How to reduce employee benefit costs amidst inflation

With rising inflation rates and the talk of a possible recession, many organizations find it challenging to keep up with demand from workers in providing competitive benefits packages.

As an employer, how do you balance your benefits budget while still offering a comprehensive benefits package that attracts and retains employees? And how can employees make the most of their benefits to lower consumer costs?

This article will cover tips for employers and employees to help lower the cost of care without sacrificing benefits or pay.

How is inflation impacting employers and employees?

Throughout 2022, inflation increased across most consumer spending categories. While the rate of inflation has slowed in recent months, it still impacts how employers and employees spend their money.

In an October 2023 news release, the U.S. Bureau of Labor Statistics¹ announced that the Consumer Price Index (CPI) increased 0.4% in September 2023. This is a 3.7% increase in inflation since 2022. For comparison, the CPI was 6.5% higher in 2022 than in 2021. The most significant year-over-year price increases were for transportation services (9.1%), shelter (7.2%), food away from home (6%), and medical care commodities (4.2%).

However, inflation hasn't only affected consumer goods. Employee benefit costs are also rising.

According to a survey conducted by the Employee Benefit Research Institute², a third of U.S. employees saw increased medical costs between 2021 and 2022. Moreover, four in ten of those who reported increased health costs said they also have trouble paying their bills or covering basic living expenses.

But employees aren't the only ones struggling with healthcare spending these days—employers are also bearing the brunt of rising costs. This is due to rising group health insurance costs.

According to KFF's 2023 Employer Health Benefits Survey³, annual premiums for employer-sponsored health coverage reached $23,968. On average, employees paid $6,575 toward their health insurance coverage, leaving employers to cover the rest.

This increased cost has led some employers to reconsider their employees' benefits.

You also can't overstate the impact of inflation on employees. When inflation increases, the buying power of workers' take-home pay shrinks.

The Bureau of Labor Statistics⁴ found that employees' real earnings, or wages, fell 1.7% from December 2021 to December 2022. The average hourly earnings also decreased from $11.20 to $11.01 per hour. This, combined with a decrease of 1.4% in the average workweek, results in an overall 3.1% decrease in weekly earnings.

With inflation likely to stick around for a while, many consumers can expect the costs of goods to remain high. This creates an additional financial burden for many workers, as their pay can't keep up with their increasing costs.

Why is it important to offer employee benefits during periods of high inflation?

With employees facing higher costs of living due to inflation, they can’t live their lives as they used to, even with the same salary or benefits as before. Many Americans are cutting costs to try and save money for increasing rent, utilities, and healthcare costs.

Offering compensation packages and annual salary increases during periods of high inflation is essential for remaining competitive in a job seeker's market. Without a robust compensation package, your employees may look for better opportunities with your competitors. You'll need to balance your budget and benefit offerings carefully to continue to attract and retain top talent.

How to reduce employee benefit costs

So, how do you reduce the cost of your employee benefits while still supporting your employees? Personalized benefits allow you to offer a variety of perks your employees love while maintaining cost control compared to traditional employee benefits.

We'll cover the specifics for each type of benefit in the sections below.

Health benefits tips for employers

Health benefits remain a critical part of any compensation package. To effectively retain your employees, you need to offer the health benefits that your employees want. However, the rising cost of traditional group health insurance has left many employers in a pinch.

Thankfully, personalized benefits like health reimbursement arrangements (HRAs) can help supplement or replace your group healthcare coverage while reducing your benefits costs.

Supplement your group plan with an integrated HRA

One strategy employers can implement to lower healthcare spending while extending coverage is to switch their group health plan to a high deductible health plan (HDHP) and supplement it with a group coverage HRA (GCHRA), also known as an integrated HRA. This may be an excellent option for your younger and healthier employees who don't have as many healthcare costs. The benefit of an HDHP is the cost savings. They offer lower monthly premiums for you and your employees.

If you're worried about the high deductible employees will have to meet, you can offer a GCHRA to help offset the out-of-pocket costs. With a GCHRA, you simply offer a tax-free allowance for your employees to spend on the medical care expenses they incur before they meet their deductible or for items that aren't fully covered by the group plan.

Offer your employees an HRA instead

Instead of offering employer-sponsored health insurance, you can switch to an HRA to save time and money. An HRA allows you to reimburse your employees tax-free for their individual health insurance premiums and qualifying medical expenses.

This enables your employees to purchase the individual health insurance plan that works best for them.

Two types of HRAs can replace your group health insurance plan:

• The qualified small employer HRA (QSEHRA)
  • The QSEHRA is specifically designed for organizations with fewer than 50 full-time equivalent employees (FTEs).
• The individual coverage HRA (ICHRA)
  • The ICRHA is an excellent option for organizations of all sizes. An ICHRA requires that employees purchase individual health insurance that meets the requirements for minimum essential coverage (MEC).

With an HRA, you set a monthly allowance. Then, your employees request reimbursement for their qualifying expenses. This gives you complete cost control and predictability, as your allowance will only change year-to-year if you choose to offer more money to your employees.

An HRA allows you to budget better and plan for the future while controlling your expenses.

If you employ 50 or more FTEs and therefore must offer health insurance to your full-time employees under the employer mandate, an ICHRA can help you satisfy the ACA requirements.

Offer your employees a health stipend

A health stipend is another affordable option. It's a health benefit where you can offer your employees an allowance for their medical expenses. However, health stipends are taxable. You have to report them as income on your employees' W-2s.

Health stipends are great for organizations with 1099 contractors or international workers who can't receive traditional health benefits. They can also benefit employees who receive advance premium tax credits (APTC).

However, a stipend doesn’t satisfy the ACA employer mandate for organizations with 50 or more FTEs. In that case, an ICHRA is a better choice.

Other health benefits options

Another way to support your employees' healthcare expenses is by offering a health flexible spending account (FSA) or a health savings account (HSA). These are both benefits that allow for employer contributions and employee contributions. Pre-tax dollars fund these accounts, which employees can then use on qualifying medical expenses.

Encourage healthy lifestyles

Lastly, encouraging a healthy lifestyle is another way to help save on employee and employer healthcare costs. After all, healthy employees are less likely to have health issues that require medical treatment.

Wellness programs help reduce medical care expenses while addressing health concerns. When employees take better care of themselves now, they can prevent serious chronic conditions such as heart disease, obesity, and diabetes in the future.

While there are many different types of wellness programs, offering them all can often become expensive and time-consuming to manage. Thankfully, well-being programs don't need to be expensive to be effective.

With a good mix of perks for nutrition, fitness, and stress management, you can help your employees live healthier lives. These perks can also boost employee morale and productivity at work.

A cost-effective way to provide wellness benefits while helping employees through periods of high inflation is through a wellness stipend. With a taxable wellness stipend, you give your employees an allowance for their wellness costs like gym memberships, home exercise equipment, health coaches, wellness mobile apps, and more.

How employee stipends can help you offer better benefits

In addition to health benefits, you should offer your employees a wide range of benefits that support their increasing financial needs.

With employee stipends, you can easily offer various lifestyle benefits that support your employees' needs during high inflation without breaking the bank. Simply set monthly allowances and let your employees choose how they use their benefits.

Employee stipends also allow you to save time and money by consolidating your various benefits programs into one program. For example, suppose you already provide an employee wellness program, gym memberships, internet access reimbursement, and other perks through various vendors. In that case, you can offer employee stipends instead. This reduces your administration time while reducing the overall cost of your benefits.

Other than the health and wellness stipends we've already discussed, let's look at some popular additional benefits you can offer with stipends.

Transportation benefits

With rising gas prices, providing commuter benefits, also called qualified transportation fringe benefits, can help your employees financially. Commuter benefits such as a free or discounted parking pass, ridesharing, company shuttles, and mass transit passes can help alleviate stress and save your employees money while ensuring they have options to get to work as they return to the office.

Remote work expense reimbursement

If you have remote workers, you can help them financially by reimbursing them for their remote work expenses. This can include cell phone reimbursement, home internet access costs, and any tools or equipment they need to perform their job. Some states may require you to reimburse employees for their remote work expenses.

Professional development

With organizations being more frugal, it may be challenging to attract highly specialized talent without a stand-out benefits package. One way to close skill and knowledge gaps in your organization is by offering a stipend for professional development.

By offering opportunities for your employees to pay for training, courses, certifications, and more, you can help retain your current employees while leveraging your existing talent to fill high-level vacancies.

Other benefits tips for employers

There are other ways to reduce the cost of benefit programs at your organization and improve retention, helping you save money on hiring. This includes dropping any under-utilized benefits and offering small pay increases.

Drop your under-utilized benefits

Another option is eliminating the benefits you're spending money on, but your employees aren't cashing in on. For example, suppose you offer a monthly gym membership, but none of your employees have signed up. In that case, you can drop the benefit and spend those dollars in other places, such as a wellness stipend.

A great way to learn which benefits your employees are and aren't using is by sending out an employee benefits survey. Our template has free sample questions you can use.

Offer pay raises

With purchasing power decreasing month-over-month, offering a small pay increase can help your employees remain on track. After all, if you aren't giving your employees a raise during inflation, they're actually earning less than before.

Consider increasing your hourly wage or salary for all employees by 1.7% (the amount that wages have decreased over the last year). You can also raise your organization's minimum wages to accommodate increasing consumer costs.

According to the Wall Street Journal⁵, some companies are giving out pay raises more frequently than once per year to combat inflation.

Benefits tips for employees during high inflation

For employees looking to stretch their healthcare dollars, here are a few things you can do to save money.

Educate yourself on your benefits

The first step employees can take to lower costs is to fully utilize all their employee benefits. More importantly, as an employer, proper employee education ensures they understand how their benefits work so they can make the most of them.

Employees should reach out to their HR representative or benefits administrator to ensure they're taking advantage of everything they qualify for as an employee, as this can help reduce their monthly expenses.

Negotiate your medical bills

A little-known tip about lowering healthcare spending is negotiating your medical bills. Many Americans don't realize there are several handy tips to lower their medical bills, get financial assistance, and even negotiate a more reasonable payment plan with their healthcare provider. This can help employees reduce their medical debt for healthcare expenses their insurance company may not fully cover.

Take care of your health

Lastly, one of the simplest things employees can do to lower their rising healthcare costs is to take care of their health. The healthier they are, the fewer trips they'll need to make to the doctor and other expensive specialists. This also benefits employers, as better employee health generally results in a more productive workforce.

While easier said than done, making simple changes like switching to flavored water instead of sugary drinks or going for a walk on lunch breaks instead of watching TV or using their cell phones can make a big difference in your employees' health.

Conclusion

When it comes to health benefits, you don't need to sacrifice quality of care to save money. While consumer costs are steadily rising thanks to inflation, there are several ways you can help lower your employees' costs while maintaining your budget. While reducing your benefits offerings during periods of inflation may be tempting, it doesn't have to be that way. By following the tips in this article, you'll be able to provide benefits without compromising value to your employees.

If you're ready to offer personalized employee benefits to your employees, PeopleKeep can help! Our HRA administration platform helps organizations like yours manage their health benefits in just minutes each month.

Schedule a call with a personalized benefits advisor today to see how HRAs can help your organization save money over traditional group plans

This blog article was originally published on January 19, 2022. It was last updated on October 24, 2023.

1. https://www.bls.gov/news.release/cpi.nr0.htm
2. https://www.cnbc.com/2021/10/07/1-in-3-workers-saw-higher-health-costs-this-year-survey-finds.html
3. https://www.kff.org/health-costs/report/2023-employer-health-benefits-survey/
4. https://www.bls.gov/news.release/realer.htm
5. https://www.wsj.com/articles/some-companies-ditch-annual-raises-and-review-worker-pay-more-often-11645612380?st=fsdiwqrnm98w5wg&reflink=desktopwebshare_permalink