Choose your employer contribution wisely- how to budget for group health insurance

Why a 100% employer’s contribution to an employee’s health plan is often not the most optimal strategy

As an employer, you want the best for your employees. Employers sometimes unwittingly think that they are doing themselves and employees a great favor by paying 100% of the premium or what is called “100% contribution to the employee’s health plan”. However, an employer’s contribution level of 99% or less has benefits you may have overlooked. There are three reasons why:

1) Prevention of double coverage
If 100% employer’s contribution is provided, then insurance companies request and require that all employees be covered under your companies group health insurance package. Hence, if you apply for coverage with a carrier and mark 100% contribution then insurance carriers will not issue the policy unless all employees are covered- regardless if they have coverage or want to waiver out.

There could be several reasons why an employee chooses to waiver out. Some employees have coverage provided through their spouse or another family member. Or a part time worker may have insurance somewhere else.

Example: you are a small business owner and you offer group health benefits. You have 23 employees. 22 employees indicate to opt-in (want to be covered) but 1 employee opts-out (does not want to be covered under your group health plan). If you have set your contribution level to 100%, your insurance carrier will request that all 23 employees are covered- including that one employee that doesn’t want or need to be covered. However, if you set your contribution level to 99% or less (even 1% makes a difference!) then insurance carriers will cover just your 22 employees happily.

2)The “other people’s money” syndrome
Providing 100% group health insurance coverage creates what is often referred to as ”the other people’s money syndrome”; if something is offered for free, people will accept it, needed or not. There is no economic incentive for the employee to pass up the offer or benefit. You could end up paying for insurance that is not needed or wanted.

3)Engagement theory
Allowing employees to pick their own health plan leaves them feeling engaged, respected, and trusted. Even if they are responsible for a small contribution, they will most likely feel more inclined to put some effort into choosing the best value and quality plan. With their own money in the game (even $10), it makes them more responsible for plan selection.

How to set your employers contribution level: You can use several strategies for setting your employers contribution level: a percentage based approach, a fixed amount approach (the same fixed contribution for every employee), or a flexible amount approach (contribution level based on the age range of the employee).  With the right strategy,  you can save money on your group health insurance without sacrificing quality, and offer supplemental benefits to your employees.

The numbers: how a lower contribution level can benefit your employees

Imagine you are a small business owner who currently covers 100% of your employee’s benefits- you are offering health insurance and dental insurance. You have 30 employees-all covered under your group health insurance (as they have to be with the 100% contribution level).

You decide to set your contribution level to 95%- which say in this case comes down to a monthly contribution per employee of $15 a month. 2 of your employees indicate that they have coverage through their spouse. Your new lower contribution level allows you to waive these two employees out. A contribution of $15 per employee x 28 covered employees= $420 a month or $5,040 per year.

How to save money on group health insurance
In addition, you decide that it’s time to reevaluate your health insurance and analyze if your current coverage is still the most effective. After comparing your current carrier and plans online for each employee, you find out that your current coverage is not the most effective and that you can save money on your group health insurance with another strategy. This saves you $900 per employee, totaling up to 28 employees x $900= $25,200 a year.

You now have $25,200 + $5,040 = $30,240 extra money a year that you can use for supplemental benefits such as life insurance, short-term disability insurance and even long term disability insurance. Your employees will probably not mind the $15 contribution a month if it means that you can offer them a much more competitive benefit package!