Employee Benefits

This article dives into decisions that employers make when deciding benefits packages for US-based employees. It tries to expose some of the complexity and open questions of this problem.

As employees we think “More benefits are better” but as employers the question is instead “how should I allocate money between salary, health, and retirement benefits” and “how do I make a decision that makes sense for everyone in the company?”. This is a more complex problem, and so maybe more interesting.

We’re thinking about this today at Coiled (join us!) This article is an attempt for me to think through the problem, and also provide transparency to others within our organization.

Example

Let’s say that we plan to spend $100,000 on an employee, how should we allocate that money between salary, health, and retirement benefits.

Let’s consider a few options:

Strong benefits
- $80,000 salary
- Great health insurance fully covered at a cost of $10,000 per year, dependents are mostly covered
- 100% 401k matching up to $10,000
Weak benefits
- $95,000 salary
- OK health insurance fully covered at a cost of $5,000 per year, dependents sorta covered
- No retirement benefits (let them make this decision with an IRA)
Straight cash
- $100,000 salary
- No health insurance (let them make this decision on the health insurance market)
- No retirement benefits (let them make this decision with an IRA)

This is a hard decision to make. As an employer we are allocating assets to employees that could be entirely in the employee’s control. However, as employers we want to ensure a low-stress lifestyle, and that may mean ensuring that some of the compensation goes towards benefits rather than entirely into a bank account. This is especially hard when you consider not just the position of one employee, but a diverse team of employees each at different income levels and each at different life stages.

We’re now going to dive into these questions a bit more. Our goal here isn’t to recommend a particular solution, it’s instead to dig into and identify the core open questions within this problem. These questions won’t have clear answers.

Health insurance

As an employer deciding a health benefits package you are presented with three important decisions to make:

What level of insurance plan to select

When employers secure health insurance plans we actually get a suite of plans. These include some plans that are low-risk, low-cost, but also low-choice (something like an HMO) and other plans that are higher risk, high-cost, and also high-choice (something like a PPO). There are more complex configurations in here, but suffice it to say that there are different options that are good for different kinds of people with different medical histories and different risk tolerances.

It’s great that employees have choice here and can opt-in to the plan that makes sense for them.
How much to contribute to these plans

Typically this suite of plans has varying cost. At Coiled we chose a middle-of-the-road suite with plans that ranged in cost from $500 to $800 a month. How much should the employer contribute to this cost, leaving the employee to pay the difference?

We chose to contribute $500, so that there was a good plan that was entirely free, while the higher quality plans required a bit of skin-in-the-game from employees. However, we also screwed up. Late last year our insurance plans updated and became about $80/month more expensive. We were busy and didn’t notice this and so fell behind, resulting in all employees having to pay a bit for health insurance even with the cheapest option. This was a good reminder to us that health care costs are a rapidly evolving situation in the US, and that we need to stay involved over time.
How much to contribute to dependents

But what if you’re not only insuring the employee, but also their spouse, and/or their kids? Typically spouse contributions are another 1x of the cost, and kids are another 1x as well (either one kid or five kids is the same 1x).

Does the company cover this cost as well? How does it allocate this coverage between covering spouses, and/or covering kids?

At Coiled we historically chose to fully cover children but not spouses. In hindsight this was possibly a biased decision because everyone making this decision was a professional in their thirties in western countries, where spouses are rarely considered dependent, except in a context of children. We’re reconsidering this.

Healthcare is important, and health insurance helps to reduce stress significantly among employees, which is good for everyone, including the employer. There are some weird decisions in here though.

How much of the employee compensation do we allocate to healthcare?
How much more do we compensate employees with dependents than employees without?
How do we allocate dollars towards spouses vs towards children?

As an employee, my gut reaction is “be generous with healthcare”, “cover dependents, and cover them all entirely”, but as employers we also look at a fixed set of dollars to go around. Money allocated towards healthcare is money that is not allocated towards retirement or towards salary. It’s a strange situation.

The United States is unique in how significant a role employers play in our society. We fill a function typically handled by society at large. It’s only after being in this position that I fully understand this awkwardness. I invite you into this awkwardness with me :)

Retirement

Disclaimer: I am not an expert in any of this. Please do not believe me.

People should save for retirement. In the US there are two major ways to defer taxes and build a retirement account

IRA: open to individuals, maximum contribution of around $6000 per year. The range of possible investments is generally quite large.
401k: open to employers, maximum contribution of around $19500 per year. The range of possible investments is generally more narrow.

401ks are common in larger companies, but relatively rare in smaller startups (although I’ve seen anecdotal signs of this changing). Typically 401k’s come with employer matching plans. For example the employer might choose to match 50% of the employee contribution. Again, this is great, but it does eventually come out of how employers choose to compensate employees, and should be compared against options in healthcare and salary.

Unmatched 401k’s?

I’m actually curious why 401k plans without matching aren’t more common. This seems to increase the amount that retirement-oriented employees can contribute per year, without having a significant financial impact on the company.

I suspect that the challenge here is mostly administrative. At Coiled I can attest that we didn’t consider 401k’s the first year just because it was complicated to figure out. However with the rise of PEOs and other organizations that can help small companies like ours navigate HR (we use Justworks) this seems feasible.

Matching encourages retirement

Really the question of matching comes down to how prescriptive we want to be as an organization about encouraging retirement savings. By setting up matching we tilt the game of your personal finances so that it makes sense to save for retirement. Again, while this reduces your take-home pay today, it may reduce long-term stress, and is generally a wise idea. Is this a role that employers should play?

Open questions

To finish up I’m going to list some of the open questions we brought up. I don’t think that there are correct answers here, but hopefully these questions elevate the level of conversation around this topic a bit.

What expense level of health insurance plans should employers select?
How much should employers allocate to health insurance vs salary?
- To what extent should employers cover dependents?
Should this support focus more on spouses or on children?
How much should employers allocate to retirement matching vs salary?

And again we should remember that we need to make these decisions for a wide range of employees, some of whom make $50,000 while others make $200,000, some of whom have children while others don’t, some of whom have health concerns while others don’t, etc..

Or, if you want to consider a far simpler question, for an employee on whom we are going to spend $100,000, select a salary, healthcare contribution, and retirement contribution that all add up to $100,000. What would you personally prefer? What do you think the company should choose? Are they different?

This article was written in haste. Please be kind in your judgements

Employee Benefits it's complicated.