Choose a Plan that Will Provide Peace of Mind
When choosing a health plan for your entire workforce, bear in mind why you are offering health care as a benefit. In most cases, the goal is to provide employees with the peace of mind they need to perform at the highest level. If employees do not feel sufficiently covered, or hesitate to use the plan, it may not accomplish the goal and will likely not serve as a draw in the hiring process. Spending less on health care, either by offering less attractive plans or choosing a low level of coverage within the plan could backfire.
Ways to Obtain a Benefits Package
There are three primary ways to put together a benefits package:
Purchase each benefit directly from a qualified vendor
While this may be the most direct and transparent method, it is also the most administratively challenging. There are numerous third-party benefits vendors in the US, and the small differences in price and product take a great deal of expertise, not to mention time, to sort through.
Working with a trusted advisor
An experienced advisor who is knowledgeable about both the needs of employees and the local landscape, can save a great deal of time and effort. While costs may be higher because of the service, that could be balanced by the possibility that the advisor will be able to find the best value at the lowest price. For European companies hiring in the US for the first time, an advisor is a valuable resource that can ensure a smooth hiring process.
Working with an American PEO (Not like working with a Global PEO)
In America, a PEO (professional employment organization) is very different from a PEO in the rest of the world. In fact, this is one of the biggest areas of confusion for European companies who expect the definition of terms to be the same everywhere.
In the US, a PEO is a co-employer that works alongside your company and handles the administrative tasks. Your company needs an entity to work with an American PEO and liability for the business and all employees stays with your company. However, the PEO serves as an outsourced back office, handling payroll, workforce management, and benefits management. Working with an American PEO can be similar to working with trusted advisor, but one that goes beyond advising and actually performs the tasks.
Health Care Options
Since most working Americans depend on their employer for health coverage, the health plan your company offers can have a disproportional impact on luring the potential employee to the team.
Preferred Provider Organization or Preferred Provider Option (PPO)
The majority of employer-sponsored health plans are either PPO or HMO (see below). Like HMOs, PPOs have a network of doctors and specialists who charge a greatly reduced fee for care. With a PPO, policy holders can go outside the network if they wish, even without a referral, but for a higher fee. The PPO option is generally the most expensive to administer and therefore comes with the highest premiums and a deductible
Health Maintenance Organization (HMO)
An HMO is a tight network of medical professionals, and the policy holder can only receive care from a member of the network. HMOs typically function in a particular region and will have its own medical facilities. People will generally visit their general practitioner first in any health issue, and that doctor will refer the patient to other network specialists if necessary. The premiums for HMOs are typically smaller, and the deductible is lower.
High Deductible Health Plan (HDHP)
The high deductible plan (HDHP) costs less to the employer because the premiums are lower than other plans. It is designed for people who are generally healthy and do not need medical care except in an emergency. The deductible is high, but if there is little medical care involved, the costs can be lower. But companies must beware: when healthcare issues crop up, the employee pays the high deductible out of pocket, which serves as a deterrent from seeking medical assistance. That could undermine the benefit of the plan. To mitigate some of the burden on employees, HDHPs are often opened alongside a Health Savings Account (see below).
Health Savings Account (HSA)
Available only for people enrolled in an HDHP, an HSA functions like a private bank account, but withdrawals can only be made for healthcare expenses. The fund mitigates some of the expense of paying high deductibles. The money that is paid into the account often comes from both the employer and the employee. It is tax-free and based on the employee’s gross, pre-tax pay. As such, it also reduces the overall tax burden for the employee by lowering the total taxable gross pay.
Flexible Savings Account (FSA)
Under an FSA, an employer and an employee can set money aside for a particular purpose, such as health care. The advantage of FSA is tax relief on the money deposited into the account. The main disadvantages are that the total amount of funds available in the accounts are capped, and if the money is unused, only $500 can roll over into the next year.
Other Common Health-Related Benefits
While it is common for US companies to offer dental coverage alongside health care coverage, dental care is typically not included in most health care packages and requires a separate policy. Even when dental is included, it is usually too basic to cover the real needs of employees, both from a preventative care perspective and for ongoing treatment. Plans vary from including just preventative care (teeth cleanings, x-rays), to restorative care (fillings, extractions, etc) to major care (surgeries, etc).
Undetected eye problems can hamper job performance severely. Vision coverage ensures that employees have incentive to take vision tests regularly and cover the costs of prescription eyewear. More advanced plans may include corrective surgeries such as laser surgery. The benefits of offering vision coverage include improving the quality of life for the employees and their ability to perform at their optimal levels at work.
Pension plans fall into two general categories. One category is for defined-contribution plans, such as 401K plans, which allow employees and employers to contribute to the funds up to a maximum amount set by the IRS. The other category consists of defined-benefit plans, where the payout to the employee is pre-determined and would begin at the age of retirement.
With the introduction of the 401K plan, many industries, particularly new ones such as high-tech, have adopted the defined-contribution model as a general practice, though companies still use traditional pension plans as well.
The most common form of retirement planning in the US is the 401K plan. The plans are company-sponsored, with employees contributing a set percentage of their pay each month and employers matching a certain amount, usually in the range of 3%-6%. The totals increase through high yield interest rates. Different 401K plans are taxed differently. Some allow employees to contribute to the fund in pre-tax earnings, but tax them when a withdrawal is made, after retirement. Others tax them at the time of contribution but allow them to withdraw tax free.
The most common form of defined-contribution planning is known simply as a pension plan. These plans were popular with companies that sought to entice employees to stay for years, or even for decades. They promised to provide monthly payment to the employee at retirement. The payments are based on formulas that reward people for staying at with the company for longer periods. For example, a company might offer a plan that pays a percentage of the final salary for each year the person is with the company.
Disability and Life Insurance
One of the biggest concerns for American employees is the possibility of illness or injury that would prevent them from earning a living, especially if they are the primary wage-earner for the family. Long- and short-term insurance can cover them in the event of disability. Life insurance will provide financial security for their dependents in the event of death.
Short-Term and Long-Term Disability
Employees who are unable to perform their jobs lose more than their livelihood. They often lose a sense of their self-identity and pride, even when the reason for their illness or injury is not their fault. While insurance does not restore their ability to work, it mitigates much of the inner turmoil that haunts people and grants them peace of mind knowing that they are not letting themselves or their families down financially.
Short-term insurance provides an income for a set period of time, usually for a period of 3-6 months. Long-term insurance carried on the support if the employee is unable to return when the short-term insurance runs out.
Employer Paid Life Insurance – $50- $100k
This insurance, known as group-term life insurance is a commonly-offered form of life insurance. The policy is owned by the employer but cover the employee, with beneficiaries being the family of the employee. This insurance provides financial protection to the employee’s family in the event of the employee’s tragic passing.
Voluntary Life Insurance
In Voluntary Life Insurance, the employee pays the monthly premiums, though employers often sponsor some or all of the payments on the employee’s behalf. There are also possibilities for adding family members to the plan so that the entire family can receive life insurance. There are no medical exams, and no one is denied coverage for any pre-existing condition.
It is customary for employers to cover the costs of transportation and related expenses, including bus or train fees, parking fees, and even rideshares on Lyft or Uber. With the rise of distributed companies with no central office, the benefit is beginning to lose some of its appeal. However, for people who live in big cities and pay a great deal to travel to and from work and worry about the costs of parking, the benefit removes a great deal of stress from people’s lives.
Papaya Supports Global Benefits in Over 140 Countries
Benefits are a powerful tool to build brand awareness around the message of empowerment of its employees. When they are well-communicated and reflect the true values of the company, prospective employees can look through the list of benefits and feel a sense of belonging.
Papaya’s in-house experts guide you through the maze of benefits in the US, help you figure out what is possible, and connect you with local benefits vendors.
Papaya’s end-to-end solution supports all types of global workers (payroll, EoR, and contractors) in over 140 countries. The automated, cloud-based SaaS payroll software provides an end-to-end solution, from onboarding to on-going management to payments across state or national borders.
The automated platform ensures payroll compliance, provides benefits management, and ensure data privacy in compliance with GDPR. Papaya’s knowledge center provides updated information on salary benchmarks, mandatory benefits, tax rates, and more – everything you need to know before hiring in the US or overseas.
Contact us for a strategic consultation.