Employee Benefits 101
Why implement employee benefits?
Offering a strong employee benefits program isn’t just an added perk; it’s a proven way to boost morale and foster long-term loyalty within your team.
In fact, 42% of employees who switched jobs cited better benefits as a primary reason for their move [1], and a significant 79% would prefer valuable benefits over a higher salary [2].
Benefits not only make a difference in retention, but also contribute to healthier employees, which increases productivity and reduces sick days.
Additionally, group benefits plans are tax-deductible, often costing only about 5% of payroll, and can be cost-shared 50/50 between employers and employees, making them a smart investment for both your team and your bottom line.
- Forbes: Discover The Top 5 Reasons Workers Want To Quit Their Jobs
- Sun Life: The Benefits of Group Benefits
3 Types of Standard Employee Benefits Plans:
Experience-Rated Plan
With an experience-rated plan, your group consists solely of the employees at your company, creating a plan that’s specific to your team’s needs.
Each year, your renewal is negotiated based on inflation and your team’s benefits usage, which can lead to renewal rates that fluctuate, typically between 15–25% or more until the equilibrium between premiums and claims is reached.
This plan structure is ideal for companies with 20 or more employees, as it provides a tailored approach to your benefits needs.
Pooled Plan
A pooled plan combines your group with other groups, meaning your employees become part of a larger pool, such as a group of 5,000.
Renewals are based on the averaged usage across the entire pooled group, leading to more predictable annual renewal rates, typically ranging from 5–10%.
While these plans may have a higher initial cost, they offer the advantage of steadier, more manageable renewals, making them well-suited for companies with fewer than 20 employees.
Health Spending Account
With a Health Spending Account, each employee receives an allocated amount to use for healthcare expenses each year. Any unused funds can carry over to the following year, offering flexibility and value.
HSAs operate on a “pay per use” basis, with costs including a 10-15% administration fee per claim.
This type of plan is a cost-efficient option for businesses looking to provide benefits flexibility and control over spending.
Insurance companies calculate renewals based on a targeted 'loss ratio,' typically aiming for claims to be about 70% of the total premiums paid. For example, if a client pays $10,000 per year in benefits premiums, the insurer would target around $7,000 per year in claims. This approach helps maintain a balance between cost and usage, keeping the plan sustainable over time.
On average, employees tend to use around 65% of their available benefits, which also plays a role in how renewals are determined and helps to keep premiums as predictable as possible.
Things To Consider:
When setting up a benefits plan, there are a few key considerations to keep in mind. Most plans require 100% mandatory participation for all eligible employees and their families, ensuring equal access across the organization. However, employees can waive health and dental coverage if they’re already covered under a spouse’s plan.
To maintain fairness and prevent misuse, all plans include 'reasonable and customary' limits on covered services.
Additionally, most plans have a waiting period, typically around three months, which is the time new employees must wait before they’re enrolled in the plan.