Many employers have been forced to make tough choices and reconfigure their benefits packages. Is there a reliable, foolproof way to restructure benefit plans overall?
Twenty or so years ago, an employee might’ve moved to a different company three or four times during the course of a career. Employers offered benefits to increase the economic security of their employees and to improve worker retention. Oftentimes, benefit plans were generous, depending on the size of the employer, and employees reaped the rewards of medical, dental, life insurance, a pension plan and more.
Traditionally, an employer’s top objective, when it came to offering benefits, was to attract and retain employees and increase productivity. These objectives remained fairly consistent over time with slight shifts in priority, depending on the economy.
Then in the last 15 years or so, exploding health care costs and a turbulent economy impacted employers. The world began to change and, today, many employers are making tough choices and reconfiguring their benefits packages.
Is there a reliable, foolproof way to restructure benefit plans overall?
“There’s no common solution,” says Randall Humphries, district manager training assistant and recruiter at Greg Randall Insurance in San Rafael. “The idea is to meet both sides’ needs.”
As employers face a new year, the latest benefits landscape is on the horizon and much of it continues to focus on cost and shared accountability.
The price of health care
“In my experience in HR, it’s the cost of health care that becomes the number one reason employers restructure their benefit plans. On average, health care coverage accounts for 25 to 30 percent of total labor expense for most employers,” says Brenda Gilchrist, principal and cofounder at The HR Matrix in Santa Rosa.
What doesn’t always make headlines is that these costs have dramatically outpaced wages for the past 10 years. “Health care costs have increased at more than three times the rate of the average American’s salary,” says Colby Ritch, insurance broker at Ritch Insurance Services in Santa Rosa.
“We’ve experienced double-digit premium increases for the past 10 years, and that’s not sustainable,” adds Victor McKnight, principal, a North Bay broker with Epic Insurance.
Since 2001, family health care premiums went up 113 percent, according to a study by the Kaiser Family Foundation and Health Research. This compares with a 34 percent gain in wages during the same time period. In 2011, the average annual premiums for employer-sponsored health insurance were $5,429 for single coverage and $15,073 for family coverage, according to the study.
“We’ve hit a breaking point,” says Ritch. “In the past, everyone had health insurance. Today, however, health insurance costs are increasing so much that many small businesses are struggling to provide benefits and still turn a profit.” That means making some tough choices, especially for smaller business owners. “If they don’t lay off employees or hire part-time employees, the small employer can’t stay in business.”
“Employers consider health insurance to be a part of compensation,” says McKnight. “Employees and employers have difficulty balancing cash compensation and benefits, especially for middle-income employees.”
As a result, midsize and larger employers are often forced to make changes to their health care benefits. The shift toward shared accountability is projected to continue.
What this often means is that employees are paying higher deductibles and copayments. In some cases, businesses are offering health insurance only to their employees. Health care coverage is available to families, but at the employee’s expense.
“It’s a sensible strategy to consider for any employer,” says John Hennessy, senior principal and health and wellness practice leader of Hay Group, a benefits consulting firm in San Francisco. “It’s becoming more and more difficult for employers to offer affordable health benefits to families. But at the very least, they can provide affordable benefits to employees.”
“Now that most employees are sharing in some of their benefit costs through high deductibles and HAS/HRA-type plans, they’re beginning to fully recognize the value of their health plans and the cost to employers,” says Gilchrist.
For decades, Americans have had a mostly passive approach to health care. You don’t go to the doctor until you have a problem. But as health care costs continue to rise, employers are taking a more proactive approach to educate employees to lead healthier lifestyles and become better health care consumers.
Are employers able to motivate employees to adopt healthier lifestyles? “Employers have no choice but to try,” says Hennessy. “We all know what we shouldn’t be doing, but in the absence of behavior change, it’s a losing proposition.”
As a result, employers continue to adopt a value-based design, which focuses more on altering behavior. The idea is to take care of your body the same way you take care of your car—check the engine, change the oil regularly and rotate the tires to make sure it’s in good shape. It’s more cost-effective to take preventive measures than to run your car into the ground and then have to replace it.
Consumer-driven health plans, on the other hand, keep employees in the driver’s seat, but now they’re (hopefully) more educated and better health care consumers.
When consumer-driven, value-based health plans work together, employees go for preventive exams and take advantage of health screenings. In some cases, employers will offer a premium reduction when health data numbers are under a certain threshold. This gives employees an incentive, for example, to keep their weight down and manage blood pressure and cholesterol.
There’s more of an emphasis today on staying healthy and definitely a trend toward wellness, says Paul Brunetta, employee benefits specialist at Standard Insurance Company in Santa Rosa. “A healthy workforce is an asset. Productivity increases, there’s less absenteeism and fewer work-site injuries.”
In some cases, employers will eliminate copayments altogether for employees meeting agreed-upon health benchmarks, which removes the barrier for getting health care when you need it, especially for employees who have a chronic condition such as high blood pressure or diabetes.
“If you’re a diabetic, then you don’t want there to be a barrier to basic treatment,” says Hennessy. The trend is to offer a health plan where there’s no copayment for a regular checkup and prescription drugs are fully covered. It’s more cost-effective for employers to have health plans in place that cover regular care and medication than to pay for an emergency room visit later when a situation gets out of control.
“Every dollar spent on prevention and wellness will equate you an exponential dollar,” says Ritch.“Prevention is the answer.”
As a result, employers are offering wellness programs and other incentives to encourage employees to live healthier lifestyles. What’s more, those employers using wellness programs are seeing a 6.1 percent average annual medical cost trend reduction and a 13.5 percent average medical cost trend reduction among members with core conditions, according to a study by Zoe Consulting Inc. (Core conditions include asthma, diabetes and high blood pressure, which can be managed through early detection, regular checkups and prescribed therapies.)
A wellness program might include paying for a portion of health club memberships, yoga classes or a visit to a dietitian to develop strategies for healthier eating. Employers may also pay for classes to help employees stop smoking, lose weight and manage chronic conditions such as high cholesterol and high blood pressure. But while there continues to be a lot of talk about wellness and prevention, a lot employers haven’t achieved that apex.
Wellness programs can be beneficial, says Gilchrist, but employers shouldn’t expect them to decrease their premium costs immediately—or possibly ever. “Wellness programs might save on other intangible costs such as decreased absenteeism and increased productivity if employees are feeling healthy,” she says. “In some cases, it might even improve morale for some employees.”
While employers continue to get more involved in managing the rising costs of health care so they can continue to offer health benefits, ancillary benefits fill in the gaps. Typically, ancillary benefits help ensure stability in their employees’ lives and can help round out a benefits package.
Ancillary benefits may include dental, group life, long- and short-term disability plans, accident insurance and even prepaid legal plans that make access to a lawyer more affordable. They also typically offer 401(k) plans to help employees save for retirement, and though pension plans are less common, today some companies still offer them.
It’s a good idea for employers to get creative when it comes to offering ancillary benefits. As companies have had to lay off employees, there’s now a heavier workload and a lot of jobs are being cross-pollinated, says Humphries. “As we study other countries, [employers] are learning that American workers are under a lot stress and that also drives up health care costs.
“There are three things employees want: more money, time off and incentives,” says Humphries. Incentives might come in the form of a bonus, gift certificate or extra time off. For example, one company established a “bad day off” policy.Each employee received one day off per quarter. “But it’s not about going golfing or to the spa, it’s about taking time off when you need it. There’s an honor system and employees know not to abuse it because when they do take time off, their peers often have to pick up the slack.”
The latest trend
Some employers are changing to discretionary time off (DTO) policies for their exempt employees rather than a traditional vacation plan, according to Gilchrist. “Some of our smaller clients are eliminating vacation plans and replacing them with DTO.”
DTO is offered to exempt employees (generally, this means salaried employees who have met qualifications under the Fair Labor Standard Act). How does it work? Rather than a company offering a limited amount of paid vacation time, employees can take as little or much time off as is operationally feasible.
“In some situations, employees may feel hesitant about DTO. It may be viewed as a take-away,” says Gilchrist. But, she explains, DTO offers a win-win situation. With DTO, there’s no cash liability for employers, since DTO isn’t an accrued benefit and therefore isn’t paid out at the time of termination, as is required of traditional time-off accrual plans by the state of California. According to Gilchrist, DTO works best when you have a staff of employees who know how to manage their time appropriately.
Granting employees stock options has been around for years. The goal is to give employees an incentive to help boost the company’s stock price. “Employees definitely appreciate having an ownership interest in the company they work for. As the economy recovers, it will be important for employers to retain their top talent,” says McKnight.
The latest trend, however, is to offer employees restricted stock options rather than common stock.
A restricted stock option means stock in the company that isn’t fully transferable until certain conditions have been met. Typically, that means an employee is expected to continue working at the company for a set period of time until the option is vested. However, those restrictions can also include a performance condition such as the company reaching earnings per share goals or other financial targets.
Restricted stock options are more popular among employees because the income tax consequences are more favorable than common stock options. That’s because the taxes on restricted stock options can be deferred until the time of the sale of the stock and for all appreciation to be taxed at the capital gains rate, even if the stock appreciated prior to vesting. In contrast, stock options can result in ordinary income to the employee, especially when the stock has appreciated before it’s vested.
The future of employee benefits
What’s on the horizon for employee benefits packages? “It’s hard to tell with health care reform,” says Gilchrist. “Companies will be evaluating whether to pay the health care penalty or pay for the insurance. What I think is going to happen is that a lot of companies will decide whether or not to have a health insurance plan. This will become more clear once the changes go into effect; then employers will strategically plan what their benefits package will look like.”
In any case, health care insurance and plans that help employees save for retirement are the most important benefits a company can offer. “Retirement [plans] will always be critical, and health care is important, especially for families,” says Hennessy. “The rest is nice to have. Disability isn’t an expensive benefit, and it should be highly valued.”
Nevertheless, benefit packages don’t necessarily help a company retain good talent.“Benefits alone won’t create employee retention,” says Gilchrist. “We’re starting to see a sporadic decrease in unemployment. When that happens, top performers start looking at other opportunities and there’s a résumé tsunami effect. Suddenly there’s a flood of résumés in human resource departments and turnover starts to increase.”
In a recovering economy, a top priority for companies right now should be retention efforts for their top performers, according to Gilchrist. According to experts in the benefits industry, today’s workers are likely to change jobs every two to three years. And the best way to retain workers, benefits-wise, is to create a total benefits plan that meets individual needs.
“Employers need to craft a total compensation package around the individual. What’s good for Jane is not necessarily good for John,” says Gilchrist. “But remember that benefits alone will not create employee retention.What’s more important is to create an engaged workforce by having meaningful and effective conversations with employees about their desires, goals and passions while ensuring their experience and desires are being applied to work they feel is meaningful.”
Employee value proposition
So what’s the best, most innovative way to recruit and retain top talent? “Companies need to get creative to find and retain good talent. They need to be proactive and create a strategic talent acquisition plan,” advises Gilchrist. She recommends employers consider mentorship programs, internships, in-house training programs and apprenticeships for high school and college students.
These days, it takes more than a benefits package to attract and retain good talent. According to Gilchrist, the latest buzz phrase in the benefits world is: employee value proposition (EVP). It’s a good idea for employers to create a value proposition that will attract and retain candidates that fit their organization. Part of creating an EVP is to create employee engagement.
Research shows that when employers have a strong connection in the community or for a cause, employees are more engaged, resulting in higher retention, says Gilchrist.
For example, employees are often more engaged when the company provides a service or product that impacts the health and well-being of others. If a company’s product or service doesn’t have that sort of impact, becoming involved in a community cause, such as helping children or feeding the homeless, can help keep employees feeling positive about the company where they work.
“When employees feel connected to something more than just the task at hand, they’re likely more engaged,” says Gilchrist.
“Many of my nonprofit clients attract and retain quality employees by creating a mission-driven environment,” says McKnight. “If you’re caring for the uninsured or feeding the hungry, you may choose to work for less compensation than you’d receive at a for-profit company because you believe in the mission.”
What’s on the horizon for employee benefits?
Bottom line, employers are going to continue to struggle, balancing the costs of providing health care coverage with or without health care reform, says Gilchrist. “As the economy improves, employers will likely face increased turnover. Employers that implement employee retention as a key initiative will be ahead of the curve as the economy recovers,” she continues. “Benefits are an important aspect of the Employer Value Proposition. Those companies that create an engaged, community-centric environment will have an advantage.”
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