Smart businesses are continually looking for ways to reduce expenses. Since group benefit plans represent a significant part of employee compensation, companies can easily save thousands of dollars every year by making changes to their benefits program.
This article shows you how to lower your benefits costs in a way that won’t upset your employees.
Here are the top 5 strategies for saving money on employee benefits.
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Change some of your group benefits from Defined-Benefit to Defined-Contribution
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Find out if there are aspects of your plan that employees don’t want or value – then change it or eliminate it
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Align your benefits spending more closely with employee wages
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Self-insure low-risk, low-cost benefits
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Get competitive quotes every few years
Let’s take a look at each strategy in greater detail.
1. Change some of your employee benefits from Defined-Benefit to Defined-Contribution
Anyone who’s ever had a pension may have heard the terms Defined-Benefit or Defined Contribution. But what do they mean?
In simple terms, Defined-Benefit refers to any employee benefit that describes what the plan covers. The emphasis is on the details of the coverage.
Here’s an example of a Defined-Benefit:
“our benefits plan covers massage therapy at 100% up to $750 per year”
Defined-Benefit plans don’t tell you anything about the costs of the plan but they do require paying a monthly insurance premium. This premium usually changes from year to year, even if the benefit remains the same.
That’s Defined-Benefit in a nutshell and it’s what most people think of when they think about employee benefits.
Defined-Contribution Plans
The opposite of Defined-Benefit plans is Defined-Contribution plans. As one might expect, these plans emphasize how much an employer is willing to pay (or contribute) towards a specific employee benefit.
Here’s an example of a defined-contribution…
“we will reimburse you up to a maximum of $750 per year from your Health Spending Account”
Below are some common examples of Defined-Contribution plans:
✓ Health Spending Accounts (HSAs)
✓ Wellness Spending Accounts
✓ Personal Spending Accounts
✓ Group RRSP and TFSA savings plans
Now that we understand the 2 different types of benefit plans – why is it more cost-effective to shift some of your expenditures to Defined-Contribution benefits?
There are 3 ways that Defined-Contribution plans help control costs.
First, employees often don’t use up all of these benefits. When that happens, there is no cost to the employer for the unused amounts.
For example, let’s say an employee is given a $500 Health Spending Account but they only end up using $300 by the end of the year. In this situation, the unused $200 remains in the employer’s pocket. Contrast this with Defined-Benefit plans, which requires paying a monthly insurance premium, whether the employees use it or not.
The second reason is that the maximum cost of a Defined-Contribution benefit will never increase until the employer decides to increase it. For example, if an employer wants to keep the Health Spending Account at $500 per employee, it will stay at that level until they decide to increase their benefits budget. Contrast this with defined-benefit plans where the premiums fluctuate yearly and inevitably trends upwards over time.
The last reason Defined-Contribution plans save money is that insurance companies generally make less profit from these plans. Normally, insurers charge a small fee based on the amounts that are claimed by employees. Less profit for the insurance company means employees are able to receive more of what their employer is giving them.
In light of these advantages, should companies change all their benefits to Defined-Contribution?
No. Both types of plans serve a unique and important purpose. By building a plan that includes both Defined-Benefit and Defined Contribution, you’re able to strike the right balance between employee protection and affordability.
2. Find out if there are aspects of your plan that employees don’t want or value – then change it or eliminate it
Every business is unique. Some are almost entirely “white-collar” office workers, while other companies are primarily made up of trades workers.
Some companies consist of older, married workers while others have younger employees that haven’t started a family yet.
Each group has different needs which means they value certain benefits more than others.
For example, older employees may place greater value on benefits such as prescription drugs or Critical Illness coverage.
In contrast, young, single employees may prefer the flexibility of a Health Spending Account or a Wellness Spending Account.
Too many businesses make the mistake of offering benefits that don’t resonate with their employees. Not only does this waste money but it also creates the perception that the plan has little value.
The solution is to find out what employees want and what they don’t want. If employees are indifferent about certain benefits, companies can strategically lower their costs by scaling back these benefits or eliminating them altogether.
If the goal is to enhance the plan, rather than to cut costs, the savings can be reallocated to a part of the plan that the employees value.
How can a business know which benefits will have their employees jumping for joy? It’s simple – ask them.
We can help you create a short and effective employee survey that will show you how to use your money more effectively.
3. Align your benefits spending more closely with employee wages
Employee incomes are a reflection of the value that they offer to their company. Obviously, an experienced, skilled worker will be paid more than someone with less experience, training or skills.
In addition, losing a top income earner is much more devastating to a business compared to losing unskilled, low-paid workers.
Despite knowing this, most businesses use the same employee benefits plan to attract and retain employees at every income level.
An employee earning $250,000 annually is unlikely to be impressed with receiving the same benefits plan as someone earning $25,000 per year.
The solution is to align the benefits plan more closely with each employee’s personal income.
One way to accomplish this is to segment the employees into classes. Classes are simply sub-groups of employees.
Each class can be based on years of service or occupations, both of which tend to have employees of similar income levels.
For example…
Class A: employees with more than 3 years of service
Class B: employees with less than 3 years of service
By creating employee classes, you can assign different benefit levels to each group:
Class A receives $100,000 of life insurance
Class B receives $30,000 of life insurance
An employer can create as many classes as they wish based on their company’s needs.
If an employer isn’t interested in segmenting their employees into classes, there are ways of aligning employee benefits with employee incomes without using classes. This involves having the benefit based on a percentage of each employee’s income.
The chart below shows 6 different examples of how a company can align benefits with incomes without the use of classes.
Examples of Employee Benefits Based on Incomes
In each of the examples provided, an employee earning $100,000 would receive twice the benefits as an employee earning $50,000.
This strategy allows a company to save money by directing company spending towards the employees that are highly valued and hardest to replace.
4. Self-insure low-risk, low-cost benefits
In recent years the word insurance has lost its original meaning.
It used to mean protecting yourself from a major financial loss by making payments (called premiums) into a pool with several other people. If someone within the pool suffers a significant loss which is covered by the policy, that person gets directly compensated for their loss
.In recent years, insurers began offering “insurance” for things that aren’t exactly financially catastrophic. For example, you might not be happy if your $40 toaster stops working, but is it worth buying insurance for it?
When it comes to employee benefits, there are some benefits worth insuring and some that are not.
High-cost, high-risk benefits such as life insurance, disability coverage and travel insurance are good examples of benefits that you would definitely want to insure.
However, some aspects of employee benefits are simply a “money in – money out” funding mechanism. In other words, they are an indirect way for employers to reimburse their employees for low-cost, low-risk expenses. Examples include dental benefits, vision, chiropractic, massage, physiotherapy, etc. By self-insuring these types of benefits, you reduce the profit margins of the insurance company and can potentially save a lot.
Health Spending Accounts (HSA) and Administrative Services Only (ASO) plans are just 2 ways that companies can self-insure some of the low-risk benefits. These plans also allow you to take advantage of services offered by the insurance company such as payment of claims, technology, and customer service.
The more employees a company has, the greater the importance of using self-insurance as a way to control costs.
Finding the right balance between insured and self-insured benefits is crucial when it comes to maximizing your savings without taking on unnecessary risk.
5. Get competitive quotes every few years
Most small businesses don’t realize the extent to which insurance companies are willing to negotiate renewal rate changes to help retain business.
Insurers are usually open to re-evaluating their original renewal if the broker can make a strong case for it.
A key bargaining chip in the negotiations is a comparison between the insurer’s renewal rates and the quotes that other insurance companies are willing to offer. This gives the current insurer the opportunity to compare their initial renewal rates with what the marketplace has to offer. The result is often that the client obtains more favourable rates and can lower their costs.
If for some reason, the current insurance company is not willing to budge, the business has the option of moving their benefits plan to a different insurer and taking advantage of the savings offered.
By getting quotes every few years, your business is able to remain in a strong position to negotiate.
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This article is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this reason, you are advised to consult with your own legal, tax, or other financial advisors regarding your specific situation.