What Is the Average Cost of Benefits Per Employee? The Complete Guide

Budgeting for employee benefits is one of many tasks that HR teams have to grapple with, and it can be quite a head-scratcher. How can you provide an enticing mix of benefits at a reasonable cost? 

Prepare to do some serious number-crunching as our guide digs deep into the latest industry data. We’ll introduce you to some hard figures on the average cost of benefits per employee and explain how to maximize the ROI of your offering so it’s financially tenable. 

What is the average cost of employee benefits?

BLS data reveals the average hourly rate business owners paid in employee benefits in December 2022. The results depend on the sector: 

• $13.17 per hour for civilian workers 
• $11.86 per hour for private industry workers
• $21.91 per hour for state and local government workers

Based on a 35-hour work week, the average monthly cost of employee benefits is: 

• $1,997.36 for civilian workers
• $1,798.69 for private industry workers
• $3,322.87 for state and local government workers 

Plan out your annual costs using the average cost of employee benefits per year: 

• $23,969.40 for civilian workers 
• $21,585.20 for private industry workers
• $39,876.20 for state and local government workers. 

What is the typical ratio of benefits to base salary?

The ratio of benefits to salary is approximately 1:2, or a third. As an example, for every $10 you spend on employee benefits, you’ll spend $20 on salary, for a total of $30. But the averages differ slightly from this example, depending on your sector: 

• The average civilian worker costs an employer $42.48 per hour in total compensation — 31% on benefits and 69% on wages. 
• The average private industry worker costs an employer $40.23 per hour in total compensation — 29.5% on benefits and 70.5% on wages. 
• The average state and local government worker costs an employer $57.60 per hour in total compensation — 38% on benefits, and 62% on wages. 

How do benefits platforms structure their pricing?

Whether you’re budgeting monthly, quarterly, or annually, your employer costs depend on the pricing structure of your preferred provider organization. Some common options are: 

• Per employee per month (PEPM): This is the most common pricing model and is easy to budget. You multiply your PEPM fee by your number of employees. For example, a $10 PEPM fee x $200 employees = $2,000. 
• Tiered pricing: Some benefits providers craft pricing based on the number of employees in a company, with bulk discounts as your workforce increases. 
• Customized pricing: This involves a detailed assessment of the company’s workforce and benefit needs to create a tailored package. 
• Pay-as-you-go pricing: Workers’ compensation commonly falls within PAYG pricing and is based on real-time payroll data. 
• Usage-based pricing: Some benefits platforms may charge based on the usage of specific plan types, such as healthcare or retirement benefits.

What affects the cost of your employee benefits program?

No two employee benefits programs are alike — the amount you’ll pay depends on numerous factors, including: 

1. Company size

The most obvious driver of employee benefits cost is the size of your business. Larger companies may be able to negotiate better per-employee rates. But smaller businesses with fewer employees may access discounted plans through group policies or self-funded plans. 

2. Breadth of your benefits offering 

Trying to offer every possible benefit will come at a premium. However, if you consolidate a wide variety of benefits into a single flexible benefits account, you’ll save money and offer your employees more choices. 

3. Annual increases

Build the potential for price increases into your annual budget as your benefits provider will factor inflation, rising healthcare costs, and other externalities into their fees. 

Example: PwC projected a 6.5% growth in the cost of medical care spending in 2022. The company notes that the aftereffect of the pandemic has been a key inflator in driving prices up. 

4.  Administrative mistakes 

The process of setting up and maintaining an employee benefits program can involve some costly errors, including: 

• Accidentally charging employees the wrong amount for coverage options
• Missing open enrollment dates 
• Forgetting to terminate employee coverage within a designated period of time 

5. Geographical location 

Does your organization’s location matter? It could. Bay Alarm Medical research finds that higher average employee benefits are associated with larger cities like San Francisco and New York. Higher-rate states include Arizona, which is home to eight Fortune 500 companies. 

6. Changing employee needs 

Employee benefits aren’t a set-it-and-forget-it situation. As your organization evolves, so will the needs of your workforce — and you’ll need to adjust their individual policies accordingly. 

Example: John is a 25-year-old single man when he joins your company. Five years later, he’s married with a toddler and another baby on the way. His spouse and children are now included in his health insurance program, so you should budget for the family premium costs associated with John’s new plan.

7. Foreign exchange fees 

Factor in exchange rate fees if you work with a non-domestic benefits provider or a distributed team with employees from many different countries. This can be tricky to budget for with fluctuating currencies — one month, you may pay more than expected, and the next, you could gain a little back. 

8. Implementation fees 

Benefits providers may charge a one-time fee to cover setup and onboarding costs. It’s worth asking your provider whether they offer any discounts or promotions to keep these costs down. 

9. Replacement card fees 

If an employee’s benefits membership card is lost or stolen, some providers charge a replacement fee every time, which can add up quickly. Be aware of any such costs before signing a contract. 

What employee benefits should you budget for?

Some benefits are mandatory, but voluntary plans can support your employee retention and engagement goals. Consider a mix of the following: 

1. Medical insurance

Health insurance coverage typically takes up the lion’s share of the overall benefits budget. The average cost of health benefits per employee depends on the sector: 

• Employers will pay civilian workers $3.28 per hour worked towards health benefits — 7.7% of their total compensation package. 
• Employers will pay private industry workers $2.82 per hour worked towards health benefits — 7% of their total compensation package. 
• Employers will pay state and local government workers $6.36 per hour worked towards health benefits — 11% of their total compensation package.  

The precise cost of employee health coverage may depend on pre-existing health conditions, the annual deductible, and your contribution strategy — specifically, the percentage of contribution you offer to pay before your workers chip in. Health reimbursement arrangements and health savings accounts provide flexibility when offering coverage to employees and can bring down your overall spending. 

2. Workers’ compensation insurance 

In the event of an employee becoming injured or falling ill while doing their job, workers’ compensation insurance covers the related medical expenses and any lost wages. 

Around 1% of an employee’s compensation package goes toward this insurance, but the exact cost depends on what the job entails and whether your company is in a high-risk industry.  

Example: A construction worker who works at height would typically have a higher insurance premium than an office worker at a tech company or law firm. 

3. Disability insurance 

Disability coverage will pay the annual salary of an employee who can no longer work due to an injury, accident, or non-work-related illness. The cost of providing this reassuring coverage is exceptionally low for companies. Short-term and long-term disability makes up no more than an average of 0.3% of the total compensation package for workers across all sectors. 

Surprisingly, a recent U.S. Bureau of Labor Statistics report finds that only 35% of private industry workers have access to long-term disability insurance. This percentage extends to 43% for short-term cover. Adding this critical healthcare policy to your benefits package could be a game-changer for talent acquisition and employee retention strategies. 

4. Life insurance 

Life insurance benefits are an essential form of financial security for your employees. This common type of cover provides a lump sum payment to the surviving family members of an employee who passes away.

Much like access to disability insurance, a life policy costs around four to eight cents for every hour worked, amounting to just 0.1% of the total compensation cost. 

5. Stock purchase plan 

This type of employee benefit allows your staff to purchase company stock with employee discount rates. Startups might offer incredibly generous stock options at around 10% of the market value, which can be a huge incentive for talented employees.

In other situations, employers may match a percentage of the stocks purchased by their staff, making it an attractive option. 

6. FICA contributions 

Federal Insurance Contributions Act (FICA) contributions are taxes that pay for Social Security and Medicare services. Mandatory employer and employee contributions are 7.65% of the salary, for a total FICA contribution of 15.3%. 

7. Unemployment insurance 

According to the Federal Unemployment Tax Act (FUTA), employers must contribute towards an employee’s unemployment insurance. This pays out if they are laid off or become unemployed through no fault of their own. 

The cost of FUTA and the criteria will vary depending on the state, but BLS data suggests that the price is around 0.1 to 0.4% of an employee’s total compensation. 

8. Voluntary benefits 

The benefits listed above are staples your employees can’t do without. But additional benefits can differentiate your offering and win hearts and minds. Some options include: 

• Paid vacation time 
• Paid sick time
• Childcare support 
• Tuition reimbursement 
• Cell phone stipends
• Pet insurance 
• Meal allowances
• Mental health benefits 
• Wellness stipends 
• Vision and dental insurance 
• Work from home stipends
• Student loan repayments 

These perks are a chance to get truly creative and respond to what your employees want, need, and expect from their employer. The cost of offering voluntary benefits will vary significantly, so it’s up to you to take it from here and research the most suitable rewards for your employees. 

How to maximize your employee benefits budget

Naturally, when pricing up your total benefits spend, you’ll want to get the most bang for your buck. Whether your goal is to save money on the overall cost of benefits or to maximize what your employees receive, follow these nine tips to stretch those dollars further. 

Tip 1: Focus on the ROI of your benefits 

Few companies can offer all the benefits, as nice as that would be. Instead, employers must focus on selecting perks and stipends that provide the most value to their employee demographic. Maximizing value boils down to understanding why you’re offering benefits in the first place — what will they bring to your business plans? Some popular reasons include retaining employees, improving job satisfaction, and providing rewards that support employees with work-life balance so they can bring their whole selves to work. 

Steven Cardwell, VP of Benefits, Well-Being, and Retirement at Premise Health, explains why it's essential for employers to see a return on investment from their benefits programs: 

"Cost is important; we want those dollars in the field, we need them in our growth, we need them to support those that are supporting our clients." 

Learn what your employees want, not by guessing, but by asking them. Employee surveys are one way to understand the sentiment around benefits, but Liam Liu, Co-Founder and CMO of ParcelPanel, prefers to use focus groups to learn about employee preferences. He told us: 

“Through focus groups, we’ve established that benefits prioritizing work-life balance are the most important to our employees. We also consider the budget available and any compromises employees will make when deciding between different options.”

Tip 2: Choose a benefits provider with no hidden fees 

When selecting your insurance company or benefits provider, ensure you understand the package fees. Ask upfront about fees associated with support, exchange rates, or any other costs that could come up. 

A good provider should be transparent and make all fees known before you commit to any contracts, as well as provide discounts or promotions. 

Example: Benepass doesn’t charge any foreign exchange, support, or replacement card fees, making budgeting a cinch. 

Tip 3: Select flexible benefits 

Creating the perfect blend of benefits to satisfy your employees is an arduous task, and this becomes even more complex in larger organizations. HR Works podcast host Josh Zygmont believes that personalization is one of the key trends in the benefits space, allowing a company’s offering to evolve in response to employee needs. He explains: 

"It’s the trend we've seen across the board; you get into your car, and everything’s set to your personal settings from the moment you go. The same could be said for benefits programs."

Tony Angeleri, Vice President of Lone Wolf Paintball, agrees: 

“Our employees are the ones we’re lining up these benefits for! Instead of a blanket benefits program, go the extra mile to personalize specific options so that each employee is allowed that one benefit they’ve been looking forward to.”

Offer personalization without sacrificing budget by choosing a lifestyle spending account with customizable benefits. You’ll empower your employees to make decisions about which benefits are the right fit for themselves and their families.

Tip 4: Conduct employee benefits benchmarking 

Benchmarking is the process of comparing your employee benefits program with similar programs at other organizations in your industry. You’ll measure your program against the competition’s to determine if you’re wasting money on benefits other companies aren’t providing and don’t deliver the ROI you want. For a comprehensive picture, compare against local and national averages or even global benefits if you’re a remote-first company.   

Benchmarking is especially useful if you’re considering renewing or changing your benefits provider, enabling you to negotiate a better price and ensure your program is competitive. 

Check out the Benepass Benefits Benchmarking Guide for a headstart with your comparisons, then follow these expert-backed tips on conducting benchmarking from HR leaders in the field. 

Tip 5: Save time on benefits admin 

The cost of the benefits themselves doesn’t represent the finish line of employer spending. Consider the time it takes your HR team to deploy the benefits and manage any changes throughout the cycle, for example, when employees join or leave the company. 

Get around this by selecting a benefits provider like Benepass that consolidates all your programs in a single platform, eliminating the administrative burden of dealing with multiple providers. 

Tip 6: Choose benefits programs with built-in forfeiture 

Your employees won’t use all their benefits to the max. Whether they forget, aren’t interested, or don’t understand what’s available, dollars will always be left on the table. Some benefits providers will pocket the difference, but others, like Benepass, offer employee forfeiture. With Benepass, you can set expiration dates for benefit funds and recoup any unspent money. 

Example: If you offer your employees a $100 food and beverage allowance but they only spend $75, the money isn’t lost. Instead, your company will receive the $25 back to put toward other benefits. 

Tip 7: Consolidate your point solutions

Many companies use a handful of point solutions to administer their benefits — one provider might help you administer wellness benefits while another administers a food program. The more point solutions you have, the more fees you’ll rack up as well. Consider opting for a vendor that allows you to consolidate your programs in one platform, reducing costs and improving the employee experience along the way.

Example: Benepass empowers companies to consolidate all their benefits programs — both perks and pre-tax — in one platform. The cost of adding new programs is cheaper than bringing on another point solution. You can also cover a wider range of expenses in a single account by opting for a lifestyle spending account.   

Tip 8: Understand which benefits are tax-advantaged 

Some of the costs related to your employees’ benefits are tax-deductible. When selecting your provider, understand which products are tax-advantaged and how to capture these deductions. 

Example: You may need to supply documentation for some benefits as evidence to support non-taxability. In case of an audit, Benepass simplifies this by providing automated spending data from employee card transactions and receipts to validate eligible spending. 

Tip 9: Re-evaluate employee benefits packages annually

Here’s the stinger: Your benefits packages will need adjusting every year in time for open enrollment, which usually happens in the fall. 

Your employee needs change, along with industry trends, so you must keep your benefits packages up-to-date with the latest rewards. Typically, you can expect an annual premium adjustment which is an excellent opportunity to check in and review whether your current benefits offerings are still relevant and performing in line with your expectations. 

Calculate your average employee benefits costs with Benepass

Benepass supports companies in distributing meaningful employee benefits that support their workforce’s personal and professional well-being. But we’re not about breaking the bank. 

Our flexible benefits accounts enable your HR teams and employees to stay in control of budgeting and allowances with real-time insights into how your workers use their benefits. 

Learn more about our innovative employee benefits approach by booking a demo or contacting our sales team at sales@getbenepass.com to explore the details.