What should we consider before increasing employee contributions?

When healthcare premiums increase, employers often feel caught between two choices: absorb the additional expense or pass some of it along to employees.

But before increasing employee contributions, it's worth examining both the potential consequences and the alternatives available.

Start by understanding the employee impact.

An increase that seems relatively small in the organization's overall budget can have a meaningful effect on an employee's paycheck.

Before making changes, consider:

• Affordability: How much will employees pay per paycheck, and how does that compare with their earnings?
• Dependent coverage: Will the increase disproportionately affect employees covering spouses or children?
• Enrollment: Could higher contributions cause employees to decline coverage or choose a plan that doesn't adequately meet their needs?
• Recruitment and retention: How will your contribution strategy compare with what employees may find at competing employers?
• Total employee costs: Are employees also facing higher deductibles, copays, or other out-of-pocket expenses?

Looking at payroll deductions alone can be misleading. A plan with lower employee premiums may still expose employees to significantly higher costs when they need care.

Consider how contributions are structured.

Employers have more flexibility than simply paying a fixed percentage of every plan's premium.

Depending on the benefits program, options may include:

• Percentage-based contributions: The employer pays a percentage of the premium, with employees responsible for the balance.
• Fixed-dollar contributions: The employer contributes a defined amount toward coverage, making its financial commitment more predictable.
• Tiered contributions: Employer contributions vary based on coverage level, such as employee-only, employee-plus-spouse, or family coverage.
• Plan-based contributions: The employer contributes toward a designated plan, allowing employees to pay more if they select a higher-cost option.

Each approach distributes costs differently between the organization and its employees.

The right structure depends on your financial objectives, workforce needs, and applicable affordability and nondiscrimination requirements.

Explore alternatives before shifting costs.

Increasing employee contributions may ultimately be necessary, but it shouldn't automatically be the first response to rising premiums.

Depending on your circumstances, other strategies may include:

• Evaluating alternative plan designs or provider networks.
• Reviewing whether your current carrier remains competitive.
• Exploring different funding arrangements.
• Examining prescription drug costs and available pharmacy strategies.
• Modeling different combinations of employer contributions and employee cost-sharing.

Sometimes the opportunity isn't to reduce benefits but to change how they're delivered or financed.

And sometimes, after evaluating the alternatives, a contribution increase is still the most practical decision.

Understand the trade-offs before deciding.

At MPOWR, we believe contribution decisions should begin with understanding what your organization is trying to accomplish.

Are you trying to maintain a predictable benefits budget? Protect employee affordability? Encourage enrollment in a particular plan? Or manage a significant renewal increase without substantially changing coverage?

Once those priorities are clear, we can model different approaches and evaluate their potential impact on employer costs, employee payroll deductions, and overall healthcare expenses.

If employee contributions need to increase, the decision should be intentional, supported by analysis, and communicated clearly.

The goal isn't to avoid every difficult decision. It's to make sure you've considered the alternatives and understand the consequences before asking employees to contribute more.