Health insurance

(Adapted From: "Small Business For Dummies, 2nd Edition)." 

Due to rising medical costs, employees usually value their health insurance coverage over other traditional employee benefits. Consider these issues when establishing a health insurance plan for your small business:

  • Commitment of the insurer to its health insurance business: Choose among the biggest plans in your area. Besides increased likelihood of staying in the business, larger players can negotiate better rates from providers.

  • Comprehensive, catastrophic coverage: So-called major medical coverage pays for the potentially large expenses such as hospitalization, physician, and ancillary charges (such as lab work). Health insurance plans specify the maximum total benefits ("lifetime maximum benefits") that they'll pay over the course of the time that you're insured by their plan.

  • Choice of health care providers: Health maintenance organizations (HMOs) and preferred provider organizations (PPOs) restrict your choice of health care providers to reduce costs. The major difference between HMOs and PPOs is that PPOs pay the majority of your expenses if you use a provider outside their approved list, whereas an HMO won't cover this at all.

  • Guaranteed renewability: Only consider health insurance plans that will keep renewing your coverage without you and your employees needing to take more physical examinations to prove your continued good health.

Also, to reduce your health insurance premiums, choose a plan with the highest deductible and co-payment that you and your employees can comfortably afford. Sharing costs with your employees is a good way to provide better policies at a fair price for all. As a small business employer, you can pay half the cost of the health insurance premiums, and your employees can pick up the other half.

Disability insurance

Most small businesses do not offer disability insurance to their employees. The purpose of disability insurance is to protect your income and that of your employees from being lost in the event of a disability.

As an employer, you may be required by your state to pay into a state disability or worker's compensation program (the latter only covers injuries and disabilities suffered on the job). Additionally, through the Social Security system, you and your employees have minimal disability benefits.

Life insurance

As a small business owner, don't bother wasting your precious compensation and benefits dollars on life insurance. Few small employers (your competitors) offer life insurance coverage, and many of your employees without dependents won't need it.

Dependent care plans

A dependent care plan enables you and your employees to put away money from your paycheck on a pretax basis, which you can then use to pay for childcare expenses or to care for an ill or aging parent. Doing so saves you federal, state, and even Social Security taxes.

Dependent care spending accounts are a "use it or lose it" benefit. If you or your employees aren't able to spend the money for childcare expenses in the current tax year, at the end of the year the IRS forces you to forfeit all the money that you haven't used.

Flexible benefit plans

Under a flexible benefit plan (also called cafeteria or Section 125 plans), employees have a choice for a portion of their compensation to receive it as pay or to put those dollars toward purchasing benefits of their choosing from a menu offered by their employer. However, because flexible benefit plans are time-consuming and fairly costly to establish (around $1,000) and administer (about $1,000 per year), they aren't practical for a small business with fewer than ten employees.


We all need down time, and weekends just don't cut it. A full week or two off can do wonders for you and your employees. You can offer more time off the longer an employee stays with you.