How to offer employee benefits as an early-stage startup

Offering a competitive employee benefits package is a crucial part of employee retention and satisfaction that has been shown to raise morale, increase productivity, and generally lead to improved wellness among employees. It's also a key asset for talent attraction.

For an early-stage startup, investing in benefits like health insurance, paid time off, and retirement plans can ensure that the employees that join you grow alongside your business.

However, it’s not always feasible for new companies to immediately offer benefits to their employees. Without an HR team or a compliance manager to oversee a benefits program, it can be especially difficult for an early-stage startup to build the resources on top of the sizeable operational overhead and general business expenses.

Key takeaways

• Non-traditional benefits can incentivize employees from traditional backgrounds to join your startup.
• Your benefits strategy is heavily influenced by the types of employees you hire (W-2 or 1099).
• Open Enrollment Period (November 1 until January 15) is the only time that independent workers in the U.S. can sign up for benefits without having a qualifying life event.

TL;DR: Early-stage startups can offer competitive benefits without a full HR team by starting with stipends or SHOP marketplace coverage. You also need to know the legal thresholds for benefits like COBRA, the ACA, and state-specific requirements.

There's a perception that taking a position at a startup means sacrificing a certain degree of job stability and security. Prospective job seekers — in particular, top talent — are looking for more than just competitive compensation. They're also looking for a competitive benefits package that combines a strong roster of traditional offerings like high-quality health insurance with less traditional benefits like wellness stipends. In building your startup's benefits package, a great place to start is assessing which benefits are typically offered by more established businesses.

Health insurance

You won't find top prospects lining up for a full-time position that doesn't come with health insurance. In the U.S., the average medical bill is $2–3K and emergency medical costs account for 62% of all personal bankruptcies filed — and these expenses continue to rise every year.

It's pretty standard to offer a comprehensive health insurance plan that can cover preventative care and general medical expenses. The idea is that your company covers the majority of the plan's cost while your employees pay the remainder directly out of their payroll. Since different hires will prefer different insurance plans and coverage levels, it's recommended that your company offer a few different options to save you from paying for a plan that isn't fully utilized.

While some are provided in conjunction with the government (like disability and unemployment), they are still based on employer contributions to these programs. These benefits require significant financial contribution as well as time — they’re primarily managed through your company.

Retirement savings

Nowadays, most businesses recognize that retirement planning is a priority for their employees. To hire and retain employees, they often sponsor employee retirement plans that serve as a tax-advantaged savings vehicle for their team.

The role of the employer is to select an appropriate plan with affordable options and often, to pledge a certain level of matched contributions to the employee's plan, be that a 401(k) or an IRA. Every pay period, the employee can choose to automatically invest a percentage of their paycheck into the plan, pretax. For current and potential employees, this benefit — along with the employer's matching contributions — can be a significant incentive to stay or join a company.

Life and disability insurance

It's also important to offer benefits that account for the unexpected — disability and life insurance serve that exact purpose, providing stability and peace of mind for employees so they don't have to worry about whether their salary is protected in the case of an unanticipated emergency.

In the case of life insurance, it gives employees peace of mind that their beneficiaries will have money to fall back on if the insured dies. In the case of disability insurance, the employee will be able to access benefits if they fall victim to an unanticipated illness or injury — temporary or permanent. Since disability is offered in conjunction with the government, the specifics can vary state by state so take note of the policies that are active in each of the states your employees operate from.

Paid time off (PTO)

Managing a healthy work-life balance is valuable to any professional. A recent workplace study discovered that employees facing burnout rank paid time off as the number one benefit that would allow them to alleviate their burnout.

Paid time off can come in the form of vacation, sick leave, personal time, and more. In the U.S., the typical paid time off offering ranges from two weeks to an unlimited policy. Whatever you decide, keep in mind that fostering an environment that motivates people to do their best work and creating a culture where people feel comfortable taking off the time they need often go hand in hand.

Unemployment insurance

Unemployment insurance is mandated by the government. It stipulates that if a part-time or full-time employee is rendered unable to work or involuntarily terminated under circumstances that are not their fault, then they are entitled to unemployment benefits. These benefits are provided by their employers, who offer them by contributing to the state's unemployment fund.

Less traditional benefits to help your startup stand out

Beyond the traditional offerings, there are some unique benefits your startup can offer to attract new hires and retain existing employees:

• Stock options
• Learning and development budgets
• Flexible work arrangements and budgets
• Wellness programs and stipends
• Paid parental leave
• Grocery budget
• Commuter benefits
• Cellphone reimbursement

Your benefits strategy is heavily influenced by the types of employees who work for you — contractors (1099), full-time employees (W-2), or a mix of both.

If you’ve hired W-2 employees, you’ll be required to provide certain benefits depending on your business size and whatever federal, local, and state regulations are relevant to your company. In this scenario, we’d recommend hiring a professional to help you stay compliant.

If you employ 1099 contractors, you’re subject to different regulations. For starters, you're not required to provide benefits to contractors. However, providing contractors with benefits can help ensure that they perform well and stay with your company for as long as you need them — so that you don't have to go about the expensive route of finding new contractors to hire.

If you're running an early-stage startup, it’s likely that your company falls somewhere between these two classifications. You might employ full-time W-2 workers, but your business might be small enough that you’re not required to provide benefits by law. Or you might be hiring full-time employees but enlisting 1099 contractors for specific projects that you don’t have the bandwidth to do in-house.

If this is the case, you’ll have a mixed array of benefits.

Portable benefits

There are several ways to provide benefits that work with different types of employees and company budgets.

In recent years, portable benefits have become a more prevalent option. They are connected to individuals, not employers, meaning they are preserved even after an individual leaves a role. These benefits are lucrative to offer to part-time (1099) contractors and can also be a good option when your startup is still in its early stages.

As your team grows, certain federal laws kick in that require you to offer specific benefits or follow particular procedures. 

If you don’t offer the required benefits when you reach these thresholds, you might have to pay penalties, which can be steep. You need to understand the different requirements, some of which are state-specific.

Federal requirements

COBRA (20+ employees)

Once you have 20 or more employees, the Consolidated Omnibus Budget Reconciliation Act (COBRA) requires you to offer continued health coverage to employees who lose their benefits due to job loss, reduced hours, or other qualifying events. 

The Department of Labor (DOL) oversees COBRA compliance. Violations can lead to excise taxes of $100 per day per affected individual.

ACA employer mandate (50+ full-time equivalent employees)

The Affordable Care Act's employer shared responsibility provisions apply to “applicable large employers” (ALEs). The IRS outlines the ALEs as those with 50 or more full-time equivalent employees (FTEs). If your startup qualifies as an ALE, you must offer affordable, “minimium essential coverage” health insurance to at least 95% of your full-time employees. 

If you don’t provide minimal essential coverage, you have to pay a per-employee penalty to the IRS. The amount changes every year, but is $2,900 per employee in 2025.

The FTE calculation includes both full-time employees (those averaging 30+ hours per week) and a combined count of part-time employees. Even if you don't have 50 people on payroll, you may still qualify as an ALE based on total hours worked.

State-level compliance and considerations

In addition to federal requirements, some states have their own mandates. If you have employees in those states, you need to be aware of any benefits you might be required to provide.

SHOP marketplaces

The Small Business Health Options Program (SHOP) allows employers with 1 to 50 full-time equivalent employees to purchase health and dental coverage through a government marketplace. Some states, like Virginia, extend eligibility to businesses with up to 100 employees. With SHOP, you can choose how much to contribute toward premiums, offer one plan or let employees choose from several, and start coverage at any time of year (no open enrollment restrictions).

Several states run their own SHOP exchanges with additional benefits. Covered California for Small Business, for example, consolidates billing into a single monthly invoice regardless of how many plans employees select.

Mini-COBRA laws

Federal COBRA only applies to employers with 20 or more employees. However, 40 states have enacted “mini-COBRA” laws that extend continuation coverage to smaller employers. These laws vary significantly: coverage periods range from 6 months (Arizona) to 36 months (California, New York). Eligibility requirements vary by state.

If you offer a fully insured health plan and have fewer than 20 employees, check whether your state requires you to provide additional COBRA coverage.

Mandatory state retirement programs

A growing number of states now require employers to offer retirement savings access to their employees. If you don't already sponsor a qualified plan like a 401(k) or SIMPLE IRA, you may need to register for your state's program. California (CalSavers), Illinois (Secure Choice), Oregon (OregonSaves), and more than a dozen other states have enacted these mandates, with more programs expected to launch in the coming years.

The specifics vary by state. California requires all employers with at least one employee to provide a retirement plan (either their own or through CalSavers). Penalties for non-compliance can add up quickly. For example, Illinois charges $250 per employee for the first year and $500 per employee for subsequent years.

State-sponsored programs are typically Roth IRAs with automatic enrollment. Employees can opt out, and employers don't contribute — they simply handle the payroll deductions.

Paid family and medical leave

Federal law requires most employers to offer unpaid time off under the Family Medical Leave Act (FMLA). To supplement this, a growing number of states have mandatory paid family and medical leave (PFML) programs. These programs allow employees to take paid time off to bond with a new child, care for a seriously ill family member, or address their own medical needs.

Most PFML programs are funded through payroll deductions, which are either from employees only or split between employers and employees. If you have employees in a state with PFML, you’re generally required to provide this benefit to employees.

Even in states without mandatory programs, offering paid leave can be a competitive advantage for recruiting — particularly if you’re an early-stage startup competing with larger companies for talent.

Open Enrollment Period runs yearly from November 1 until January 15. It’s the only time independent workers can enroll in a new health insurance plan, make changes to their plan, or renew their current plan for the new year, without needing to have a qualifying life event like marriage or moving states. For most people without health insurance, open enrollment is the only time to get coverage for the following year. It's also the time to offer your employees portable benefits.

Do early-stage startups need to offer employee benefits?

There's no federal requirement for startups to offer benefits like health insurance until you reach 50 full-time equivalent employees. However, offering a benefits package — even a modest one — can help you attract talent in a competitive hiring market.

What benefits are most important for early-stage startup employees?

Employees often see health insurance as a valuable benefit, along with retirement savings and paid time off. Non-traditional perks like wellness stipends, flexible work arrangements, and professional development budgets can also be highly attractive to startup employees.

When is a startup legally required to offer health insurance?

The Affordable Care Act mandates that once you have 50 or more full-time equivalent employees, you have to offer health insurance benefits or face IRS penalties. Some states have additional requirements for employers with fewer than 50 employees.

Are retirement plans like 401(k)s required for startups?

Federal law doesn't require startups to offer retirement plans, but several states — including California, Illinois, and New York — mandate that employers provide access to a retirement savings program. If your state has a mandate and you don't sponsor your own plan, you'll need to register for the state’s program.

What low-cost benefit options work well for early-stage startups?

Stipends for health, wellness, or professional development can be attractive benefits for employees. These don’t have the administrative burden or legal requirements of traditional benefits programs. 

How can startups offer benefits without a full HR team?

Some payroll providers like Gusto and Rippling bundle benefits administration with payroll processing. This makes it easy for startups to manage health insurance, retirement plans, and compliance in one platform.