Providing various employee benefits is pivotal to your company’s long-term success. A robust benefits program improves retention and recruitment efforts, boosts morale, and increases job satisfaction. But some employers may not know that benefits fall into two categories: those required by law and those that are voluntary.
Knowing which benefits are mandatory under federal and state law will ensure you don’t pay a penalty for not providing them. Additionally, offering voluntary benefits even though they’re not required will help you stand out to potential employees in a competitive job market.
In this article, we’ll compare mandatory and voluntary benefits and explain why adding a wide variety of perks to your compensation package is essential.
In this blog post, you’ll learn:
- The key differences between mandatory and voluntary employee benefits, and which ones your business must provide by law.
- The popular voluntary benefits you can offer to stay competitive and support employee well-being.
- Why offering a mix of required and non-required benefits helps attract top talent and boost employee satisfaction.
What are mandatory benefits?
Mandatory benefits, sometimes called required benefits, are benefits or perks required by federal, state, or local law.
According to the U.S. Bureau of Labor Statistics, legally required benefits “provide workers and their families with retirement income and medical care, mitigate economic hardship resulting from the loss of work and disability, and cover liabilities resulting from workplace injuries and illnesses.”1
While federally mandated benefits are the same for everyone, state regulations vary. So, knowing which benefits your state and local governments require in addition to federal guidelines is crucial.
For example, you must offer disability insurance in the following states:
Common types of mandatory benefits
Current employers are legally obligated to offer their employees a few traditional benefits. We’ll review the common ones below so you can confirm if you comply with federal regulations.
Workers’ compensation
Workers’ compensation is the first benefit you must offer your employees. This type of coverage reimburses your employees for certain expenses if they miss work due to a critical illness or injury. The injury must be one they experienced while at work or performing their job duties.
Some expenses that are eligible for reimbursement with workers’ compensation include:
- Medical care
- Treatment for an injury or illness
- Rehabilitation
- Missed income due to time off work
While workers’ compensation is government-mandated, it’s managed state-by-state, meaning extra requirements vary based on location. Texas is the only state that doesn’t require business owners to offer workers’ compensation insurance.
Unemployment insurance
Unemployment insurance provides cash benefits to eligible workers who become unemployed or have reduced work hours through no fault of their own. Employers and employees contribute to unemployment coverage. But only individuals who meet eligibility requirements can receive income for up to 26 weeks.
The type of insurance you’ll need will vary by state, but employees are generally eligible for unemployment if they:
- Are unemployed through no fault of their own (i.e., laid off, downsized, etc.)
- Meet their state’s requirements for wages earned and time worked during an established time period (also known as a “base period”).
- Meet any extra state requirements.
Social Security and Medicare contributions
Social Security and Medicare are federally mandated benefits that all U.S. employees pay into during employment to use later in life. Employers don’t offer these benefits.
Social Security ensures employees will have an income when they reach retirement age or if they become permanently disabled. Medicare provides health insurance coverage for individuals 65 or older or those with specific disabilities or chronic illnesses.
Employees and employers pay Medicare and Social Security taxes as payroll deductions. Your employees’ paychecks and Form W-2s will show their contribution amounts.
Health insurance
Whether you must offer health insurance coverage depends on your company’s size. The Affordable Care Act (ACA) only requires applicable large employers (ALEs) with 50 or more full-time equivalent employees (FTEs) to offer affordable health insurance that provides minimum value and minimum essential coverage (MEC).
If you’re an ALE and you don’t offer sufficient or affordable medical coverage to at least 95% of your FTEs and at least one of those workers buys health insurance with a subsidy on the individual market, you could be subject to costly tax penalties.
Companies with fewer than 50 FTEs don’t need to offer health insurance, nor will they have to pay a fine for not doing so. However, health insurance is the most in-demand employee benefit you can offer. Providing a health plan helps with recruitment and retention.
Learn about your small business health insurance options and alternatives.
Family and Medical Leave Act (FMLA)
Like with health insurance, only companies with 50 or more employees must comply with the Family and Medical Leave Act (FMLA)2. This Act requires ALEs to provide their workers with up to 12 weeks of job-protected, unpaid leave for specific medical and family issues.
To qualify for family and medical leave, eligible employees must:
- Work at your company for at least 12 months.
- Have previously worked a minimum of 1,250 hours before the start of the leave.
- Work within a 75-mile radius of your company’s location.
Certain qualified life events make an employee eligible to receive time off under the FMLA.
Some medical and family reasons to apply for leave include:
- The birth of a child
- Caring for a spouse or family member with a severe medical condition
- Adopting or fostering a new child
- Tending to the employee’s serious health condition
What are voluntary benefits?
Voluntary benefits plans — also known as fringe benefits or perks — are other forms of indirect compensation offered to employees along with their regular salary and mandatory benefits. Employees typically receive these additional benefit options at no cost or reduced, affordable rates.
Companies of any size can provide voluntary benefits to their staff. You decide which ones and how many to offer, and participation is optional. In some cases, employees who participate in a voluntary benefit share a reduced cost with their employer through regular payroll deductions.
The IRS considers voluntary benefit programs a form of payment for services, even if you offer them to non-W-2 employees, like 1099 contractors and international workers. This makes voluntary perks a good way to increase all your employees’ total compensation.
Common types of voluntary benefits
You can offer your employees various supplemental benefits, such as covered accident insurance, retirement plans, and student loan repayment programs. But let’s look at some other attractive benefit options in the sections below.
Health benefits
If you’re not an ALE and not required to offer your employees medical insurance, that doesn’t mean you shouldn’t provide a comprehensive health benefit. Small group health insurance is available to companies with fewer than 50 employees in most states through the Small Business Health Options Program (SHOP) exchange. You can also buy a small group plan from a broker, agent, or directly from an insurance company.
If you don’t want or can’t afford group health insurance, there’s a cost-effective way to support your workers. A health reimbursement arrangement (HRA) provides employees with tax-free reimbursements for their individual plan premiums and other out-of-pocket medical expenses.
HRAs have several advantages. You can choose how much tax-free allowance to offer your employees to keep your budget in check. Reimbursements are also tax-deductible and payroll tax-free for employers and income-tax-free for employees. Employees must have a qualifying health plan that provides minimum essential coverage (MEC) to participate in an HRA.
The three most popular HRAs are:
- The qualified small employer HRA (QSEHRA). The QSEHRA is for small businesses with fewer than 50 FTEs.
- The individual coverage HRA (ICHRA). The ICHRA is for organizations of all sizes. ALEs can opt for an ICHRA instead of traditional group health insurance to comply with the employer mandate.
- The group coverage HRA (GCHRA). Also known as an integrated HRA, the GCHRA is for companies of any size. But it only works with employer-sponsored group health plans.
Finally, health stipends are taxable, voluntary health benefits, like HRAs, but have fewer compliance regulations. There are no eligibility requirements or minimum allowance amounts, so you can offer your employees as little or as much money as you like to help them pay for their medical costs.
Stipends
Other than health stipends, you can offer your employees a wide range of other stipends.
For example, wellness stipends reimburse your staff for wellness services and other expenses, such as:
- Gym memberships,
- Fitness classes
- Exercise equipment
- Meditation apps
If you have workers with families (or pets), you can provide child care, daycare, or pet insurance stipends. These perks help offset the cost of childcare and pet-sitting services when your employees must come into the office.
Flexible work schedules
A flexible work schedule, or flex schedule, allows employees to begin and end their work hours in a way that best fits their personal lives. With flexible work hours, you can offer options like a 9/80 schedule. This allows employees to work 80 hours over nine days instead of the usual 80 hours over ten days.
Flex schedules also allow for flexibility in work location. For example, flexible work arrangements can include fully remote and hybrid work, which is a mix of time working in the office and at home. If you allow these options, you can offer a remote work stipend to reimburse employees for their in-home office equipment.
Dental and vision insurance
Improper dental care can lead to severe health issues like diabetes, cardiovascular disease, and cancer caused by gum disease. Similarly, proper vision care helps employees maintain healthy eyesight while at work so they can get tasks done and improve their daily lives. This makes vision and dental insurance as important as regular health coverage options.
Most major medical plans don’t cover adult vision and dental care, which are considered ancillary benefits. You can add this additional coverage to your compensation package along with a group health insurance plan, or reimburse your employees for vision and dental expenses with an HRA or health stipend.
Paid time off (PTO)
According to our 2024 Employee Benefits Survey, 90% of employees say that paid time off (PTO) is important to them, yet only 56% of business owners offer it. So if you’re not currently offering PTO, now is an excellent time to add it to your competitive benefit package.
PTO combines vacation, sick time, and personal time into one bucket that employees can use when taking paid time off work. Some companies accrue their PTO based on how many hours employees work per pay period or how long they’ve been employed. Others allow days to roll over annually or offer unlimited PTO days.
Either way, a robust PTO policy ensures your employees don’t come to work when sick. It also ensures employees have time to recharge when they need a mental break, and can make time for vacations and trips with loved ones.
Commuter benefits
Commuter benefits, or transportation perks, are especially handy if your employees are in the office or are hybrid workers.
This type of benefit plan helps cover all or part of your employees’ commute-related out-of-pocket costs, such as:
- Gas
- Transit passes
- Qualified parking passes
- Ride-share services
- Toll reimbursement
The IRS allows employers to provide certain commuter benefits, like mileage reimbursement, with pre-tax dollars for qualified expenses3. But you can make the benefit taxable to your employees if you want to reimburse employees for more types of transportation expenses than the IRS allows.
Why you should offer voluntary benefits at your organization
Even though they’re not mandatory, there are several advantages to providing your employees with voluntary benefits.
The biggest advantage of voluntary benefits is that they attract and retain skilled workers. With mandatory and voluntary benefits, employees will know you care about them and their well-being. This can increase employee satisfaction and improve company loyalty. It also makes it more likely to attract candidates away from your competitors and keep them for the long haul.
Voluntary benefit programs also help your employees save money, especially if they have an unexpected illness. For example, short-term disability insurance provides income for employees recovering from a critical illness or injury. With an HRA or health stipend, workers can pay for medical expenses if they don’t have the out-of-pocket savings to cover the cost themselves.
Also, some voluntary benefit plans, like certain life insurance products, have a guaranteed issue option. This means coverage doesn’t depend on health status, and more individuals can enroll at discounted group rates. Offering benefits that provide financial stability is an excellent way to win over employees, especially with rising healthcare costs and inflation.
Your core benefits package reflects your company’s beliefs and values, and your employees recognize that. When you offer a variety of voluntary perks, you show your employees they’re appreciated, and their happiness is vital to you. It’s a great start to be an employer of choice and an organization that puts its employees first.
Conclusion
If your current compensation package only includes mandatory benefits, you’re missing out. Employees view a well-rounded benefits package as important as salary when considering whether to work at your company. To make the most impact, you should offer a mix of required and non-required benefits to better support your employees in and out of the workplace.
If you’re new to providing health benefits, PeopleKeep by Remodel Health can help. Our benefits administration software enables companies of all sizes to offer their employees a flexible and personalized HRA on a budget. Contact us, and we’ll help you design and manage your HRA in no time.
This article was originally published on February 6, 2023. It was last updated on June 16, 2025.
1. How Much Do Private Industry Employers Pay for Legally Required Employee Benefits?
2. Family and Medical Leave Act
3. Publication 15-B (2025), Employer’s Tax Guide to Fringe Benefits
