Your Employee Benefits Questions Answered: Employee Contribution Options for Medical Coverage

Q: What are my options for setting up employee contributions for medical coverage?

A: This is one of the most common questions we get from employers. There are numerous ways to set up employee contributions for their health coverage.

First, what are the requirements?

In order to offer group medical coverage, nearly all insurance companies require the employer to pay 50 percent of the lowest cost single premium and/or 25 percent of overall premium. That changes for groups with more than 50 employees when the ACA steps in because the government may charge penalties if the coverage is considered too costly for some employees based on their income.

To further ensure the employer keeps benefits attractive to as many employees as possible, insurers also have minimum participation requirements. Participation is typically 75 percent of all eligible employees after valid waivers (i.e., other insurance coverage), though some carriers use 50 percent of the TOTAL eligible. This requirement can change for groups with more than 50 employees when the insurance company may opt to offer coverage anyway.

TIP: If the insurance company knows that employees who decline have other coverage, that can give your group more favorable rating because they know that they have access to health services and, hopefully, won’t delay getting care.

As for other rules that may apply, this month’s Compliance Corner covers what is permitted when segmenting employees in order to offer different benefits and/or different premium costs, and the potential for discrimination.

Contribution theories

The average cost share across all customers is typically a 70/30 split for medical premiums. A growing number of employers are choosing to pay 100 percent of employee coverage and applying that to all tiers.

There are two main schools of thought when it comes to contributions:

1. Defined contributions (i.e., flat dollar amounts)
2. Percentage of cost

Within these two main themes, you can find many variables for setting up tiers of coverage*, such as:

• Paying a flat $400 towards all tiers of coverage
• Paying a flat percentage for all tiers
• Paying variable percentages for tiers
• Paying variable amounts for tiers (e.g. $400 towards single, $600 for employee plus spouse, $800 for employee plus children, $1200 for families)

*Tiers of coverage refers to single, employee plus spouse, employee plus children, and family.

There is a third method that we’ll address in a future article called a Cafeteria Plan, or Full Flex Plan. Stay tuned!

Common renewal scenarios affecting cost shares

• Offering a second plan option. When faced with a tough renewal, the employer may find they need to reset where costs are. offering two plans, such as a core and buy-up plan, can establish a lower set point for employee contributions while offering choice for those who want to pay more for better benefits. NOTE: This option is not always available to groups under 10 enrolled.
  • This strategy works great for companies recruiting younger workers while maintaining an established workforce, as well as for an applicable large employer who needs to offer a plan that meets ACA affordability.
  • With two plans, the employer can choose whether to pay the same percentages or flat dollars for both plans or create incentives for one plan over the other. By offering an HSA-qualified plan, the employer can even offer contributions or matching contributions to the employee HSA to help them get accustomed to how an HSA works.
• Groups with age-banded rates. If your group had age-banded rates and is suddenly moved to “composite rates,” young employees can see their costs skyrocket while older employees see their rates come down. An employer could apply the percentage increase they received on their overall renewal to what each person is currently paying and perhaps slowly move to a more consistent cost for all tiers of coverage over time rather than applying the increase disproportionately to what individuals had been paying the prior year.
• If you’re new to offering benefits, health insurance could be a new expense to your business when it may not yet have predictable income, therefore, paying 50 percent towards coverage and starting slow with what you know you can afford is a smart move. As time goes on, your business may be able to absorb future increases at renewal but, if not, then at least, you’re not taking away a benefit.

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When it comes to determining employee contribution rates, the best approach is to offer the same benefits to all employees with the same pricing structure. It’s easier to administer, remember, communicate, and manage while avoiding any discrimination issues. However, we recognize that it may not work best for your unique situation.

See our article in the April 2024 Compliance Corner for a deeper dive on contribution strategies and avoiding discrimination.

Remember that your ARC client advisor is a resource for exploring options and discussing alternatives you may consider, especially during your renewal or as you approach large-group status. By working with your client advisor at ARC, you can feel confident knowing you are making the best decision for your company and your team.