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What are ancillary employee benefits (& should you offer them)?

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Chances are your employees are more anxious nowadays.

They’re more concerned about the health of themselves and their loved ones. They may have more financial worries and concerns about their future employment than they did prior to the COVID-19 pandemic.

As their employer, you can minimize some of that uneasiness by providing ancillary benefits to their health insurance package.

Ancillary employee benefits definition

Ancillary employee benefits complement your existing group health insurance plan. They can help pay for treatments and other health-related expenses that traditional health insurance does not cover.

Your company can offer ancillary employee benefits as either:

  • Voluntary benefits, which means employees pay 100 percent of the premium. The benefit for the employee is that they will pay a lower premium buying as part of a group plan than if they attempted to buy an individual policy.
  • Employer-contributory benefits, which means the employer pays anywhere from half to all of the premium cost for employees. As with health insurance premiums and retirement plan contributions, the employees’ share of ancillary benefits is deducted from their paychecks.

As with health insurance, employees pay their share of the premium on ancillary benefits through payroll deduction. When employees use benefits, a claim is submitted and the benefit amount is paid to the provider. For life insurance claims, the claim would go directly to the policy’s beneficiary.

Examples of ancillary employee benefits

Disability insurance: Offering a group disability plan to your employees can help them in the event they become too ill or injured to work for an extended period. Short-term and long-term disability insurance replaces some of the pay workers lose when they cannot work because of an injury or illness that is not related to their job.

According to the Bureau of Labor Statistics, 42 percent of private industry workers had access to short-term disability insurance plans offered by their employers in 2018. About 34 percent had access to employer-sponsored long-term disability plans.

Employers that offer group disability insurance typically pay the full cost. According to BLS, private employers in 2018 paid the full cost for 85 percent of workers with short-term disability coverage and 94 percent of workers with long-term disability coverage.

Critical illness insurance: Critical illness insurance (CII) pays a lump sum benefit if you are diagnosed with a covered illness. It is designed to help people cover the cost of treating and recovering from expensive illnesses and procedures, such as heart attacks, strokes, and cancer. Critical illness insurance can pay for costs not covered by health insurance, such as deductibles and out-of-pocket costs. You can also use the funds for travel expenses and your regular bills.

Accident insurance: Accident insurance pays out a lump sum if you incur specific kinds of injury as a result of an accident. It covers a variety of injuries resulting from an accident. These may include dislocations, lacerations, concussions, burns and other serious injuries. It can supplement health insurance if an accident causes you to have medical expenses that your health insurance doesn’t cover.

Life insurance: Group life insurance offers employees the advantage of being guaranteed coverage without having to go through underwriting.

Vision and dental coverage: These are among the most common ancillary employee benefits.

Pet insurance: Pet ownership has grown during the pandemic as people look to animals for comfort and companionship. Offering employees pet insurance will enable them to keep their pets healthy.

Wellness benefits: You can offer a number of wellness benefits that give employees an incentive to stay healthy, which can help with productivity and lowering health-related costs. Wellness benefits can include paying a portion of the cost for a gym membership or exercise classes.

[ Related: What is financial wellness & why is it important ]

Why you should offer ancillary employee benefits

It wasn’t long ago that offering your employees health insurance and a retirement plan was sufficient. But workers are becoming more aware of the need for insurance that protects them beyond what their health insurance covers.

Here are some ways your company can benefit from offering ancillary employee benefits:

  • Give employees low-cost benefits. While everybody is aware that traditional health insurance is extremely costly to both employers and employees, ancillary employee benefits cost comparatively little. Plus, by having multiple ancillary benefits, employees can choose which ones are right for their families.
  • Give your employees peace of mind. Prior to the 2020 pandemic, many people didn’t consider the possibility of becoming critically ill or disabled. People are understandably more concerned with their health and that of their families. And the less people worry about what might happen, the more they can focus on their work.
  • Give employees more incentive to stay. Employees may be more inclined to stay at a job that gives them comprehensive insurance coverage and preventative benefits.
  • Make your company more competitive when it comes to recruiting talent. One of the effects of the pandemic is the move toward working from home. This may become standard procedure for a number of firms even after the pandemic ends. That means your company is not only competing against local businesses for talent, but other businesses across the country. Offering ancillary benefits to your compensation package can make you more competitive.
  • Take advantage of tax savings by establishing a Section 125 plan. The IRS established Section 125 to enable employees to receive certain benefits that are non-taxable. A Section 125 plan is also known as a cafeteria plan.

Both employees and employers can reduce their tax obligations with a Section 125 plan. Employees who spend $200 a month in pre-tax dollars can save, on average, about $60 on their tax bills. Employers save about $15 for every $200 an employee sets aside on benefits. Savings include FICA, the Federal Unemployment Tax Act, and workers' compensation insurance premiums.

Ancillary employee benefits are available to businesses of all sizes and budgets and they have a wide-ranging value for both employers and employees.

If you’re interested in ancillary benefits, you should talk to your employees about which offerings they are most interested in.

Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

Published October 13, 2020