Are employee benefits inequitable? | EBA – Employee Benefit News
Employee benefits are intended to attract and retain talent that comes in all shapes and sizes. For most employers, these programs are essentially one-size-fits-all. And while insurance and retirement plans are often the “same,” their value to individual employees is much different.
I will go a step further and say that they have become highly inequitable with some employees actually subsidizing the benefits of others. It simply isn’t fair. Employers need to start paying attention to these issues and deliver more equitable programs.
The major driver of inequity is the cost of health insurance. A recent New Hampshire-based employer I reviewed sponsored a plan that cost employees $223 per month for single coverage, which was roughly 30% of the cost. The problem is that the value a 28-year-old is getting for his or her money is much different than that of a 60-year-old.
We all know that older people have higher insurance costs than younger people. However, in the employer health insurance market, most insurance companies and employers charge the same fee for all employees. This composite rating model is outdated. It was designed years ago when employers were paying for most of the premium. Now that employers are charging employees more, it has created an environment where some employees are subsidizing the cost of other employees.
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For this same employer, I compared the cost of a similar plan on the individual market, which is age-rated. The monthly premium for a 28-year-old is $399 and $996 for a 60-year-old. Using these numbers, the 28-year-old paying $223 month is paying 55.8% of the real cost while the 60-year-old is paying only 22.3% of the premium. Looking at it another way, the employer is providing the 28-year-old $176 in monthly value and the 60-year-old $773. This works out to $2,112 vs. $9,276 annually with the 60-year-old getting more than four times the value than the 28-year-old.
Is this fair? It really doesn’t matter if the idea is to attract and retain talent. Going by the numbers, the program is much less valuable to the 28-year-old. My 28-year-old son and 24-year-old daughter hardly view their health insurance as very beneficial. In their lives, the cost of health insurance is perceived as a reduction in pay. Life and disability insurance follow the same formulas for the most part. The value of a life insurance policy is much less valuable to a 28-year-old than a 60-year-old.
According to a government job report, well over 20 million Americans quit their jobs in 2021, and labor shortages are evident almost everywhere. Now, I’m not claiming that this is due to inequitable benefits programs, but an employer does need to acknowledge its value to attract and retain talent throughout a diverse population.
What we have with a one-size-fits-all benefits program is a zero-sum game. When you have one health insurance product for a population of 100 employees, it will fit some and not others. If you served only sausage pizza for lunch, some would like it and others wouldn’t. Think about how unhappy people would be if you charged them for the pizza and they didn’t like it. What does a 28-year-old paying $2,500 a year for health insurance — that they don’t use — think about that cost?
Read more: It’s time to reimagine traditional employee benefits. Here’s how to do it
Within an employee population, there are winners and losers. If your clients want to attract and retain talent, then it’s important to understand who the “losers” are. And as costs continue to rise and employers increase the employee contribution the same for everyone, then the inequities continue to grow.
The time has come to provide a more personalized benefits program designed to deliver more value across the employee population. Employers need to consider benefits that the younger and healthier employees would value. Things like college debt repayment, health club memberships and an emergency fund come to mind. With 69% of Americans having less than $1,000 in the bank, the probability of a 28-year-old employee needing funds to pay the deductible for a car accident is greater than needing to pay the deductible for healthcare.
The challenge is doing this while maintaining the current benefits budget if that is a requirement. The only option would be to spend the same dollars in a different way. One solution is to give employees more choice. On average, employers are buying more health insurance than many employees need, and then they impose the costs on those employees. If an employer continues this practice, it becomes difficult to develop an equitable program.
Employers can help level the playing field by adopting an Individual Coverage Health Reimbursement Account. An ICHRA earmarks money for employees to buy the health insurance they want from the individual health insurance marketplace. In my example, a 28-year-old could buy a higher deductible plan for $238. This savings of $173/month could accumulate to over $2,000 in an emergency fund in just one-year. The cost for the same plan for the 60-year-old is $594, close to $4,500 less expensive annually than the plan the employer had chosen. While this is one extreme example, it can play out for millions of employees across America.
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If the goal is to attract and retain talent, then employers need to turn their thinking upside down. Stop buying insurance products you think people want and imposing the costs on the entire population. Start by thinking about how much you are charging employees to participate. Then give them a choice and let them spend or save their own money.
