How to factor health insurance cost into salary decision?

Question

I work at a small company where we pay 100% of employees' health insurance premiums. The cost can vary dramatically depending on whether an employee waives coverage, wants individual coverage, or has a spouse and children they want on the plan. An individual on the plan might cost us ~$5k/year and a family ~$20k.

This means a dramatic difference in the net cost and benefits of similar employees at similar roles and pay grades. For example, if an employee is offered $80K as a salary, an employee who waived coverage will make $80K, while someone with a totally insured family will cost the company $100K - a 25% difference. What's a viable way to mitigate that discrepancy?

How do others deal with compensation offers given that the health insurance costs for employees can vary so much? Do you just determine the salary assuming the employee would use the most expensive insurance coverage (potentially weakening the offer you could make to an employee who didn't want so much coverage)? How have others solved this?

Note: I don't think switching to a system where employees pick up some of the health insurance premium solves this problem, since those who consumed more health insurance would still get a greater benefit as someone with the same salary but needing less coverage.

Answer 1

Some companies require employees to pay some of the cost of health insurance. In those cases the company contribution can be held consistent for all employees. But you've eliminated this option.

Another way to address the perceived imbalance is to use a "cafeteria plan" for benefits. Employees get a fixed amount of benefit; they can "spend" that on family health care or on a 401(k) match or on tuition remission or something else. You pitch that as allowing each employee to craft the benefits plan that meets his needs. Right now it can seem unfair to your single employees that others get the same salary plus extra insurance; it may also seem unfair to those who don't participate in the 401(k) plan that others get a company contribution, and ditto for those who use or don't use other benefits.

Transitioning to a cafeteria plan from a no-limits package like you have now can be tricky, though -- you'll have to either add benefits or get flack from people who are now losing what you used to fully cover.

Answer 2

This is coming really close to not being a viable question because you're asking what's "legal" and that's something for which you really need the help of a lawyer.

In many places, there are laws protecting discrimination on protected characteristics like gender, race, age, marital status, etc. There are also many places that have limitations on what you may legally ask in an interview - and often asking a woman if she has kids (and is the primary caretaker of those kids) is a huge red flag.

So if you can't ask, how can you know?

Taking a guess is almost worse - I don't think your company really wants to explain that "she looked like someone who might have kids..."

I would believe it could be possible to offer a fixed stipend - "the company will pay $x for your health insurance, regardless of your family state, and/or will pay you $x directly if you don't use the insurance plan" - so that it actually does cost $x per employee.

In practice, what I've seen is that people are pretty good at figuring out the companies that offer the right tradeoffs for them. Companies with incredible health insurance tend to have less competitive salaries across the board, and they tend to attract people who value the security of insurance over the plain hard cash option. That is often people with families or complex health concerns. But it can also be totally single, totally healthy people who just like the feeling of being safely covered just in case.

Conversely, a lot of the smaller startups in my area tend towards more minimalistic coverage and they largely attract healthy young single people without a lot of medical needs... and people who really like the adventures of startups, regardless of age. Because they like the risk vs. reward of that particular trade.

There's a lot of things in employment that don't work out "fair" in terms of individuals - health insurance, commuting/parking, various work at home options, etc.

Answer 3

How do others deal with compensation offers given that the health insurance costs for employees can vary so much? Do you just determine the salary assuming the employee would use the most expensive insurance coverage (potentially weakening the offer you could make to an employee who didn't want so much coverage)? How have others solved this?

In smaller start-ups where I have worked and have been privy to the salary concepts, we kept the salary considerations distinct from the benefits package considerations. For us at least, benefits were simply a cost of doing business, and were budgeted for the overall company on an average per-employee basis, not on an individual level.

We paid salaries based on what the market rates were for the position, and based on our desire to land the individuals - without concern for what level of benefits the individual might consume.

After all, benefits required this year might be different than next year. Someone comes in on an individual plan, but then gets married or has a child and subsequently needs a family plan. At that point you can't reduce her salary just because she is now consuming more benefits.

I do know of smaller health-related offices that offer a benefits package at a particular dollar level to all their employees. If you consume less benefits, you can get the remainder in a bonus at the end of the year. That worked well for them, and let them feel like they could predict their expenses per employee more accurately.

Answer 4

Beyond the obvious legal questions here, what I have seen at larger companies is a sliding scale based on coverage.

In our case we have good coverage, like your case at 100% in some cases. However, only the single employee coverage is at 100% of the premium. We have several plans so if a single wants more than the basic plan, they pay some amount, not really the difference but some part thereof.

For us the range is free for single employee coverage to about $400/mo for the best coverage on a family. Most fall somewhere in between.

Our employer recently also started to differentiate family coverage and family coverage with 3+ kids.

At some startups I have seen them provide a "budget" where the company pays up to some dollar amount of the premiums, but the employee is above that. This isn't bad for single, but is really expensive for family coverage.

I think if you as an employer start manipulating salary based on family status you will run into legal problems, but that may vary based on your country etc.

I work in the US

Answer 5

The way to compare this is to compare it to what it would cost you to insure yourself at a level that you are comfortable with out side of your works group policy. Generally you will find that a group policy is less expensive than a comparable policy offered to the public like through the Healthcare.gov website. However you may be getting more of a policy through your employer than you really need. So what you need to do is figure out what policy you need, figure out what it will cost you in the open marketplace, then compare it to the cost of the policy you choose from your employer. Your insurance is only a benefit if the policy costs you less through your employer than you would get if you choose to waive coverage from your employer and purchase your insurance independently.

If you are comparing two competing offers the same process is true. Compare what it would cost you to independently insure with a base salary, with the offer of salary plus insured benefit. The one that costs less at your bottomline is your better salary offer.

Answer 6

Your question implies that in your jurisdiction insurance is a fringe benefit. You have no idea before you interview them what fringe benefits they will actually use.

You are right that your situation won't be fixed by sharing the cost with the employees. It does change the numbers, but it doesn't solve the problem.

The cost of fringe benefits is an important calculation when determining rates you will charge customers. Though you can look at your current mix of employees to get a average cost it can impact the actual financial performance of a project, contract, or team. If they are more expensive when compared to the average they will not generate the profits you expect. For a long term contract this can hurt the company if they drift from being inexpensive to being expensive over the life of the contact.

Some companies do modify the pay and incentives based on the options chosen. I have known companies that awarded extra pay for not using the insurance because they received coverage from their spouse, or because they were retired military. I have also worked with companies that awarded extra vacation days for not needing insurance.

There has also been a trend of not covering a spouse if the spouse also has a job. The idea is to let the other company cover their employee.

Unfortunately for you a large difference between the most expensive package and the least expensive package makes it very hard to predict actual costs. The best you can do is pick a average cost based on your experience, and to refine those numbers as need. The larger the number of employes you have, the less likely that one new employee will render your estimates worthless.