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Over the years, it has always amazed me how little thought some employers put into their contribution scheme for employee benefits. When I ask employers why they have the contribution schedule they use, I frequently get something like… “I’m not really sure; I think the old HR director set that up in 2003.” I’m not joking.
At worst, poorly designed plans can incent employees to do the opposite of what you want to accomplish. At best, a well-designed contribution scheme can attract higher quality employees, lower turnover, and cost your company less in premiums. Let’s look at some of the characteristics of a well-designed contribution strategy for employers in a dual-option or triple option environment:
- In general, the employer should NOT pay 100% of the employee-only premium. If the employer pays 100% of the cost, who will opt out of the plan if they have access to other coverage? NO ONE. While paying all of the cost may seem generous, this approach is almost always wasteful. Employers covered as retired military have Tri-Care, which provides these people with a high level of benefits. Requiring even a small contribution will eliminate employees with other coverage from “double-dipping”. Other categories of employees with access to other coverage are retired workers of many types, employees covered on a spouse’s plan where the employer pays all of the cost, and some union plans.
- Consider paying a flat amount per employee instead of a percentage of the premium. This is especially fair if the rates for the medical plan are age rated, as many small group policies are. A case could be made that the percentage is discriminatory to younger employees, whose age rates are much lower. Older employees are getting a much larger benefit, if a percentage is paid, as their age rates are much higher. There are many different thoughts as to the “fairness” of this approach.
- Base the contributions on your company culture, type of business, and what the competition for employees is like. Some industries are quite competitive, and benefit costs to employees can make or break retention and recruitment. Other industries such as hospitality and retail are not facing as difficult a hiring environment and benefits are not expected to be as rich. There is a wide range of strategies, even within the same industry.
- Make the contribution plan purposeful. Contribution approaches that pay the same percentage of the premium, regardless of what plan is chosen are not recommended. Most employers are not interested in encouraging employees to choose the most expensive, least cost-efficient plan. High-cost plans with a small or no deductible may be offered alongside more moderate plans for a variety of reasons. However, contributions as a percentage should be based on the lowest cost plan, and employees should have to “buy-up” and pay the difference between the two. Paying a flat percentage of any plan subsidizes the high-end plan and encourages selection of the highest cost option, even when it isn’t the best value for employees.
- By keeping these guidelines in mind, employers can gain more control over their benefit dollars and still provide excellent benefits to employees. Carefully considering how contributions will affect employee decisions can save a company thousands of dollars a year.