Organizations face a maelstrom of pressures that are affecting their ability to maintain stability, continuity, and business momentum, while employees struggle to sustain a sense of security and support for their individual needs. The combined impact of commercial, economic, and labor market volatility is weighing on company and individual finances, straining both. One particular issue, rapidly rising operating and living costs, is influencing employment decisions for both organizations and their workers. A major factor is the rapid, continued rise in employee benefit expenses, driving companies to seek better, more affordable coverage and employees to look for better, more affordable coverage with other employers. Designing a comprehensive, dynamic employee benefits strategy that meets both company financial and talent needs is essential.

The rising costs of healthcare sit at center stage

Healthcare costs in the U.S. have been rising much faster than in other developed nations, reaching nearly double the per-capita spending of others. This is driven by higher prices for healthcare services, fewer doctor visits, higher volumes of medications (and nearly 3X more expensive) used, and administrative spending reported to be five times (5X) the average in comparable countries. PWC reports a 9% expected annual increase that is further driven by a number of factors including:

• Hospital and related services inflation of 7.6% annually.
• Expanding provider (physicians, practices, hospitals, clinics) reimbursement pressure in part to maintain their operating margins.
• The increasing use of AI-enabled revenue optimization tools by providers driving higher paid amounts per submitted claim.
• Market consolidation of providers that lessens insurers’ negotiation power.
• Escalating pharmacy spending/reimbursements (on oncology, immunology, diabetes, and obesity drugs) and demand for behavioral health support.

Employer-sponsored health insurance remains the most common source of health-related coverage for 60% of non-retirees in the U.S. While 75% of workers are eligible, just over 30% decline coverage because of high cost. Another 63% decline coverage because they have eligibility through other means (e.g., spouse, parent, or military benefits).

In response to these trends and pressures, corporate insurers and open market plans are adjusting their prices, deductibles, benefit levels, provider networks, and market availability. At the same time, companies are reviewing and reconsidering their suppliers, benefits, and employee cost-sharing and contributions.

Understanding the costs of employee benefits

Designing an employee benefits strategy considers two primary elements: eligible workers' benefit needs and preferences, and the cost of providing them. Employee benefits serve several purposes, but they primarily attract and retain valued workers, provide access to quality care, and afford financial protection and stability for them and their families.

At the same time, they represent a significant, ongoing expense for an organization. They typically include health insurance, retirement plan contributions, paid time off, and mandatory employer-paid taxes (paid on workers' behalf), such as Social Security and unemployment insurance. The U.S. Bureau of Labor Statistics (BLS) regularly reports on employer spending and has found that these typically make up roughly 29% to 31% of the total compensation costs associated with employing workers. 

The largest portions of that expense are health-related insurance (e.g., medical, dental, vision, psychological), retirement (e.g., 401 (k) and pension), life and disability insurance, and other wellness and well-being programs, which together represent 60-75% of costs. Other benefits, such as paid time off and perquisites, and legally mandated taxes (e.g., Social Security, Medicare, and unemployment) are responsible for the remaining expenses. 

Providing those benefits is expensive: the BLS reports that private-sector employers pay an average of $29,300 annually per full-time worker, including $10,358 for health, life, and retirement coverage alone. Most small and mid-sized businesses budget 25% to 35% of total payroll to provide access to benefits. These cost levels are forcing employers to regularly review and reconsider their benefits strategy.

How organizations fund employee benefits plans

A major part of planning and designing an employee benefits strategy is how the package will be funded, which requires collaboration between HR and Finance leaders. Larger employers are increasingly considering three well-established ways to pay for (and administer) their plans, plus three others popular with small- to medium-sized businesses (SMBs). The most common approaches for companies include:

Fully insured

More common for smaller organizations, this option has a fixed monthly premium per employee (for each selected insurance type, medical, dental, etc.) that an insurance carrier assumes and handles claims for. Those premiums are paid for each eligible employee based on factors such as covered family status (employee only, +spouse, or +spouse and dependent child(ren), geographic location, etc.

This approach offers fixed, predictable annual costs and low administrative effort for the employer. However, the company’s flexibility to design tiered plans or manage provider networks is limited. Their ability to manage cost increases based on actual claims or utilization rates year over year is limited to non-existent. 

Self-funded 

Larger employers often choose this option, paying employee benefit claims directly through an outsourced, third-party administrator (TPA) instead of paying a fixed premium to an insurance carrier. This option is most frequently supplemented by purchasing stop-loss insurance to cap catastrophic losses. 

Benefits include greater cost control and visibility into employee benefit utilization data, as well as lower costs than fully insured options with premium markups. Flexibility in plan design, including tailored benefit packaging and provider network building, plus the ability to retain savings from low claims experience, make this option especially attractive to those building the benefits strategy. However, financial risks include the need for liquid cash reserves to make timely reimbursements and unpredictable cash flows due to hard-to-predict claim volumes and catastrophic cases. The company remains responsible for compliance and tax reporting.

Hybrid or level-funded plans

This option blends fully insured and self-funded plans, where the company makes fixed monthly payments to an insurer or TPA that funds a claims fund, administrative and compliance expenses, and stop-loss insurance. This offers an attractive option for smaller employers who want greater claims transparency and the associated cost control abilities

Advantages include predictable costs, access to claims data, and potential refunds if claims expenses are below expectations. However, stop-loss insurance can increase with high claims expenses, and tailoring options are limited to mandated carrier provider networks and pharmacy benefit managers.

Alternative options that are popular with smaller organizations involve pooling for their covered employee bases for lower costs and more coverage options, including:

Group captive plans 

These involve smaller organizations pooling their employees into a jointly owned and operated plan, with organizations sharing oversight and management responsibilities to improve buying power, access to better provider networks, and more benefit options.

Professional Employer Organizations

PEOs are third-party companies that contract with groups of small employers, co-employ their workers, and gain economies of scale by buying insurance as part of a larger employee group. This is especially attractive to companies that can afford to provide reasonable benefits, lack HR functions or benefits teams, and want to outsource design, delivery, administration, compliance management, and reporting to a partner.

Individual Coverage Health Reimbursement Arrangements 

ICHRA are plans that let employers of any size provide eligible workers with tax-free monthly allowances to reimburse them for purchasing individual health insurance premiums and qualified medical-related expenses on the open market. These give companies flexibility by letting them tailor allowance levels for different employee classes and provide IRS-approved pre-tax benefits. However, because these require employers with 50+ employees to purchase ACA-compliant (or Medicare) insurance plans, they may not qualify for government affordability subsidies and risk changes in federal support for ACA premium levels.

The value of a robust employee benefits strategy

On the surface, benefits entice employees to join and stay with an organization. More broadly, though, they serve a business purpose: the benefits strategy is part of the employee value proposition (EVP) and has monetary value as part of a total rewards offering. Along with other compensation elements, it provides financial security for health, retirement, and other large expenses. Equally valuable, though, is access to quality (and more affordable) medical care and resources in return for employees' performance, effort, initiative, and contributions to achieving business objectives. A robust benefits strategy supports:

Candidate attraction

ADP research found that 60% of employees named healthcare coverage as the most important benefit when considering a job offer. This is especially true for SMBs, as 74% of their workers said health insurance would influence them to accept a role at a new company.

Employee retention, engagement, and productivity

Mercer’s industry research has revealed the power of a robust benefits strategy: 44% of employees who reported that their health and wellbeing were supported were more loyal to their employer. In addition, Cigna Healthcare found that 59% of employees with access to 10+ health and wellbeing benefits stated that they were less likely to leave their employer. 47% of organizations reported that those benefits directly reduced absenteeism and significantly increased employee productivity.

Core components of a benefits strategy

Three primary types of benefits make up an organization’s benefits offerings and are designed to meet its foundational and legal requirements and employee preferences. While these comprise the bulk of a traditional employee benefits package, they are not exhaustive, as the definition of “benefits” has expanded to include on-site amenities, activities, and programs designed to engage employees. That said, the core elements and examples of those covered in a company benefits strategy, and can be further categorized by their nature as either insurance-, program-, and/or policy-based, include:

Foundational benefits

These represent standard offerings that employees and job candidates expect to be offered as part of their total compensation packages.

Health and well-being

• Health insurance (medical, prescription, dental, vision, mental health)
• Disability insurance
• Paid time off (vacation, sick, personal, holidays, parental, bereavement) 
• Employee assistance programs (EAPs)
  
  

Retirement and financial security

• Retirement plans (401(k), 403(b), pensions)
• Savings plans (Health (HSA) or Flexible Savings (FSA) plans, student loan repayment assistance, SECURE 2.0 Act, emergency savings accounts (PLESAs)) 
• Life insurance
• Employee stock purchase plans (ESPP)
• Employee stock ownership plans (ESOP)
  
  

Legally Required Benefits 

While many do not consider them benefits per se, employers pay for these mandatory contribution/tax-liability programs on behalf of each worker, and they fund government benefit programs in individuals' names that employees can use in the future. Some are state and local programs that vary by location, and employees outside the U.S. are covered by other related benefits, whether the employer pays taxes or not. 

• Social Security
• Medicare
• Workers' compensation
• Unemployment insurance
• Family medical leave (FMLA) 
• State disability
  
  

Perquisites

These discretionary benefits ("perks") come in the form of policies, programs, and resources usually created to respond to industry competition for talent, targeted employee and candidate lifestyles and preferences, and identified employee challenges. Organizations offer them based on practicality, affordability, and how critical they are to attracting, engaging, retaining, and supporting employee productivity.

• Remote/hybrid work location and schedule flexibility.
• Family care (Parental leave, child or eldercare assistance).
• Financial wellness and budgeting (seminars, online tools, access to expert guidance).
• Physical fitness and lifestyle wellness programs, tools, resources (onsite fitness classes, gym memberships, wearable fitness devices, online wellbeing resources).
• Corporate discount programs (mortgage discounts, travel, dining, electronics, entertainment).
• Lifestyle conveniences (onsite or remote worker access to free meals, dry cleaning services, on-site athletic facilities, employee social clubs or special interest groups.
  
  

Other benefit options

When building a comprehensive employee benefits strategy, total rewards teams may choose to include other components that drive an exceptional employee experience and engagement (e.g., plan, design, integrate, and communicate). Employee and team recognition programs (cash, gifts, experiences, marketplaces, charitable contributions) are popular elements that may be more closely associated with compensation programs, but many still consider them benefits. Similarly, while professional learning and development opportunities fall under the L&D team, employees often view them as benefits, especially when they can access and participate on their own or with minimal approvals.

Building a robust and cost-effective employee benefits strategy

An effective employee benefits strategy blends financial, operational, and talent outcomes that work together to deliver its purpose and value proposition. This requires engaging and partnering with leaders and experts from the business, finance, operations, and HR communities. Together, they can craft a benefits strategy that balances what motivates workers to be attracted and retained with the organization’s ability to manage costs and provide the security that supports employees’ most basic needs. Build the benefits strategy and ecosystem using the same methods used to design any sustainable, agile, and responsive business or HR plan—with discipline, analysis, and leadership engagement. Suggested steps that should be conducted on a continuous basis include:

1. Identify the purpose and align with business goals

Develop a mission statement that clarifies the purpose and desired outcomes. Review the company's strategic plan, its principal financial priorities and objectives, growth plans, and operational strategies and budget plans to identify where and how the benefits strategy must align with those. Interview top leaders to understand how they view the fit between benefits costs and offerings and their operational and talent requirements. 

Next, review and generate insights into the business objectives and how they relate to the HR strategy, workforce planning, talent strategy, and total compensation philosophy to link them to the criteria needed to design the benefits strategy. For example, to what extent can the strategy address and balance goals to contain overhead expenses, attract advanced-skills employees, retain and reduce critical segment workers, and adopt new technologies that limit headcount growth? The answers will support defining and integrating the benefits strategy into business requirements.

2. Audit recent benefits plans’ performance

As available, review and analyze prior year(s) benefits utilization to understand the cost-benefit of each insurance, plan, program, and resource; assess who used them, at what levels, and how frequently. The more demographically detailed the analysis, the more targeted the effectiveness evaluation can be for the most critical talent pools. Further compare that baseline assessment to the desired outcomes, retention, days away from work, engagement levels, and costs vs. projections. Assess providers for cost-effectiveness, compliance with requirements, employee service levels, and the ability to adapt to changing expense and utilization levels.

3. Analyze employee demographics and engage with them 

Analyze employee demographics to understand who the plans are built for (by targeted talent grouping), the blend of young, single workers; workers with young families; and more mature workers with longer-term medical issues and financial goals. Directly engage employees to understand their preferences and trade-offs, such as more affordable medical care vs. better coverage and networks, more time off vs. greater savings options, or resources and tools for personal financial budgeting and management vs. access to discounted travel and entertainment.

4. Establish a budget 

Evaluate proposed cost increases against total operational expenses and labor costs, and consider the affordability of each element of the comprehensive benefits package. Categorize/prioritize the benefits into three “buckets”: essential, must-haves, and preferences, by employee groupings from a critical workforce segmentation (CWS) perspective. Balance quality offerings with cost-containment or voluntary benefit models. Consider funding and supplier options, such as fully insured plans vs. membership in a PEO or benefits consortium.

5. Conduct benchmark analyses

Do market research (annually at minimum) to understand the geographic standards and what peer companies and competitors for talent are offering in terms of:

• Types, number, and variety of benefits, coverages, and options.
• Benefits levels related to the extent or limits of health coverages, employer matching of retirement or savings plans, and days offered in leave policies.
• Cost-sharing of premiums, deductibles, out-of-pocket maximums, life or disability insurance, and employer contributions to retirement plans.
  
  

6. Design the strategy and plans

Develop a strategy aligned with financial and budgetary requirements, and assess how much flexibility can be introduced to meet the needs of different employee groups. Start with premium costs that support single employees and those with dependents. Identify opportunities to add personalization and choice through coverage/cost options suited to different life stages and needs, wage and salary levels, geographic locations, and key employee segments (e.g., executives, technologists, sales, or design engineers). Be prepared to adjust plan, policy, or program provisions, coverage levels, and support options between plan years.

7. Measure, track, and evaluate

A data-driven employee benefits strategy is essential. Establish critical metrics and dashboards to quickly review benefit plans, costs, and effectiveness. Include continuous external market surveys, government or commercial medical or insurance rate inflation, retirement plan returns, and legal and regulatory changes. Use internal data to understand claim volumes and expenses (including catastrophic cases), employee utilization and satisfaction (with plans, the platform, and carrier or provider interactions), and resource access and usage rates. 

Conduct advanced analyses of those indicators against the purpose and outcomes (business, operational, and talent) that the benefits strategy is designed to influence, such as employee productivity, presence ratios (work hours), production goals, turnover, financial performance (overall expense to budget, profitability), employee engagement, and critical skill candidate acceptance rates.

8. Communicate to stakeholders 

Regularly communicate data and key trends through streamlined reports or formal, periodic presentations to executives, finance leaders, and board members. Tailor them to include the data results, claims patterns and levels, and costs vs. plans they will be most interested in. Make employees aware of the financial value of their benefits package as part of a total rewards/compensation statement. Promote and remind employees about the range and depth of what is available to them using simple language, short one-pagers, or digital portals to support their understanding and utilization of the offerings.

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