Start-Up Companies

Typical Coverages Provided: The following benefits are normally provided for the Mature Silicon Valley Company (there are some variations based on the specific industry, e.g., software, semiconductor, peripherals, internet, biotech, etc.):

  • Medical, with several options
  • Life and AD&D
  • 401(k)
  • Flexible Spending Accounts
  • Dental
  • Long Term Disability (LTD)
  • Vision
  • Short Term Disability (STD)

Coverages for the Start-Up Company: Medical and dental insurance are the main benefits. However, if your employees are coming from larger companies, they will also want a 401(k) plan available immediately for their rollover funds and further tax-deferred savings.

Competitive Employee Contribution Schedules: While 50% of the companies in the Valley require some type of employee contribution for individual coverage, we recommend that the start-up company begin by paying all of the employee’s cost for the basic coverages because: (1) it provides a tremendous hiring advantage; and (2) the cost is minimal since employee contributions typically are a small portion of the cost.

While it may be tempting to provide dependent coverage at no cost to the employee for hiring advantages, we do not recommend it. Introducing a dependent contribution will only become more difficult as you grow in size–now is the time to include dependent contributions. The average in the Valley is 10-25% of the total cost; again, this will vary by specific industry. There are three approaches: (1) One rate for all dependents; (2) Two rates: one for one dependent and another for two or more dependents; or (3) Three rates: one for spouse, one for child(ren) and one for spouse with child(ren). The latter approach is most often used for employers with under 50 employees, while the two-rate approach is used most often for employers with more than 50 employees.

Employee Choice Program (Cal-Choice): In California, there are privatized medical and dental insurance programs that are available to any employer with 2 to 50 employees. They provide a selection of carriers and benefits for each employee with rates set by age. There are up to 7 carriers and three benefit plans from which the individual employee can choose. Obviously, an employer cannot be expected to keep up to date on each of the plan’s provisions; therefore, there is an 800 telephone number which employees may call to get answers for their benefit plan questions. Premium rates are generally competitive with the insurance marketplace.

Suggested Benefits Strategy for the Silicon Valley Start-Up Company: Many factors come into play including demographics (employees’ location, age, sex, etc.), industry, growth expectations, etc. This discussion is limited only to growth expectation, which is common to all industries. Following are our recommendations for the new start-up company, based on employee-count expectations:

  • If your company expects to limit total employee-count to up to 10, we recommend that you provide coverage through one of the above referral choice programs. We are assuming that most of your initial employees will have the entrepreneurial spirit and understand that any benefit questions must be answered by the plan administrator, albeit with less personalized service. With these plans, there is no way that you can provide personalized service because, potentially, each employee will have a different program.
  • If your company expects to limit employee-count to 10-50, we recommend an insurance carrier which specializes in “small case” coverages. They understand the smaller employer and will give you better service.
  • If your company expects to grow to more than 50 employees, you will have some opportunities in the future which you should prepare for now. “Managed Care” programs can work to the advantage of the employer and the employee if set up properly. You should align yourself now with an insurance carrier which can provide this service to you in the future without the employee relations problem of changing carriers in two-three years.

Phase-in of Benefits: In any industry, following is the recommended phase-in of benefits:

  • Medical/Dental: Implement upon reaching two employees. California law provides advantages beginning at this size regarding medical underwriting and medical insurance acceptance of all of your employees.
  • Section 125 Pre-Tax Contributions by employees: Include at the same time you implement your first benefit plan. There will be cost savings to the company and the employee immediately!
  • Life/AD&D and LTD: Implement after you have 10+ employees. Underwriting becomes easier at that size (LTD could be delayed until you have 20 employees).
  • 401(k): Implement after you have 5+ employees. Administration cost becomes more economical at that size.
  • Section 125 Flexible Spending Accounts: Evaluate after you have 20 employees. This is a tremendous employee benefit, but the administration fee may exceed the employer saving until you have more employees.
  • Vision (if necessary, based on industry): Implement after you have 50 employees.

We hope this is of help in the strategic planning for your company. If you have questions, please call Mike Radakovich at (408) 366-8882.