Employee Benefits & Insurance Requirements

Offering the right benefits keeps employees healthy, reduces turnover, and helps you avoid big fines or lawsuits. But the U.S. system mixes federal rules, state rules, and market practice — so some benefits are legally required, some are optional but highly recommended, and many details depend on your company size and location. Below I explain the core legal requirements, common voluntary benefits, compliance must-dos, and practical next steps you can implement this week.

Table of Contents

Quick Roadmap

Mandatory employer insurance & benefits (what the law requires)
Key federal rules that affect many benefits (ACA, ERISA, COBRA, FMLA)
State-driven requirements (workers’ comp, paid leave, sick pay, unemployment)
Best-practice voluntary benefits that attract talent
Compliance checklist & practical next steps

Mandatory employer insurance & benefits (what most employers must provide)

Workers’ Compensation — Almost every state requires it.
Employers generally must carry workers’ compensation insurance to cover medical care and partial wage replacement for employees injured on the job. Rules and premium rates vary by state and industry risk. Get a policy from your state fund or a private insurer; penalties for failing to carry coverage can be severe.
Unemployment Insurance (UI) — Employer-paid, state-administered.
Employers pay state UI taxes (and federal FUTA) to fund temporary benefits for workers who lose jobs through no fault of their own. Each state sets tax rates and filing rules. Employers must register with the state unemployment agency.
Disability Insurance (in some states) — Employer or employee contribution depending on state.
States such as California, New York, New Jersey, Rhode Island, and Hawaii have state disability or paid family leave programs funded by employee payroll deductions or employer contributions. Check your state’s program. (See the state labor agency for details.)

Key federal laws that shape employer benefits

Affordable Care Act (ACA) — employer shared responsibility
If you are an Applicable Large Employer (ALE) — generally 50 or more full-time employees or full-time equivalents — you must offer “affordable, minimum-value” health coverage to full-time employees or face potential IRS penalties and reporting obligations. Even smaller employers may want to offer coverage to attract talent; small-employer tax credits exist for some.
COBRA — continuation coverage for group health plans
If a group health plan is sponsored by an employer with 20 or more employees, federal COBRA rules generally require the plan to offer a temporary continuation of coverage (typically 18–36 months in many cases) to employees and dependents who lose coverage due to certain qualifying events. Employers must provide required notices and allow elections. Note: some states have “mini-COBRA” rules that apply to smaller employers.
ERISA — retirement & welfare plan standards
The Employee Retirement Income Security Act (ERISA) sets minimum federal standards for many private retirement and welfare (including health) benefit plans, imposes fiduciary duties on plan managers, and requires certain reporting and disclosure. If you sponsor a 401(k) or other plan, ERISA compliance (fiduciary duty, plan documents, disclosures) is critical.
FMLA — unpaid, job-protected leave
Covered employers (generally 50+ employees within a 75-mile radius) must provide eligible employees up to 12 weeks of unpaid, job-protected leave in a 12-month period for specified family and medical reasons, with continuation of group health insurance. Eligibility requires 12 months’ service and 1,250 hours worked during the relevant period. State laws may offer broader protections.

State & local requirements you must check right away

Workers’ compensation rules vary substantially — who is covered, exemptions (e.g., some small agricultural employers), and required notices differ by state. Get state guidance and call your insurance agent.
Paid sick leave / paid family leave: Many cities and states (e.g., California, New York City, some municipalities) require paid sick leave or paid family leave beyond federal FMLA. Check local laws for accrual rates, carryover, and notice requirements.
State “mini-COBRA” laws can extend continuation rights to employees of small employers.
State unemployment insurance tax registration and rates — register with your state once you hire your first employee.

Voluntary benefits that move the needle (and why employers offer them)

Even when not required, these benefits help recruit and retain staff:

Group health insurance (medical, dental, vision) — the most expected core benefit. Small employers may access SHOP Marketplace plans or use brokers.
Retirement plans (401(k), SIMPLE IRA, SEP IRA) — offering a plan (with or without matching) increases employee loyalty; ERISA and fiduciary rules apply to many plans.
Paid time off (PTO), parental leave, flexible schedules — competitive differentiators. State laws may also mandate some of these.
Short-term and long-term disability insurance — either employer-paid or voluntary, these protect employees’ incomes if they become disabled.
Voluntary benefits (accident insurance, life insurance, pet insurance, student loan repayment assistance) — low-cost to employer (often employee-paid through payroll deduction) but high perceived value.
Wellness programs and EAPs (Employee Assistance Programs) — reduce absenteeism and support mental health.

Common Compliance Traps (and how to avoid them)

Misclassifying workers (employee vs. contractor) — misclassification can trigger back taxes, fines, and benefit obligations.
Failing to count FTEs correctly for ACA — counting full-time equivalents incorrectly can change ALE status and trigger penalties. Use IRS guidance and payroll records.
Missing COBRA notices or deadlines — COBRA has strict timing and notice rules; noncompliance leads to penalties.
Ignoring state leave or paid sick laws — local rules may apply even if federal FMLA does not.
Neglecting ERISA fiduciary duties for retirement plans — document decisions, follow plan terms, prudently select investments.

Practical Checklist — What To Do This Month

Inventory existing benefits & policies. Document health plans, retirement plans, leave policies, workers’ comp, and who is covered.
Confirm company size for federal rules. Count full-time employees and FTEs to determine ACA ALE status and FMLA coverage. (50 FTE is a common threshold for ACA and FMLA implications.)
Register for state UI & workers’ comp (if you haven’t). Obtain policy numbers and display required workplace posters.
If you offer group health, confirm COBRA obligations and prepare notices and an administrative workflow for eligibility changes.
If you sponsor a retirement plan, review ERISA obligations (fiduciary training, fee transparency, plan documents, Form 5500 filing if required).
Check state & local leave laws where your employees work — update handbooks and PTO accruals accordingly.
Talk to your broker or payroll provider about automated alerts for ACA reporting, COBRA deadlines, and state filings.

Cost & Budget Considerations

Workers’ comp rates vary by industry risk and your claims history — a safe workplace and return-to-work programs reduce premiums.
Health insurance is often the single largest employee benefit cost. Small employers can shop plans, consider defined-contribution arrangements, or offer QSEHRA/Individual coverage HRAs for flexibility.
Retirement matching is discretionary but historically provides high ROI in retention — even modest matches (e.g., 3–4%) greatly increase participation.
Voluntary benefits shift cost to employees via payroll deduction but increase perceived value.

Best Practices — Policy & Communication Tips

Publish a clear benefits summary (SBC for health plans) and an employee handbook covering eligibility, leave request procedures, and COBRA rights.
Use a benefits administrator or payroll vendor to automate reporting (ACA, COBRA, state filings).
Train managers on leave requests, accommodation signals (FMLA/ADA), and compliant communications.
Conduct an annual benefits audit: costs, participation rates, employee surveys, and compliance review.

Top Resources

U.S. Department of Labor — FMLA, COBRA, ERISA guidance.
IRS — ACA employer provisions and ALE guidance.
State labor and insurance departments — workers’ compensation, paid leave, and unemployment guidance (search “[your state] workers’ compensation” or “[your state] unemployment insurance”).

Short FAQ

Q: Do I have to offer health insurance if I employ 10 people?
A: No federal mandate forces small employers (<50 FTE) to offer health insurance, but offering it helps recruitment and may make you eligible for tax credits if you qualify. Check state rules for any local requirements.

Q: When does COBRA apply?
A: COBRA typically applies to group health plans of employers with 20+ employees in the prior year; it allows eligible individuals to continue coverage for limited periods. Employers must provide timely notices.

Q: Are small employers covered by FMLA?
A: FMLA generally applies to employers with 50 or more employees within a 75-mile radius; smaller employers may be subject to state leave laws.

Final takeaway — a practical one-sentence plan

Start with a benefits inventory, confirm whether federal thresholds (50 FTE for ACA/FMLA; 20+ for COBRA) apply to you, secure workers’ comp and UI registrations, and automate ACA/COBRA/state filings through your payroll or benefits administrator — then layer in voluntary benefits that match your budget and hiring goals.