Fifteen years ago, I bought a Flying Scot sailboat from 1969. It is a 19-foot sailboat. I was the fourth or fifth owner. Although I didn’t know much about its original design specs, it sailed quite well. However, every once in a while I noticed some stresses and strains in its performance and realized that the rig or hardware was literally installed upside down or upside down. For example, last week while finishing the woodwork, I realized that the boom slide had been installed upside down – who knows how long. As you can guess, as I slowly rebuilt the boat to the original intention, its performance has improved dramatically.
This story reminds me of how I feel now about employee contribution rates.
Quick quiz: Can you state the employee contribution strategy to your company’s group health plan? How does math work?
I have found that it is common for employers with more than one health plan to increase existing employee contributions year over year by the same percentage – in other words, to leave all rates increase by the same tide. It’s also common that the person who initially set the employee contribution strategy is long gone, and no one in the organization currently fully understands the original intent or the underlying math. Just as I assumed my Flying Scot was rigged and installed correctly, it’s easy to assume the same with employee premium rates.
But, just as buying a new sail, rudder, or centerboard for an unwilling sailboat will not completely improve performance, investing money in improved care management programs, Wellness initiatives and plan design modernizations will only produce a full return on investment if the employee contribution methodology is solid.
To review your current methodology, let’s first take a look at your lowest cost plan, which could be a high deductible health plan. Let’s determine the Employer Percentage Contribution, Dollar Contribution, and Resulting Employee Contribution for each level. For example:
In this methodology, the employer sets its contribution in dollars at a certain percentage of the rate reserved for employees and at a generally lower percentage of the rates of the family component. This strategy ensures that dependents who register receive more employer contributions (column C). Does your current methodology resemble this approach?
Or maybe you provide the same dollar contribution for all registration levels. For example:
If your current strategy doesn’t seem to match any of these examples, the family contribution rate may be based on the employee contribution rate plus a percentage of the difference between the individual and family premium. While this approach is arguably too complex, it is not uncommon. For example:
So far, so good? To check if your vang is set up backwards, let’s see what happens when we consider the additional plans on offer. Here is an example of adding a second plan to Example 1 and maintaining the same employee defined contribution amounts:
Under this strategy, the employer’s budget is based solely on the HDHP plan. While employees can redeem the PPO plan, the employer’s contribution does not increase. The same strategy shared in Example 2 can also be easily applied to this model.
However, many employers use the same percentage of contributions for both plans. For example:
This strategy creates an additional employer subsidy for the PPO plan (column C2), which encourages employees to choose the PPO plan over the HDHP.
Which of these methodologies is the best? Some considerations:
Although Example 2 is the most profitable for employers, it can result in uncompetitive family-level contribution rates. Double-check by examining the references provided by the latest Kaiser Family Foundation Survey.
Examples 1 and 4 offer the greatest opportunity for budgetary control, sound economic incentives, overall competitiveness, and compliance with the non-discrimination tests of benefits and section 125 contributions.
Although the math in Example 3 is not math, it is not the easiest methodology to explain to executives, let alone staff.
While Example 5’s popularity continues, it increases costs for the employer, prompts employees to purchase more coverage than necessary, creates headwinds for Section 125 test compliance, and leaves the door wide open. open to navigation in rough seas if Congress ends up capping the benefits of Section 125. the highway.