Many small businesses struggle with how much to ask their employees to contribute to their employer-sponsored medical and ancillary coverages.
The Goldilocks Principle applies here like everything else. Too little, and employees will leave for better benefits or not take an offer of employment at all. Too much, and your bottom line suffers and puts you at a disadvantage against the competition.
What’s more, many employers miss the most important part of an employee contribution strategy: The fact that your strategy, over the long term, directly affects the kind of employees you end up employing.
Using A Benefits Strategy To Keep Your Best Employees
If you pay a high percentage of dependent coverage, for example, you will attract employees who NEED dependent coverage. This will increase your per-employee net cost over the long term, as those employees will stay with you in order to maintain the coverage levels that you offer.
The problem with this position is that employees who don’t need coverage at all (or just take single coverage) won’t feel any pain moving on. There’s less incentive for them to stay with you.
In other words, you are not using your benefits to keep and retain the best people; you are using your contribution strategy to attract and retain people who like your contribution strategy.
And that strategy will cost you more money.
No one strategy fits everyone, so as part of every new client engagement our consultants take the time to go through the logic of your benefits strategy. As well as looking at the more obvious considerations such as budget or ease of administration, we also take into account influencing factors such as your particular industry and marketplace considerations.
To that end, here are three possible employee benefits strategies and the pros and cons of each.
Benefits Strategy #1: PERCENTAGE (Straight or Tiered)
This is the most common strategy because it is simple to administer and easy to understand. We don’t like it much, for reasons we will explain, but many groups still employee this method.
Some groups pay a flat percentage of whatever the cost is for the employee’s contract, regardless of whether the employee is covered as a single, or has nine children and a spouse. So, if their premium is $450 a month with a 50% split between employer and employee, that obviously means they pay $225 and you pay the other $225.
However, suppose the employee has a family and the family premium is $1300. In this example, they would pay $650 and you would pay the $650 balance. The net result is that you’re paying $425 a month (that’s $5,100 per year) more for the employee with a family. That’s your call, of course. However, most business owners would agree that not every employee who covers their family is automatically worth an additional $5,100 a year to their employer.
Some employers may have a rider along the lines of, “we cover 80% for single coverage and 50% of the dependent coverage” or something similar. Sure, this is better for the employer. However, how such a position is seen by employees depends on what the ‘de facto’ policy is for your own particular marketplace.
Clearly, whatever position you take needs to be broadly in line with what your competition does, if you’re to keep quality employees.
Lastly, with the advent of ACA rating (where each person is rated individually in small group), this can result in wildly different rates.
Take this example where the employer pays 50% of all contracts. This is a real example from a small group in New Jersey, zip code 08527 effective 2/1/2018.
Employee 1 (with family. Age 55, spouse 55. Kids 21, 17, 14 and 12)
Total cost: $2,541.58 per month
Employer cost: $1,270.79 per month
Employee cost: $1,270.79 per month
Employee 2 (with family. Age 35, spouse age 36. Kids 9, 8)
Total cost: $1,398.98 per month
Employer cost: $699.49 per month
Employee cost: $699.49 per month
Employee 3 (Single. Age 64)
Total cost: $752.27 per month
Employer cost: $376.14 per month
Employee cost: $376.14 per month
Employee 4 (Single. Age 24)
Total cost: $ 412.43 per month
Employer cost: $206.22 month
Employee cost: $206.22 per month
If all these employees do the same job, there is a $12,775 annual difference in cost to the employer between the highest and lowest premium. And the two employees covering only themselves are more than $2,000/year apart.
Depending on where your “best” employee falls on this spectrum, you may have to make up the difference in salary – or risk an unhappy over-achiever.
PROS: Easy to administer and understand
CONS: Unintended consequences that may attract or repel people based on their needs in such a way that the employer always pays more, or makes things unfair to certain cases. USE classes here.
In addition, this position does not provide separation when more than one plan is offered. Employees have a stronger incentive to “buy-up” to the better plan if the percentage is applied at the same rate to all plans.
Benefits Strategy #2: Flat Amount or Defined Benefit
This method has become very popular in recent years. Some employee benefit advisers explain this strategy as if it was something brand new, yet it has been around since renewal rates started increasing by double-digit percentages. Back in those days folks just explained that they pay a flat amount. Now it’s had a marketing makeover; with people calling it a “defined benefit”, all of a sudden it is fancy.
The concept is easy to grasp. The employer payment has a capped maximum, regardless of the contractor plan selected. So, let’s say an employer says they will pay $650 per month or less.
In our example above, here is what those employees now pay:
Employee 1 $1891.58
Employee 2 $748.98
Employee 3 $102.27
Employee 4 $0
In each case the employer pays $7,800 except for “Employee 4”, where they pay $4,949.16. The employees’ costs vary widely, but they are not the same proportionally as the first method. Employee 1 still pays the most, but pays more than in our previous example. Employee 3, on the other hand, pays less.
What’s nice about this strategy is that all employees cost the employer the same amount regardless of coverage selected. Your employees might not like this too much if you went cold turkey, but there are ways to ease into this method.
One of our clients who adopted this strategy once called me on a Saturday and explained his previous position something like this:
“I am going over these costs, and I keep thinking of two employees who pretty much do the same job. Once employee is better at her job than the other, but I pay way more for the other employee’s insurance. So in effect, I am paying more for the lesser employee. Why would I do that?”
This conversation led him to decide to pay a flat amount no matter what. His costs are now fixed, and he knows when he hires someone what his maximum employee benefits cost is going to be.
PROS: The maximum cost to employer is the same for all employee circumstances. Employees can save by choosing to cover their dependents somewhere else (perhaps their spouse’s plan). This method can be done on a global level (with some modifications due to the ACA) so that employees are incentivized to only take ancillary coverages. It can also be modified to return unused money to the employee (taxed) so they are incentivized to bring costs down.
CONS: Families and folks with higher premiums will pay more than singles and those with low premiums. Doesn’t attract employees who currently have their family benefits heavily subsidized, so it can inhibit recruitment of those people.
Benefits Strategy #3: SINGLE ONLY Coverage
This is similar to the second strategy but instead of a flat amount, an employer commits to paying 100% of the employee coverage but 0% of any dependents.
The logic here is summed-up by one of our clients this way:
“You are my employee. I will pay for you. Your wife and kids are not my employees. Some of your co-workers don’t have dependents so it is not fair for me to pay for your dependents and not theirs. I want to take care of you, and I will do that 100%.”
One trick to make sure employees who have access inexpensive coverage through a spouse is to offer a “buy-out.” You offer the employee taxable money of a lesser amount than the premium to waive coverage, but only allow it if your plan adheres to DOL and ACA rules AND if the employee has qualified GROUP (not individual based-exchange) coverage.
This method sends the message that you want to take care of everyone equally, but their personal needs are not business ones. Over time, as with all philosophies, this will hit the employees with whom this strategy resonates. You will have more instances where employee spouses cover themselves, with any kids added to whichever plan provides the better value. Your employees will always make a good decision for their own bottom line here – so should you.
PROS: Predictable costs –not as much as the second method if you have ACA rates that are age-based, but you will know the range better during the hiring process. Sends the message that you want to take care of your employees.
CONS: All employees will enroll unless you modify this to charge something or offer the buy-out. Will cause issues for employees with spouses who don’t work, or don’t have benefits offered.
Benefits Strategy: Finding The “Win-Win” Option
There are plenty of other benefits strategies, including custom-modified option. Some employers may offer both Option #1 and Option #3 for dependents, for example.
The bottom line is that a lot more thought should go into this part of your employee strategy, and it shouldn’t happen just at renewal as you “tweak” contributions to get the increase to where you want it. One employee waiving coverage because their spouse’s plan was a better deal can save you thousands of dollars.
It is important to strike the balance between taking care of your employees and being fiscally responsible to your bottom line.
For a no-obligation consultation on the benefits strategy options for your organization, get in touch with us at firstname.lastname@example.org