Mistake #1: Insuring things that are not a risk.
Do you have insurance for your windshield wiper blades, or your car battery? Then why do you have insurance for basic lab tests and doctor office visits, which cost about the same? The simple fact of the matter here is, routine medical care is not really a risk. It’s like minor repairs or maintenance. But it costs about twice as much to cover it through insurance than it does to pay for it directly. This is an expensive mistake; it costs employers and employees an average of $3,000 per employee per year. Let’s think about that for a moment: if a group has 100 employees, this means they waste about $300,000 of salary and profits each year in over-insurance. And think about your own company: how much more of your product or service do you have to sell each year to make up that waste? And for your employees, how much is that over-insurance bleeding their paychecks?
Yes, get health insurance to cover big-ticket items like open heart surgery or other catastrophic expenses. That’s what insurance is supposed to do- to insure against actual financial risk. But carve out routine medical expenses and pay for those directly. How do you do this? By purchasing a health insurance policy with a deductible that is high enough to exclude those expenses, say, $5,000 single and $10,000 family, or higher. Then, pay for routine medical care like prescriptions, urgent care, lab, radiology and so forth directly, via a gap plan or a HRA, instead of through health insurance.
Mistake #2: Over-insuring people who don’t need it.
Employers tend to buy plans based on the needs of their sickest employees, which means that healthier employees are stuck paying for much richer plans than they need. Some employers try to adjust for this by offering some lower cost options, but if the lower cost options have deductibles and out of pocket limits that terrify employees, nobody will choose them. Either way, both employees and employer end up wasting money on insurance premiums. The cost of this mistake is hidden: it only becomes apparent when it is finally fixed. But for a 100 employee group, it’s likely to be a 6 figure mistake.
Start off with a high deductible (at least $5,000 single, $10,000 family) major medical plan to get the premiums down for everybody. And then offer gap plans with reasonably priced buy-up options to cover that deductible. If the least expensive gap plan has deductibles and out of pocket limits are within the means of healthier employees, they will choose that option and save a lot of money! And if the richer buy-up options are scaled in price to accommodate the less healthy or lower income employees, everybody gets what they need and nobody, including the employer, is wasting money by over-insuring.
Mistake #3: Not getting serious about payroll tax savings.
Employee and employer payroll taxes (Federal and State income, Social Security, Medicare), for even moderate earners, is about 30% of total earnings. For a family earning $60,000, that’s over $18,000 per year. Multiply that by the number of employees you have, and it becomes a very large number indeed. And at least part of it is avoidable.
Do an audit of your employee benefits and see if there are any tax savings you are missing. Here are some obvious ones:
- Health Savings Accounts (HSAs) – If your HSA medical plan option is attractive and doesn’t scare people away with stratospheric deductibles, you and your employees could save as much as $1,065 (single) and $2,130 (employee and spouse or children, or family) per year by making HSA contributions on a pretax basis.
- Dependent Care Accounts – These pose no risk to employers, and can save as much as $1,500 per employee per year.
- Commuter benefits. If done on a pretax basis, this can save an additional $972 per year.
- Health Reimbursement Arrangements (HRAs) – These are not taxable as income to employees, and are tax deductible and exempt from payroll taxes for employers.
- Flexible Spending Accounts (FSAs) – These can be used to pay for almost any medical, dental or vision expense pretax, and can save another $825 per employee in payroll taxes each year.
- Premium Only Plans (POP Plans) – Make sure that all of your health, life, disability and other forms of employee coverage are being pre-taxed.
The total tax savings of course depends on the benefits that people select, but the potential could be as much as $4,365 for singles and $5,427 for everyone else per year. That is a big increase in take-home pay! And a big reduction in employer payroll taxes!
The Bottom Line.
For a 100 employee group, fixing mistake 1 will typically save them $300,000 per year. The savings from fixing mistake #2 can’t be calculated up front, but will become very obvious after open enrollment. Also, fixing mistake #3 could save another $436,500 to $542,700 per year. In total, that’s between $736,500 and $842,700 saved by the group and its employees each year. That is a lot of profit, and a lot of take home pay.
The good news is, these solutions aren’t particularly disruptive, they involve little or no risk, and they are sustainable. Once you are on the right course, you are set for years to come!