A Simple Guide to Statutory vs. Voluntary Benefits in the US

Benefits are an essential component of a competitive employment package and can help attract and retain top talent. In fact, 40% of employers believe workers leave their job for employment with better benefits.

Regulations on what constitutes statutory and voluntary benefits can differ between countries and jurisdictions. In the US, compensation and social security are compulsory under the law, whereas health insurance and retirement plans are not, though they are increasingly expected by workers.

In this article, we will discuss voluntary and statutory benefits, what is typically offered by employers, the relevant tax implications of a benefits package, and why benefits matter for both employers and employees.

Voluntary vs. statutory benefits: A comparison

There are several key differences between statutory and voluntary benefits. Those include whether these perks are legally mandated, how they are funded, their purpose, and the relevant tax implications of the packages. An at-a-glance table with the key distinctions is provided below:

Statutory benefits: What you must offer by law

Statutory benefits are law-mandated benefits that employers must provide their employees to ensure a baseline level of security and living standards for workers. In the US, certain benefits are stipulated by the federal government, but individual states can have their own rules and regulations.

Federal mandates

The US federal government requires all employers to offer their employees the following benefits:

Social Security and Medicare

Social Security and Medicare are funded by Federal Insurance Contributions Act (FICA) payments. FICA is a federal payroll tax that is paid by both employers and employees. Employers are obligated to set up and contribute to FICA taxes, as well as correctly withhold contributions from the employees, and submit the funds to the Internal Revenue Service (IRS). In general, employers and employees split the FICA costs equally, with each paying 6.2% to Social Security and 1.45% to Medicare.

Unemployment insurance

Unemployment insurance is a mandatory employee benefit that obliges the employer to pay a weekly allowance to qualifying individuals who have lost their jobs through no fault of their own. Individuals are paid this financial support for a certain period of time (up to 26 weeks in most, but not all, states) or until they find alternative employment.

Unemployment insurance is funded by Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA). Employers pay both FUTA taxes at the federal level, and separate SUTA taxes to the state, with different states having different rates and regulations regarding what is owed.

In general, employers are required to pay 6% FUTA tax on the first $7,000 USD of the employee’s salary for the year, but many employers also qualify for a 5.4% SUTA credit that allows them to reduce their tax burden.

Learn more about state UI rates with our comprehensive article.

Workers’ compensation

Workers’ compensation is a statutory benefit intended to aid employees who are unable to work as a result of suffering work-related injury or illness. This benefit provides assistance to the employee while also limiting the employer’s liability. The employer is required to cover all injury or illness-related treatment, while also providing some limited financial support (usually a percentage of the employee’s salary).

Employers are responsible for the full cost of insuring against workers’ compensation claims, either by self-insurance (by setting aside funds to pay compensation claims) or through purchasing a private or state-run insurance policy.

Family & Medical Leave (FMLA)

FMLA allows employees with certain medical or family difficulties to qualify for 12-week job-protected leave. This leave is unpaid, and can include the birth of a child, dealing with serious illness or injury, or caring for a family member suffering from serious illness or injury. This benefit must be offered by employers with more than 50 employees within 75 miles, provided the employee has worked at least 1,250 hours in a 12-month period.

State-specific statutory benefits

Apart from the statutory benefits mandated by the federal government, some states may require employers to cover additional provisions.

For example, states like California and New York stipulate that employers must offer paid family and medical leave (PFML) to all their employees. Similarly, disability benefits are part of some states’ compulsory packages (e.g., Hawaii, Rhode Island).

State benefits can vary substantially from state to state and require continuous attention. With Deel PEO, you can ensure that you remain compliant at all times across all 50 states..

What are voluntary benefits?

Voluntary benefits are employment perks that employees have the option to participate in. The employee pays (partially or fully) for the benefit via payroll deductions.

Voluntary benefits are not required by law, but they provide value for both employees and employers. For employees, these optional perks can contribute to a better quality of life and overall job satisfaction by enabling access to medical care, financial support programs, easier or lower-cost products and services, and more. For employers, voluntary benefits are a way to boost worker productivity and retention, strengthen the employer-employee relationship, and mitigate burnout risk.

What voluntary benefits do employers commonly offer?

Voluntary benefits include a range of products and services, such as:

• Additional health insurance (dental, vision, hospital, and critical illness insurance)
• Retirement plans
• Paid Time Off (PTO)
• Various flexibility, wellness, and health programmes
• Additional insurances (e.g., life insurance, accident insurance, pet insurance)
• Financial support programmes (such as student loan repayment assistance)

Health insurance plans

Medical insurance is a particularly popular type of voluntary benefit in the US. In this section, we will explore some of the most commonly offered plans, the services that these plans cover, and who pays the contributions.

Health Maintenance Organization (HMO)

HMOs operate within a limited network of doctors and medical facilities. Employees will need to choose a primary care physician (PCP) as their first point of contact, and any specialist visits will require a referral from this PCP.

HMO costs are typically covered by both the employer and the employee, with each employer deciding what amount/share they will subsidize. The employee’s portion is deducted from their paycheck.

Preferred Provider Organization (PPO)

In general, PPOs are more widely used than HMOs, because they offer more flexibility. Unlike HMOs, PPOs do not require patients to get a referral, and out-of-network care is allowed, though at a higher out-of-pocket cost. Similarly to HMOs, employers pay some of the PPO premium, but the exact contribution varies from employer to employer.

High-Deductible Health Plan (HDHP) and Health Savings Account (HSA)

HDHPs and HSAs are frequently offered together: you need an HDHP to have an HSA. HDHPs have cheaper premiums but higher deductibles, and tend to cover preventative care such as check-ups and screenings fully. HDHPs are usually paid for by the employee, though employers might choose to pay a portion of the cost.

HSAs allow you to set aside funds pre-tax to use for a wide range of qualified medical expenses (dental, prescriptions, vision, doctor visits, etc.). HSAs can be entirely covered by the employee, the employer, or both. HSA funds belong to the employee, and any amount that is not spent by the end of the year is rolled over to the following year for the employee to use.

Flexible Spending Account (FSA)

FSAs are another type of tax-advantageous account where employees can reserve money for medical expenses. FSAs can be used with other healthcare plans, but not an HSA, and are exclusively offered by employers.

Unlike HSA, FSA funds do not roll over at the end of the year, and any remaining money stays with the employer, who is the account owner. FSAs are financed by the employee, but some employers also make contributions.

Health Reimbursement Arrangement (HRA)

These plans are entirely funded by the employer and allow employees to request reimbursement for qualified medical expenses and premiums. Employers can generally claim tax deduction on HRAs, while employees use the funds tax-free.

You can learn more about Medicare and private medical plans from our all-in-one resource on the topic.

Retirement plans (401(k), Roth 401(k), IRAs)

Another voluntary benefit that employers offer is retirement plans. Employees pay into their retirement pot through a payroll deduction, with the funds typically being invested in various stocks, bonds, and funds to help them grow over time. Below, we summarize some of the most common retirement options:

401(k)

A 401(k) is a US retirement savings plan that is widely offered by private sector employers. Both employers and employees contribute to the pot based on a set percentage of the employee’s salary, with many employers matching their employees’ contributions up to a threshold.

Deductions are made pre-tax, meaning individuals’ taxable income is lower at the end of the year. Employees can choose their investment option based on their risk tolerance, age, and retirement goals.

Some 401(k) plans have a so-called vesting schedule. This means that although employees fully own their contributions, a certain amount of time must pass in employment before that’s the case for the employer contributions.

Two types of vesting schedules are usually used: cliff vesting (full ownership of the fund is given after three to five years of service) and graded vesting (employees earn an increasingly higher share of the employer contributions the longer they serve).

Roth 401(k)

Roth 401(k) is a variation of the 401(k) plan where contributions are taxed upfront, but withdrawals later on are not, provided you are at least 59.5 years of age and have had the account for at least five years at the point of withdrawal. This way, the pot is invested and grows tax-free. Employer contributions typically match the employee’s ones up to a point, just like in the traditional 401(k) case, with the matching occurring pre-tax.

Individual retirement accounts (IRAs)

These are pension accounts that individuals can open independently of an employer. You can take advantage of two possible types of tax advantages, similar to a 401(k) and Roth 401(k). You can either pay tax in the year of contribution or at the point of withdrawal.

Paid Time Off (PTO) and parental leave

In the US, PTO is not required by law at the federal level. Some states do mandate paid sick and parental leave, but this is not the case nationwide. As such, these allowances are considered part of the voluntary benefits package.

PTO is a bank of paid days off that employees can use at their discretion for any reason. In the US, employers can track PTO, sick days, and parental leave separately, but many also bundle all three together.

Paid parental leave (and paid PTO, in general) is becoming increasingly expected by employees. Employers who offer a comprehensive PTO benefits package are more competitive when attracting quality talent.

Flexible work and wellness programs

Health insurance, pension plans, and PTO are some of the more traditional voluntary benefits offered by employers. However, in recent years, employees are increasingly seeking jobs that come with flexible work options and wellness programmes.

These perks can include remote or hybrid work setups, flexible working, or even reduced hours on certain days (e.g., Fridays). These options generally result in better work-life balance for employees, reduced stress, and higher productivity, all of which directly benefit the employer-employee relationship.

Another attractive set of benefits that is gaining traction is the provision of wellness and well-being programmes, gym memberships, and other health-related initiatives. Just like flexible work, these contribute to a healthier, more engaged workforce.

With the shift away from office culture and increasing focus on health and well-being, companies that can accommodate more comprehensive packages are likely to be more successful in attracting and retaining workers.

How and when to enroll in benefits

Employees can typically enroll in benefits annually during a period called ‘open enrollment’. This timeframe is decided by the employer, but typically happens in the fall to allow the changes to take effect from the start of the year. During open enrollment, employees can opt in and out of various benefits, choose different plans, add a dependent or a spouse, and so on.

Outside of that period, employees can change their preferences for benefits provided they have undergone a qualifying life event (QLE), such as a change in marital status, address, birth or adoption of a child, or death in the family. In this case, employees can make changes to their plans within 30 to 60 days of the event, depending on the specific benefit plan.

New employees also don’t have to wait for an open enrollment window, as they are enrolled and can select their preferences within a 30 to 60-day period from their start date.

It’s essential to keep employees’ information up to date, especially beneficiary designations, which ensure the right individuals receive assets and benefits in case of a worker’s death.

Managing these processes, deadlines, and admin can be daunting. With Deel’s all-in-one HR platform, you can streamline your onboarding, benefits, and payroll needs in one unified place.

Understanding the tax impact of employee benefits

In the US, benefits packages can have substantial tax implications for both employers and employees. Some benefits are subject to tax, but others are tax-deferred or tax-free.

Tax-advantaged benefits accounts

Tax-advantaged benefit accounts allow you to have a more favorable tax outcome by reducing your overall taxable income, growing your savings tax-free, or deferring taxation. Examples of these include HSA and FSA plans.

HSA funds have a triple tax advantage that allows them to be tax-deductible, to be withdrawn tax-free, and also grow tax-free via investments. HSAs can only be opened with a HDHP plan, but roll over if unused and can be transferred if there is a job change.

FSAs do not roll over (use-it-or-lose-it rules apply) and are employer-owned, so they cannot move with the employee in case of a job change. However, contributions and withdrawals are tax-free.

A Dependent Care Account is another type of tax-free account that might be offered by an employer. This account is intended to help with expenses associated with child or dependent care.

How benefits appear on the W-2

Form W-2 is the official document that employers are required to provide to their employees each year. The W-2 form shows the amount of money the employee received through wages, bonuses, and tips, as well as any taxes and benefits withheld.

Some employees also receive fringe benefits, which are additional perks such as company cars or gym memberships, which are subject to tax. These are also reflected in the W-2 form, as they are considered part of the employee’s gross income.

Benefits paid by the employer (e.g., health insurance benefits) are not taxable to the employee, but pension plan contributions will appear on the W-2 form.

Voluntary benefits aren’t required—but they are expected

Employers are mandated to offer certain statutory benefits, such as social security and workers’ compensation, to their employees to remain compliant. However, many employers also offer additional perks, which employees can choose to opt into.

These voluntary benefits allow employees to stay competitive in the job market and attract and retain talent. A well-balanced benefits package helps employers stay ahead, ensures worker satisfaction, and boosts productivity.

Deep PEO allows businesses of all sizes to offer Fortune 500-caliber benefit packages while also handling all of your payroll and HR processes.

To find out more, book a quick demo with our Deel team.