Feel the Burn… Benefit Plan Selection for a Newly Funded Start-Up

March 31st, 2008 Posted in Benefit Plan Design, Health Insurance, High-Tech Companies, Start-Ups

Okay, so your bank account just went from 0 to 60 in Porsche Carrera GT kinda time. Sorry I just needed an excuse to post a video of a car that’s so hot it’s not even on Porsche’s retail site. 605 horsepower. Stock. But at a price tag of $440,000. I digress…

After spending months or maybe even years with little to no employee benefits – being covered by COBRA, your spouse’s policy, or maybe a substandard individual plan – a newly funded start-up may be tempted to hasten the burn by purchasing that well-deserved, gold-plated employee benefits package. Before doing so, answer this question: “Why do you want to sponsor an employee benefit plan in the first place?”

Attract and Retain Employees

There is one overwhelming reason to become a plan sponsor and that is to attract and retain employees. You should purchase whatever benefits will allow it to hire and keep qualified employees. A company trying to recruit highly trained engineers in a tight job market will have a different benefits strategy than one hiring run-of-the-mill, non-technical types.

The level of premiums you pay on behalf of your employees and their families should follow this same strategy. Should you pay 100% of both employee and dependent coverage? 100% employee and 80% dependent? 50% employee and 0% dependent or something in between the extremes? All will depend on what it takes to attract and retain employees.

What to Buy?

Scarce dollars should follow catastrophic risks.
Suffering an accident or illness which results in a $200,000 medical bill is catastrophic. Becoming disabled and therefore unable to earn a paycheck for the next 30 years is catastrophic. Having to buy a pair of eyeglasses or having to pay for a root canal is inconvenient, but not catastrophic.

Consider purchasing the components of an employee benefit plan in the following order: 1. health insurance, 2. long-term disability insurance, 3. retirement plan, 4. dental insurance, 5. employer paid life insurance, 6. short-term disability insurance, and 7. vision insurance.

You may ask why I put dental insurance so high on the list. True, dental in and of itself is not a great insurance buy, but it is an excellent employee benefit. Believe it or not many employees will appreciate your dental plan more than your medical insurance. People typically get their teeth cleaned twice a year and under a good dental plan it will cost them zero. Dental is a very visible benefit. Whereas it often takes a significant sickness or injury before someone truly understands the value of medical insurance.

Insurance Brokers

Entrepreneurs are consistently told to surround themselves with competent advisers. When it comes to employee benefits you should seek out the services of an ethical insurance broker. It is that person’s job to get to know your business – your needs as an employer, to prepare a request for proposal, to shop the insurance marketplace, to consolidate the quotations from various insurers into an easy to understand format, and then to help the business owner come to an informed decision as to which insurer and what plan(s) should be offered to employees.

It is the insurance broker’s responsibility to conduct employee enrollment meetings. These meetings are a golden opportunity to explain how the employee benefits package is an integral part of the company’s long-term vision.

Conclusion

If you are smart enough to get a start-up off the ground then you have the mental capacity to make a valid argument for a Carrera GT as your new company car. Or as reality enters the picture maybe you should install that badly needed employee benefits package instead. With the help of an ethical insurance broker, select plans and contribution schedules that will attract and retain the employees you need to grow your business. What do you think? Car or benefits?

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