Benefits 101 Michigan

Traditionally, retail work has offered little more than per-hour pay. As a result, most retailers have hired people who could forego benefits: the young, who are covered by parents or trust in good health; the married, who have benefits through a spouse; or the retired, who have benefits through the state or from previous employment. And, of course, there are those who make do without benefits. According to the U.S. Chamber of Commerce, more than 44 million Americans are uninsured, and nearly 60 percent of them are employed by small businesses.

Furthermore, as big companies shift responsibility for rising healthcare and retirement costs to employees, even those with benefits in the family may feel they can't afford to do without. That leaves retailers relying more and more on the young and those who make do without benefits - both high-turnover populations. Frequent turnover costs employers more in recruitment and training; it also makes it harder to ensure exceptional customer service, which is independent retailers' principal competitive advantage.

Offering benefits helps recruit and retain high caliber employees. But with independent retailers struggling to stay in the black, how can they afford to offer new benefits?

HEALTHCARE 101

Healthcare is the most important benefit employers can provide. In a 2002 Blue Cross and Blue Shield Association survey of small business owners, 78 percent said offering healthcare benefits increased loyalty and decreased turnover; 75 percent said it helped recruitment, 64 percent said it increased productivity, and 58 percent said it reduced absenteeism.

Still, health benefits are a rarity in the gift industry. Michael Russo, president of the Gift Association of America (GAA), says of its members, "Very few offer health or retirement benefits. Their biggest complaint is that [the cost of] insurance is so high. About six or seven years ago, when the insurance companies were getting 30 or 40 percent increases every year, it got to be prohibitive. Any companies we spoke to were either [requiring] employee contribution or just dropping it completely because they couldn't afford it."

Traditional health insurance, in which employees can see any doctor they like, is expensive and nearly obsolete. Managed care keeps costs down by negotiating with doctors, labs and hospitals. Within managed care, the most common programs are HMO, PPO and POS plans.

• Health Maintenance Organizations (HMOs) offer a restricted network of physicians, and often require referrals from a primary care physician for specialists, as well as prior approval from the HMO. In return, patients usually pay a small co-payment rather than a portion of the bill. HMOs are generally the cheapest option.
• Preferred Provider Organizations (PPOs) offer a wider choice of providers. Premiums may be slightly higher, and out-of-pocket costs are generally higher and more complicated than HMOs. However, patients can choose to see a doctor that is out of the PPO's network.
• Point-of-Service plans (POS) are a hybrid of HMOs and PPOs. Like an HMO, participants designate an in-network physician to be their primary care provider. But like a PPO, patients may go outside the provider network.

THE STATE OF INSURANCE

Health insurance is regulated by each state, so businesses need to check with the state insurance department to find out what regulations and programs apply. Some states offer incentives such as tax credits to help small businesses that contribute to insurance plans or health savings accounts; some states allow small companies to band together to buy health insurance.

The department can also confirm that an insurer is licensed to sell health insurance in the state. Premiums are generally set by state law; in some states, premiums are based on characteristics such as health status, smoking status and claims experience. Others use a "community rating," so that everyone in a geographic area pays the same. Some states place legal limits on how much a premium can be raised when a policy is renewed. (Watch out for discount cards - because they're not insurance, they're not subject to the same regulations.)

There are also some federal requirements. For instance, an insurer cannot deny coverage to a small business due to the health status of its employees or their dependents, and insurers cannot charge higher rates to individuals in the same group based solely on health status. Also, employers with 20 or more employees and a group health plan are required to offer employees (and dependents) the option of continuing membership in the plan at their own expense after they leave the job.

WHAT YOU'LL PAY

Premiums account for 8 to 15 percent of payroll for many small businesses, according to HealthCoverageGuide.org, which advises employers to budget $1,600 to $2,500 per employee per year. Those with five employees or fewer should increase those numbers by 10 percent. The site's Plan Type/Price Range Generator provides an estimate tailored to each company's priorities.

According to a 2006 America's Health Insurance Plans survey, the average premium for small group health insurance was $3,730 per year per employee, and $9,770 for family coverage. But that need not be paid entirely by employers; companies often pass up to 50 percent of the premium on to the employee, and 100 percent for dependents. (To see average costs by state, visit www.ahip.org.) In addition, employers' health insurance expenses are tax deductible.

To keep costs down, cut coverage or pass a higher share of costs on to employees through higher premiums, co-pays and deductibles. High-deductible plans are often significantly cheaper, and "catastrophic" plans with fewer benefits still offer a safety net in the event of serious illness. By surveying employees, employers may be able to offer the benefits that are wanted - and not the ones they won't use. Employers can also encourage healthy habits by providing information about exercise, weight loss and smoking cessation.

FLEXIBLE ALTERNATIVES

Flexible spending accounts (FSAs) let employees save pre-tax dollars to spend on health or dependent care. Money set aside must be spent by the end of the year. FSA can supplement health insurance, paying for what isn't covered, but employees don't need insurance to use one. Meanwhile, employers who offer FSAs save money on payroll taxes - often enough to pay for the cost of offering them.

FSAs are part of a Section 125 "cafeteria" plan, which Entrepreneur.com calls "one of the most underrated and underused employee benefits available for small business." Other variations include a premium only plan, which lets employees deduct insurance premiums from gross pay before taxes, and a health savings account (HSA).

HSAs are owned by the individual instead of the company, an arrangement that helps minimize paperwork and allows employees to take the account with them to a new job. However, they must be enrolled in a high-deductible health insurance plan (minimum $1,100 for individuals or $2,200 for families) to qualify. Adoption assistance and reimbursement plans for commuter expenses are also available.

RETIREMENT 101

While healthcare is the most important benefit on employees' minds, retirement benefits may well be second. According to one survey by the Life Insurance Marketing & Research Association, nearly 70 percent of employees would rather have a retirement plan than a pay raise. And retirement plans have advantages for small businesses: Employer contributions are deductible from the employer's income. Small employers can also claim a tax credit of 50 percent of the cost to set up and administer the plan, up to a maximum of $500 per year for each of the first three years.

Several plans are designed to minimize hassle and cost. Some are as simple as letting employees contribute to an Individual Retirement Account (IRA) via payroll deduction, with no employer contribution. In a Simplified Employee Pension (SEP), the company contributes the same percentage of pay for all employees, but it doesn't have to contribute every year, and can decide how much. SEPs can be set up with a two-page form. The SIMPLE IRA plan is also set up via a short form; administrative costs are low, and a financial institution handles most of the paperwork. Employees contribute, and employers either match or make a fixed contribution. (The SIMPLE 401(k) plan has similar requirements.)

More complicated options include regular 401(k) plans, which allow employees to defer compensation so it can grow tax free, as well as defined benefit plans, which promise a set return at retirement but tend to be more costly for employers.

There is no model form for 401(k) and defined benefit plans. Businesses should consult a financial institution and file IRS form 5500 annually. For more information, checklists and a free newsletter, visit www.irs.gov.

COST/BENEFIT ANALYSIS

Most retailers should be able to offer some benefits to their employees at little or no cost - especially those that help employees maximize savings and take advantage of tax breaks. Other benefits such as job sharing, flex time or working from home may require schedule juggling, but cost employers little or nothing.

As for health and retirement benefits, retailers should consider the cost of turnover and recruitment before deciding they can't afford it. After all, benefits is an area where big business has an advantage. A U.S. Department of Labor National Compensation Survey found that almost all large businesses (100 employees or more) offer health insurance, while only 60 percent of small ones do. Likewise, 90 percent of large businesses offer retirement plans, compared to less than half of small ones.

If independent retailers don't want to lose the best people to big chains, they'll have to make sure employees can afford to stay.

Collective Bargaining

There's strength in numbers. One method of gaining clout is pooling small businesses through an industry association. However, neither of the major U.S. gift associations currently offers such a program.

State-level associations may provide an option for some businesses, as do purchasing alliances, which serve as an intermediary between insurance companies and employers. Purchasing alliances allow employers to purchase a coverage package that includes products from more than one insurer, so they can offer a range of choices yet pay only one bill. Usually, a health plan administrator handles service issues and provides information. For those not in an alliance, paperwork for introducing the plan, open enrollment and ongoing maintenance are often performed by a broker.

Retirement FAQs

The Small Business Administration suggests asking the following questions before adopting a retirement plan:

• Is it a qualified plan? If so, employer contributions are tax deductible and employees' investment grows tax-deferred.
• Does the plan offer a number of investment options? They should include a stock, bond, money market and balanced fund.
• Can the employee transfer money from one fund to another?
• Does the plan provide daily valuations?
• Is there a toll free number employees can call to get valuations and transfer funds?
• Is local service provided?
• Does the plan come with enrollment support?
• Is the company solid, with a good reputation and ratings?