LAST REVIEWED Sep 18 2019 16 MIN READ
By Margarette Jung
As a 401(k) provider, we’re often asked what benefits we, a young startup with fewer than 50 employees (at the time of writing, we’re at 18 31!), choose to offer our own employees. We’ve written about why commuter benefits, health insurance, and 401(k) matching are more cost-effective than simple salary increases; we face the typical San Francisco startup difficulties of high costs and a competitive hiring market. We’re confident that our benefits policy has our employees’ long-term interests at heart, and that it actively helps us recruit better talent. Here are the benefits we offer, and our underlying philosophy.
Human Interest benefits: An overview
First off, let’s talk about which benefits we offer and don’t offer, and why (we’ll go into the specifics later). All of our full-time employees receive:
Medical, dental, and vision insurance with 100% of employee premiums and 50% of dependents’ premiums covered
Annual membership to One Medical Group, a concierge-style network of doctor’s offices
A flexible spending account (FSA) with a $500 contribution
A matched 401(k) – because, well, that’s what we do!
Matched donations to 501(c)3 organizations
This is a much more robust suite of benefits than many startups in our stage, location, and funding situation offer. We do face a cutthroat market for talent, with the median salary for a San Francisco-based entry-level software engineer at a full $107,000. So why are we focusing on benefits, when most people evaluate offers based on compensation and perks?
We want people motivated by more than money
While we want to provide our employees a good income in a city with such a high cost of living, we’ve decided not to compete on just salary. In a small team, every hire has an outsize impact on the company culture, and we want people who are drawn by our mission and growth trajectory rather than by salary or job title. Budgetary constraints are part of the equation, but more than anything else, we prioritize long-term employee gains and mission alignment, which is what we encourage our clients to do as well, so our compensation is structured accordingly.
More bang for your buck: The ROI of employee benefits
As we mentioned, many benefits (including 401(k) match and commuter subsidies) provide tax advantages compared to a simple salary increase or bonus. Compensation boosts are subject to income and employment taxes for employees; and Social Security, Medicare, and other employment taxes for employers. On average, employees face a 22.4% tax on earnings, and employers pay 8.9% – and the figure is typically higher for San Francisco-based workers and businesses. If we offered a salary increase of $5,000, our employees would see just $3,880 and we’d pay $445 in taxes, so between the two of us we’d get a net of $3,435. If we offered that money as a 401(k) match, however, it’d be tax-free for employees until they withdraw (so the full $5,000 would go into their retirement accounts) AND we’d be able to deduct the contribution when we file our corporate taxes. It’s a win-win.
Benefits are more inclusive than perks
The HBO show Silicon Valley is a bit of a caricature, but parts ring true: Many startups will use ping-pong tables, weekly paid happy hours, or expensive napping pods as a selling point. And if you asked most younger workers whether they’d like a fully stocked bar or a matched 401(k), you may not see many people choosing option B. But we believe that in the long run, everyone will benefit more from a comfortable retirement than from flashy perks. We also believe that our company benefits from diverse viewpoints and an inclusive environment, and while perks tend to attract a younger, more affluent crowd, more thoughtful, long-term benefits have value across age, family status, and financial situation. Bottom line: Our employees are invested in Human Interest for the long haul, and we want to return the favor.
Healthier employees are more productive, full stop. To the best of our ability, we want to ensure that our employees don’t miss work because they or their families are sick, waste hours trying to schedule doctor’s appointments, or skip preventative care and end up with a more serious illness. Currently, we pay 100% of our employees’ medical, dental, and vision premiums. The general recommendation is for employers to shoulder 75-90% of the burden so employees are incentivized to choose the most affordable plan, but we decided to cover the full amount because we prioritize employees’ health. We also cover 50% of dependents’ premiums, because we are budget-constrained, and we’d prefer our employees’ spouses get insurance through their own employers if possible. To minimize time spent on scheduling and other healthcare overhead, we also offer an annual membership to One Medical Group, a network of doctor’s offices with zero wait time, same-day appointments, and online communication. Finally, we offer a Flexible Savings Account, or FSA, which can be used for alternative therapies, glasses, contact lenses, or other treatments not covered by insurance. Like a 401(k) match, employee contributions to FSA’s are made pre-tax (that is, not subject to income or employment taxes) and employers don’t have to pay payroll taxes on the funds they contribute. With an FSA, employees contribute a set amount and have one year to use the funds. However, if they don’t use the full balance, they can’t recoup the money. So to help offset that risk, we contribute $500 to every employee’s FSA, as long as they put in at least $1.
A matched 401(k) – because, well, that’s what we do!
You wouldn’t expect anything less from a 401(k) provider – we match contributions up to 4% of employees’ compensation. The benefits of offering a 401(k) are substantial for both employer and employee – we as a company save on payroll taxes, and our employees enjoy tax advantages while growing their nest eggs. We cover all employee fees on the 401(k) so that as much money as possible flows into their retirement accounts. Finally, we offer both Roth and traditional 401(k)’s, which can be helpful for younger employees. As a side benefit, matching up to 4% of compensation allows us to qualify as a safe harbor plan, meaning that we automatically pass non-discrimination tests for highly compensated employees. Safe harbor matches require that employers match at least 4% of compensation, which is why the most common formula – including ours – is a match up to 4%. We take our own advice, so our 401(k) has many other features that we recommend to our clients. Here’s the breakdown: What’s the Best 401(k) Plan?: Features You Should Be Looking For From Your Provider.
Equity in the form of RSU’s and ISO’s
Many startups offer equity as part of their compensation package, both to align incentives and because they have less cash on hand. Not all equity is the same! There’s a big difference between RSU’s (restricted stock units) vs. ISO’s (incentive stock options): check out this article for an in-depth explanation of these and other equity compensation terms. In broad strokes, ISO’s offer the right to buy shares in the company, while RSU’s offer actual shares in the company. RSU’s can be offered for very early stage startups (each share’s value is not very high quite yet) and they become less common the more mature the company. From employees’ perspective, there are three benefits to RSU’s over ISO’s:
You don’t have to pay a strike price; the shares are yours outright
The two-year period for long-term capital gains starts at vesting, rather than when you exercise
You don’t have to exercise your options within 90 days of leaving the company
We also encourage our employees to file an 83(b) election with the IRS on their RSU’s, which allows them to “prepay” the tax on their stock based on a lower valuation. Our earliest employees received RSUs; now that we’ve grown, every new employee who comes aboard receives ISO’s. With ISO’s, employees have the option to buy shares at a later date based on a four year vesting schedule. This means they’ll have the ability to pay an exercise price, or strike price, for stock in the company over time. The logic is that the company’s value will rise over time, so our employees can buy shares for less than they will be worth in the future. For example, imagine that you are granted 4,000 options when you join a company, each of which has a strike price of $0.10. The vesting schedule states that you will have the ability, or “option,” to purchase 25% of those stocks after your first year, and then proportionally every month from years 2-4. After one year at the company, you can purchase 25% of your 4,000 shares, or 1,000 of them, at $0.10 which would cost you $100. Every month thereafter, you could purchase approximately 83 of your options (3,000 remaining options over the course of 36 months). If, on your one year anniversary, your company went public and the stock price rose from $0.10 to $0.50, you would now be able to sell those 1,000 stocks for $500; a net gain of $400. For more wholistic information on stocks and equity, you can check out our post on startup equity basics.
Unlimited vacation can be a double-edged sword: on the one hand, you empower your team to take time off when they need it; on the other, overachiever employees may end up taking less vacation, and in the process not only set that example for others, but also burn out. (We aren’t worried about employees abusing the policy – if someone does, that’s indicative of a larger problem with the individual rather than with unlimited PTO.) To ensure that unlimited vacation doesn’t turn into no vacation, we instituted a two-week minimum. Managers are responsible for making sure that employees take at least two weeks off, in addition to federal holidays. This sets a standard for actually taking a break and recharging, which is proven to boost productivity in the long run.
Commuter benefits: BART, Muni, and more
Another tax-advantaged benefit, we offer employees a commuter benefits program – they can set aside pre-tax dollars to pay for public transportation, parking, bike maintenance and other expenses incurred going to and from work. This can save our team members up to 33% on their transit expenses, and the money rolls over month-to-month. Plus, we offer every employee $30 per month to help offset the total cost of commuting.
Matched donations to 501(c)3 organizations
Finally, we serve an incredibly important social mission: making financial security a possibility for everyone. Our employees are passionate and caring people, and we want to support those traits. To that end, we participate in a charitable donation matching program that matches our employees’ contributions to 501(c)3 organizations up to $500 in order to support their personal causes, whatever they may be. What they support, we support. (Plus, this is another scenario where matching offers more tax advantages to both employer and employee than a simple salary increase.)
Sound like a good deal?
We strive to offer the best possible benefits and environment for our employees – not just because it boosts productivity, but because we truly care about our team. If this sounds like a good place to work, check out our careers page for open opportunities!
Human Interest works with startups like Joyable and Buffer to help their employees save with a great, scalable 401(k). Click here to learn more.
Margarette Jung is a former Head of Marketing at Human Interest.