How much do benefits cost per employee?

Most employers want to ensure that their teams are covered by an excellent set of benefits that keeps their teams comfortable and healthy. However, the cost of providing benefits can often become more expensive than employers anticipate. This makes knowing how much benefits cost per employee important, as it can help an employer to balance lower costs while still making sure that they are able to provide the benefits they wish to offer to their employees.

The average cost of benefits per employee

According to the US Bureau of Labor Statistics, the average cost of benefits per civilian employee was $12.74 per hour worked, as of March 2022. This amount accounts for around 31.2% of total compensation for employees, while the other 68.8% is provided in the form of wages and salaries. Total employer costs for compensation overall, therefore, averaged $40.90 per hour. Total compensation costs for civilian workers were $15.60 at the 10th wage percentile, $31.39 at the 50th (median) wage percentile, and $78.58 at the 90th wage percentile.

Benefit costs for private industry workers, meanwhile, averaged $11.42 and accounted for 29.6% of employer costs. The other 70.4% was accounted for by wage and salary costs, which averaged $27.19. Overall, total employer compensation costs for private industry workers averaged $38.61 per hour. Total compensation costs for private industry workers were $14.97 at the 10th wage percentile, $28.60 at the 50th wage percentile, and $74.46 at the 90th wage percentile.

State and local government workers were noted to have a higher benefits cost than both civilian and private industry workers. The average benefits cost for a state and local government worker averaged $21.15, representing 38.1% of total compensation costs. Wages and salaries averaged $34.32 per hour worked and covered the remaining 61.9% of total compensation costs. The average employer costs for state and local government workers averaged $55.47 per hour worked. Total compensation costs were $24.05 at the 10th wage percentile, $52.13 at the 50th wage percentile, and $93.14 at the 90th wage percentile.

Breaking down the average cost of benefits per employee

Working out the average cost of employee benefits, both per hour and per year, will largely depend on the company or organization involved, the perks and benefits said company or organization offers, and whether or not benefits are adjusted based on employee compensation rates. However, there are certain factors which can more easily be broken down and examined to help employers arrive at an average labor cost for individual employees. 

As a percentage of the money per hour from employee benefits is for insurance, it can be considered a factor. Each type of insurance a company offers its employees can then be broken down into its own sets of factors which determine its overall cost.

Health and medical insurance

While the numbers offered by the Bureau of Labor Statistics can provide a guideline, employers should be aware of the fact that many other factors will influence health insurance cost. These factors include:

• The insurance carrier
• The type of plan chosen
• The network of providers
• The employer location
• The employer contribution strategy
• The demographic of employees (the “employee census”)

When a company or organization provides medical or health insurance to its employees, this insurance will normally come in the form of a group plan that covers everyone. This is known as “employer-sponsored” health insurance. 

This type of coverage has been on the rise in recent years, and it’s important for employers to note the trajectory of cost increases over time. Looking at trends and potential expenses is crucial to ensure that employers are not misreading their numbers when building employee benefits packages. 

Reimbursement programs

For employers who wish to avoid the frustration of group health insurance programs, it is possible to offer a reimbursement program to employees. Qualified Small Employer Health Reimbursement Arrangements (QSEHRA) allow employers to offer non-taxed reimbursement for some healthcare expenses. Advantages of this include the fact that employees are given more control of their coverage and expenses are cut for the employer, while improving employee wellbeing and wellness. 

A business must be eligible to offer a QSEHRA, however, and to qualify it must:

• Have fewer than 50 full-time employees
• Provide the arrangement on the same terms to all full-time employees (reimbursement amounts may only vary based on age and the number of individuals covered)
• Not offer a group health plan, like SHOP coverage or a flexible spending account

Life insurance

Like health and medical insurance, life insurance can be made more complicated if an employer chooses to use a group plan. It involves ensuring that the employer or organization complies with all nondiscrimination requirements if they wish to ensure that it is tax-deductible. As an example, a group plan chosen may have to apply to at least 70% of an organization’s employees. 

There are methods of working around nondiscrimination limits to group plans, including by offering benefits to smaller subsects of employees. These can be based on the following categories:

• Marital status
• Job duties
• Compensation
• Length of service
• Participation in a pension, profit-sharing, stock bonus, or accident and health plan
• Other employment-related factors

A typical group life insurance plan policy will come in set amounts, such as $50,000. Both employees and employers pay the premium costs as part of a co-pay agreement. An example of this might be an employer and an employee each agreeing to pay half of a premium which costs $200 per month.

Unemployment insurance

The payroll taxes a company or organization pays to the government fund unemployment insurance, and each state has its own rules and regulations on unemployment. If one specific business has locations in multiple states, it is advised that the owner, board, or management team become familiar with the rules and regulations of each in order to gain a full understanding of the total cost that applies to that business.

The Federal Unemployment Tax Act and the State Unemployment Tax Act make up the majority of unemployment taxes that companies are required to pay. Employers will pay the majority of this tax, but some states do require employee contributions as well.

Social Security

Employees and employers both cover the cost of Social Security:

• Workers pay 6.2% of their earnings up to a capped salary of $127,000
• Employers pay the same percentage of the employee’s earnings toward Social Security
• Combined, the employer-employee contribution to Social Security is 12.4%
• Contractors must pay the full contribution of 12.4% on their own

Understanding and preparing for new hire costs

When hiring a new employee and deciding on their compensation package, an employer should remember that hiring them will cost more than just their base salary. It includes the cost of their benefits, as described above, but it also involves other fixed cost projections and a series of common blind spots and mistakes that may accidentally be overlooked.

Fixed cost projections

All personnel-related costs should be factored in when an employer plans and projects a company’s new hire budget each year, in addition to salaries. This will include costs associated with recruitment and training, as well as benefits. A typical recruitment process can cost a business up to $4,129 per hire, and it was reported in 2019 that companies spent an average of $1,286 per employee to train them into their new roles.

Most employees will need to work for around 6 months before they can be considered fully integrated into their roles. This means that employers may have to wait for some time before they receive any return on their investment.

Typical blind spots and mistakes

There are some factors that business owners and employers may accidentally forget or overlook when forecasting the cost of employee benefits:

Administrative costs

The time and labor devoted to administering healthcare benefits can be manual and extremely time-consuming. Downloading and making use of HR software can remove the burden associated with this, by removing paper-driven processes that ensure professionals have more free time to carry out tasks involved with more meaningful and important areas of work.

Fluctuating benefits status

An employee may begin working needing an individual or single health care plan, but this could change as they grow older, find a partner or get married, and have children. These changes will increase the cost of their benefits package for their employer.

The changing cost of benefits can be challenging for an employer’s budget, but it will be even more detrimental to them or to an organization as a whole to have employees who are unhappy or no longer receiving the benefits that keep them comfortable and healthy. Managing fluctuating needs and providing benefits that suit the needs of employees ensures this is less likely to happen and be an issue for the future.

Mistakes in paperwork

A range of common mistakes in paperwork can have severe financial penalties, and have an impact on a business as a result. Missing enrolling dates, not having all the proper documentation on file, charging employees an incorrect amount for their coverage, and failure to terminate coverage within the proper time frame are all typical examples of this that an employer might make.

Unexpected annual increases in health costs

Experts at Investopedia have said that healthcare costs are projected to continue rising across the US. This is not only based on government policy, but is also influenced by a number of other driving factors, including:

• Population growth
• Population aging
• Disease prevalence or incidence
• Medical service utilization
• Service price and intensity

The state of the US and the world as a whole can have a significant impact on the cost of health insurance per year. The most recent example of this is the COVID-19 pandemic, as experts predicted that it could lead to increases in premium rates. It’s now expected that premium rates will rise for years as a result of the pandemic.