Employee Benefit Expenses: Meaning, Types and Calculation

Editorial Staff
August 8, 2024
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Employee Benefit Expenses

Employee benefits are crucial components of compensation packages offered by employers to attract and retain employees. These benefits go beyond salary and include health insurance, retirement savings plans, paid time off, and various other perks. Employee benefits can be categorised into four main types: health and wellness benefits, financial and retirement benefits, time-off and leave benefits, and work-life balance benefits.

Employers must design benefits packages that align with the needs of their employees, are affordable, and comply with legal requirements. Some benefits, like health insurance and retirement plans, are commonly offered, while others, such as flexible work arrangements and wellness programs, are gaining popularity.

In fact, approximately 60% of people say benefits and perks are a significant consideration when deciding whether to accept a job.

The costs incurred by a company towards employee benefits are called employee benefit expenses. In India, employee benefit expenses are on the rise, though they still remain below some advanced nations.

For example, employee benefit expenses in the US are generally higher than in India, with employee benefits accounting for 30% of total compensation costs in the US compared to around 15% in India.

Also, Read: Why are Employee Welfare Programs Important Especially in India?

What Are Employee Benefit Expenses?

Employee benefit expense is the amount an organisation spends to provide benefits to its employees, over and above their basic salary. These benefits can be mandatory or voluntary and may include health insurance, retirement plans, paid time off, life insurance, and other perks.

Companies determine these benefits by conducting employee surveys, analysing industry trends, and considering competitor packages to ensure relevance and value to employees, thereby enhancing job satisfaction and loyalty.

Employee benefit expenses in India can vary by industry due to factors such as the level of risk associated with the work, the size of the organisation, and the specific benefits offered. Companies from sectors like construction, mining and manufacturing could often attract higher rates, as compared to office-based work or retail, which are relatively less risky.

Quick Read: 10 Best Insurtech Companies in India

Why Are Employee Benefit Expenses Important?

Offering a diverse range of employee benefits can help you as an employer to enhance job satisfaction, attract top talent, and improve your employee retention. Employee benefits expenses incurred are not only about financial security, but, also contribute to a positive work environment, employee engagement, and overall job satisfaction to your employees.

Incurring employee benefit expenses is important for the success of a business for several reasons. Here are a few:

Firstly, offering attractive benefits can help you retain top talent and reduce your employee turnover, which can save time and resources that would otherwise be spent on hiring new employees.

Secondly, employee benefits can increase productivity by making your employees feel more motivated and engaged in their work.

Thirdly, offering a comprehensive benefits package can help your business attract top talent, which can lead to better performance and higher revenues.

Finally, incurring certain employee benefit expenses is mandatory for companies in certain countries, and failing to do so can result in legal penalties and negative publicity. So, in many instances, it is not a choice, but, more of a compulsion.

Also, Read: Importance of Employee Benefits

4 Major Categories of Employee Benefit Expenses

The four major categories of employee benefit expenses are as follows:

1. Insurance

This category includes diverse types of health insurance, as well as life insurance and disability insurance. Health insurance options are important for employees and their families to meet any health eventuality. Companies like Onsurity offer monthly healthcare and wellness membership plans starting at Rs 49 per employee.

2. Retirement plans

Retirement plans are a common category of employee benefit expenses. These plans are designed to help employees save for retirement and can be categorised into two types:

Defined benefit plans
Defined contribution plans.

Defined benefit plans provide a source of income for retirees based on their years of service and salary, while defined contribution plans allow employees to contribute a set amount of money to their retirement account each month. The employer may also make contributions to the employee’s account.

3. Additional compensation

This is a significant component of employee benefit expenses, encompassing any monetary rewards provided to employees beyond their regular salary. This category includes bonuses, commissions, and other forms of financial incentives that recognise and reward employees for their performance and contributions to the organisation.

Offering additional compensation can motivate employees, boost morale, and incentivise high performance, ultimately contributing to a positive work environment and increased employee satisfaction.

4. Time off

Time-off employee benefits encompass various types of leave that employers can offer their employees beyond standard work hours. These benefits include holidays, vacations, sick leave, personal leave, and bereavement leave.

Employers have the option to provide these time-off benefits to their employees, and they play a crucial role in enhancing work-life balance, promoting employee well-being, and improving overall job satisfaction. Time-off benefits are not legally mandated in all cases, but they are a valuable component of an employee benefits package, contributing to employee retention and productivity.

Types of Employee Benefit Expenses

Employee benefit expenses can be categorised into various categories, each serving a specific purpose in enhancing employee well-being and satisfaction:

1. Mandatory benefit expenses

Mandatory benefits expenses refer to the costs associated with providing benefits that employers are compulsorily required to offer to their employees.

These benefits are mandated by law and vary from country to country. Examples of mandatory benefits include worker’s compensation insurance, unemployment insurance, and in some regions, paid sick leave. These expenses are essential for compliance with legal regulations and are typically included as part of the overall compensation package provided to employees.

2. Health insurance benefit expenses

The health benefit insurance expenses refer to the costs associated with providing health coverage to employees. These expenses include the premiums paid by the employer for group health insurance plans that cover employees and their families.

In India, health insurance premiums are tax-deductible under Section 80D of the Income Tax Act, providing tax benefits to individuals and employers who invest in health insurance coverage.

Companies like Onsurity offer comprehensive healthcare packages, trusted by more than 8000 plus businesses and serve 15 lakh plus members. Onsurity is the nation’s only healthtech company that offers monthly subscription-based employee healthcare packages to MSMEs, SMEs, Startups and growing businesses.

3. Statutory benefit expenses

Statutory benefit expenses in India refer to the costs associated with providing your employees compulsory benefits that you are legally required to offer to their employees.

These benefits are made necessary by law and include provisions such as state insurance, provident funds, gratuity payments, maternity leave, and payment of bonuses. Statutory benefits are crucial for ensuring employee welfare, financial security, and compliance with labour laws in India. Employers must budget for these expenses as they are mandatory and contribute to employee social security and well-being.

4. Voluntary benefit expenses

Voluntary benefit expenses are optional benefits that you as an employer can offer to your employees to supplement their compensation package.

These benefits can include dental and vision insurance, life insurance, disability insurance, employee assistance programs, wellness programs, education and training programs, childcare assistance, employee discounts, gym memberships, health checkups, and doctor tele-consultations. As an employer, you can choose which benefits to offer based on your budget, business goals, and your employee needs and preferences.

Also, Read: Group Term Life Insurance for Employees

Factors Affecting Employee Benefits

There are various factors impacting employee benefits. Some of these include:

1. Workforce demographics

The age, gender, and family size of employees can significantly impact the cost of benefits. For instance, older employees may require more comprehensive health insurance plans with higher premiums, while employees with families may require additional benefits like childcare or parental leave.

2. Company goals and needs

The specific needs and goals of the company can also affect the cost of benefits. For example, a company with a focus on employee development may offer extensive training and education programs, while a company with a diverse workforce may offer more inclusive benefits like gender-neutral health insurance plans.

3. Advantages that are beneficial

The more thorough the advantages bundle, the higher the expenses. For instance, offering just medical coverage will cost not as much as offering health care coverage, retirement plans, and different advantages like educational cost repayment. Managers need to painstakingly consider which advantages are essential and alluring for their employees and plan appropriately.

4. Organisation size

Smaller organisations might have budgetary constraints, as compared to larger organisations with superior spending power. Also, larger organisations can bring down the average costs per employee, due to better bargaining ability with service providers, as an example with health insurance providers.

5. Geographic location

The cost of living and labour market conditions in different regions can also affect the cost of benefits. For example, companies in urban areas may offer higher salaries and benefits to attract and retain talent, while companies in rural areas may offer lower salaries and benefits due to lower living costs.

6. Legal and regulatory requirements

Employers must comply with legal and regulatory requirements related to employee benefits, such as health insurance, retirement plans, and maternity leave. Failing to comply with these requirements can result in legal penalties and negative publicity.

7. Market competition

Employers may offer competitive benefits packages to attract and retain top talent, particularly in industries with high turnover rates or a shortage of skilled workers. In such cases, the employee benefit expenses are likely to rise.

8. Employee feedback and preferences

Employers should consider employee feedback and preferences when designing benefits packages. For example, offering benefits that align with employee values, such as environmental sustainability or social responsibility, can increase employee satisfaction and engagement.

Understanding these factors can help you as an employer create cost-effective benefits plans that meet the needs of your employees while also aligning with the company goals and budget.

Suggested Read: Employee Appreciation vs Compensation

Strategies to Manage Employee Benefit Expenses Include:

Leverage strategic outsourcing: You can outsource tasks that don’t require in-house teams, to reduce financial strain and manage your employees’ benefits.

Offer flexible benefits plans: Provide employees with the flexibility to choose the benefits that matter most to them, allowing for more control over their compensation package and meeting diverse needs while managing costs.

Re-evaluate your benefits package: Regularly assess your existing benefits package to ensure all components are being utilised and identify areas for adjustments.

Consider different plan design options: Explore options like monthly healthcare and membership plans. For example, Onsurity offers monthly healthcare and wellness membership plans starting at very nominal rates.

Prioritise employee health and wellness: Educate your employees on their healthcare expenses to help them get the most from their benefits. Encourage workers to use preventive screening tests to identify potential health risks and catch health concerns early to avoid expensive procedures and treatments in the future.

Also, Read: Group Health Insurance for Small Business

How Much Do Employee Benefit Expenses Cost to a Company?

The cost of employee benefits to a company can vary depending on factors such as industry, company size, and the specific benefits offered. It’s hard to indicate any particular rates for India, as they vary because of the statutory requirements and also the size and nature of the industry.

However, in countries like the US, employee benefit expenses can be a significant portion of a company’s total compensation costs, with an average of $28.97 per hour for wages and salary and $12.06 per hour for benefits, which is 29.4% of total compensation costs in countries like the US.

This means that for every hour worked by an employee, a company can expect to spend approximately $12.06 on benefits in addition to their wages and salary. For private industry workers, the average cost of benefits per employee is $10.88 per hour, which is around 30% of the total cost of hiring.

In India, companies like Onsurity are making healthcare and wellness plans very cost-effective. In fact, with Onsurity, employers can provide healthcare benefits to their employees starting at just Rs 49 per employee. The company’s plans include a range of benefits such as discounted doctor teleconsultations, medicine delivery, health check-ups, and fitness rewards, all accessible through a user-friendly mobile app.

How to Calculate Employee Benefit Expenses?

To calculate employee benefit expenses, you need to add up the expenses of each benefit for a year and divide the total by the annual salary of your employee. Then, multiply the result by 100 to get the percentage.

For example, let us assume you are incurring the following employee benefits annually:

Performance incentives: Rs 10,000
Travel allowance: Rs 5,000
Insurance: Rs 10,000
Learning benefits: Rs 5,000

Let’s say an employee has an annual salary expense which is Rs 120,000, the total cost of your benefit for that employee is Rs 30,000/Rs 120,000 = 0.25. Now, multiply it by 0.25×100 = 25%. Your organisation’s employee benefits cost per annum for a single employee is 25%.

Please note, that the above is just an illustration and could vary from company to company and country to country.

Also, Read: Group Health Insurance Policy

Conclusion

In conclusion, your employee benefit expenses are a crucial aspect of your company’s overall compensation package for employees. These expenses include mandatory and voluntary benefits, such as health insurance, retirement plans, life insurance, paid time off, and other perks.

The cost of these expenses can vary depending on factors such as the number of your employees, benefit options, and industry standards. Managing these expenses is essential for a company’s financial well-being, and businesses should consider several strategies to control costs while offering a competitive benefits package.

FAQs:

1. What is the employee benefit expense ratio?

The employee benefit expense ratio is a financial metric used to evaluate the cost of employee benefits relative to a company’s total compensation expenses.

2. Is employee benefit expense direct or indirect expense?

These expenses can be both direct and indirect, depending on the specific benefit and how it is offered. Direct ones are those that can be directly attributed to a particular cost object, such as wages, salaries, and other benefits paid directly to the employee.

Indirect employee benefit expenses, on the other hand, are those that cannot be directly attributed to a particular cost object and are typically presented as a part of overheads relating to respective functions, such as manufacturing, administration, marketing, etc.

3. How do you calculate employee benefit expenses?

To calculate this one needs to identify benefits offered, gather cost information, choose a cost-allocation method, account for employer contributions and factor in tax implications.

4. What are employee benefits in accounting?

Employee benefits in accounting refer to the costs and financial reporting requirements related to the benefits provided by an entity to its employees. These benefits can include apart from wages and salary items like medical insurance, housing, paid sick leave, employee stock options, bonuses etc.

5. What do you mean by employee benefits?

Employee benefits refer to additional perks or compensation provided to employees beyond their base salaries or wages. These benefits can include various forms of insurance (such as medical, dental, or life insurance), stock options, training opportunities, paid time off, retirement plans, and more.

6. What is employee benefits in HRM?

Employee benefits in HRM refer to the additional perks and compensations provided to employees beyond their normal wages or salaries. These benefits can include insurance (medical, dental, life), stock options, training opportunities, and more.

7. Is employee benefit expense a fixed cost?

These are considered a fixed cost in HRM because they do not change with the level of production or sales. These expenses include salaries, wages, and other benefits provided to employees, such as contributions to the Provident Fund and staff welfare expenses.

8. Are employee benefits operating expenses?

Yes, employee benefits are considered operating expenses. They are necessary costs for a business to keep things running and are usually repetitive in nature. They are typically shown under a separate line item in the financial statements and are included in the calculation of operating expenses.

9. What are the different employee benefits in India?

In India, employee benefits can include various perks and advantages provided to employees beyond their regular salary or wages. These benefits can be mandatory or voluntary and include health insurance, retirement benefits, training and development, paid time off and life insurance.

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