Understanding Cost-Sharing in Employee Benefits

Understanding Cost-Sharing in Employee Benefits: The Employer’s Role in Premium Contributions and Standard Practices

Introduction

In the fiercely competitive job market, employee benefits play a crucial role in attracting and retaining top talent. Among the many decisions that employers face in crafting an appealing benefits package, one of the most significant is determining the benefits premium cost-sharing arrangement between the company and its employees.

This article aims to delve into the complexities of ‘cost-sharing’ and shed light on standard practices for designing sustainable and attractive employee benefit programs.

Firstly, if you were not aware, it’s quite common for part of the cost of the benefits program to be paid for by employees via payroll deduction. This is typically a ‘condition of employment’ and is outlined in a contract of employment. Premium amounts can vary significantly depending on the scope of the program, the demographics of the group and other factors, meaning the dollar amount of the payroll deduction can differ significantly from employer to employer. No greater than 50% of the overall cost can be passed along to the employee, per insurer guidelines. The “cost sharing” per benefit line is indicated to the insurance carrier at the implementation of a program, and most carriers will indicate the “employee” and the “employer” premiums, per benefit line, on each monthly invoice simply to assist with payroll.

What should Employers consider when determining cost-sharing?

The cost-sharing ratio between employers and employees is not a one-size-fits-all equation. It depends on a multitude of factors, including:

• the size of the company,
• plan design,
• the premiums in dollars for various benefit lines,
• demographics,
• employee classifications,
• and of notable importance, the tax implications.

Striking the right balance requires careful consideration, and the differing taxation of various benefits (link to taxation of benefits page) is usually one of the primary considerations.

Three different ways to view Cost Sharing:

An employer might approach cost sharing by considering the benefits to be covered by the employee:

• Employee pays Long Term Disability premiums only
• Employee pays all pooled benefits premiums (Life, AD&D, Disability and Critical Illness).
• Employee pays all pooled benefits premiums plus 50% of health and dental premiums

In all the above scenarios, the Employer must ensure that no greater than 50% of the overall cost is passed along to the employee.

Alternatively, the employer might apply a percentage to the entire cost of the program, with the maximum allowable percentage of 50%. For example:

• Employee pays 25% of total premium costs.
• Employee pays 50% of total premium costs

In the event that a percentage is applied, the premium should be applied first towards the benefits for which an employee-paid premium ensures a tax-free benefit (most notably, Long Term Disability). The tax implications of cost sharing should be carefully considered in order to reduce or eliminate the possibility of a taxable benefit.

Less commonly, an employer might charge a flat dollar amount:

• Employee pays $25 per pay period towards benefit premiums
• Employee pays $100 a month towards benefits premiums

Regardless of the approach to cost sharing, the formula must be viewed with the actual dollar amount of premiums taken into consideration, per benefit line.

How should an organization approach cost-sharing? What is typical?

As mentioned, it is essential to understand the cost for the various benefit lines (and yes, these change year to year!) and the tax implications. In addition, employers must consider how their cost-sharing arrangement compares to their industry, and to their particular company’s philosophy. Beyond the tax implications, there are several factors that influence the cost-sharing structure:

1. Plan Design: The specific design of the benefits plan can impact the appropriate cost-sharing scenario. For example, a plan with high life and disability coverage may see higher premiums for these benefits.  If the employee is covering these premiums for tax reasons, the employer may wish to cover 100% of the remaining benefits.
2. Industry Norms: Employers often look to industry benchmarks to ensure their contribution levels remain competitive and appealing to potential employees; what are your main competitors doing? If your primary competitors are advertising that they cover 100% of benefit premiums, you may need to follow suit.  
3. Company Size and Financial Resources: The financial capabilities of the company, combined with its size, can influence the employer’s ability to contribute significantly. Generally speaking, larger, most established companies tend to cover a greater share of benefit costs, because they can afford to do so. 
4. Talent Demand: In high-demand talent markets, employers may need to offer higher contribution levels to attract and retain top performers, in addition to offering a more comprehensive program.
5. Company Philosophy: what are the core values of your company, and how does your cost-sharing formula fit into this?

Balancing Employee Needs and Cost Containment

Employers face the delicate challenge of balancing attractive benefits with cost containment. While it is vital to provide robust benefits that meet the diverse needs of employees, it is equally crucial to manage expenses efficiently.

Beyond the cost-sharing of the premiums, please keep in mind that the plan design itself offers an element of “cost-sharing” through coinsurance and deductibles, and additionally, through reimbursement limits. Please consider:

1. Deductibles: flat deductibles are paid out-of-pocket before coverage is applied; while deductibles can incentivize employees to be more conscious of their benefit usage, thus reducing unnecessary expenses, they penalize lower claimers and are less common these days.
2. Co-Insurance: this refers to the percentage of coverage, such as “80%” for basic dental. Co-insurance requires employees to share a portion of the costs for specific services, encouraging them to make more informed healthcare choices.
3. Reimbursement limits; items may have limits that leave the employee out-of-pocket for the remainder of the cost (i.e. orthotics that cost $500 for which the employee only receives $300 back). Potentially in combination with points 1. and 2. above, reimbursement limits can erode the overall percentage of an expense for which an employee is covered. 

All of the above can encourage employees to make informed choices when it comes to their healthcare spending. However, with most employers stating that the overall goal of a benefits program is to facilitate employee health and wellness, employers should be mindful that employees are not bearing too great of a costs for their coverage, from a holistic perspective.

As we said, approaching the cost-sharing that is right for your company is not one-size-fits-all; you need to carefully consider the factors outlined above, and work with an experienced advisor to ensure the right approach that allows for excellent coverage in combination with cost-sustainability.

Conclusion

Decoding cost-sharing in employee benefits is a complex task that demands careful consideration of multiple factors. Employers must keep abreast of industry trends, assess their financial resources, and regularly evaluate their benefit packages to ensure competitiveness and relevance in the job market.
In today’s competitive landscape, employers must recognize that ongoing evaluation and adjustment of benefits packages are necessary to attract and retain top talent. By striking the right balance between attractive benefits and cost containment, employers can demonstrate their commitment to their workforce’s well-being while maintaining financial sustainability. The key lies in crafting a benefits package that aligns with the company’s values, meets the evolving needs of their employees, and supports the organization’s overall goals.