How Much Should an Employer Contribute to an Employee’s Healthcare Costs?

Updated: November 04, 2009

Let's face it, some type of healthcare reform will be passed by Congress and signed into law by President Obama within the next 6-12 months. Healthcare reform is too big of an issue to Obama to not pass something. The question still remains though as to what it will include. The question on many small business owners minds is, what will it mean to me and my business? My educated guess is nothing if you are already providing health benefits and paying the majority of the premium for the employee.

So let's say that you are already providing benefits to your employees and paying for the majority of the employee-only premium if not the dependents as well; are you paying too much? This is a complicated subject because if you contribute too high of a percentage, you have people participate that wouldn't otherwise since the coverage is essentially "free" or close to it, but if you don't contribute enough, you can't meet the minimum participation requirements of the carrier and experience adverse selection where only the sick people take insurance.

One way to tell whether you are contributing too much is to look at how many employees are electing employee-only coverage. If you have a normal distribution demographically speaking of employees within your firm, then you should have people of all ages. You should see a portion of employees who are single that elect employee-only coverage, a portion that are married that elect employee-spouse, a portion that may be divorced or widowed who elect employee-child(ren), and a portion that elect employee-family coverage. If you see a lot of employee-only coverage, then you may be contributing too much. A very high level of employee-only coverage (unless you typically employ a younger demographic, say recent college graduates) usually indicates that your employees are taking your coverage because you are paying for it and their spouses and possibly dependents are participating in another plan. Think of it this way, if a couple with no children both work at places with employer-sponsored plans, then it is typically way less expensive for each of them to take the employee-only coverage from their respective employers and let the employer cover the majority of the premiums. The same can be said for employee-family coverage. Employee-child(ren) coverage is typically half as expensive as employee-family coverage so if you are covering the majority of the employee-only premium and none of the dependent coverage, it is likely the employee will elect employee-only coverage and the spouse will elect employee-child(ren) under their employer-sponsored plan since it will be a lot less expensive than insuring everyone under one plan and electing employee-family coverage.

My recommendation to employers is to take the money you are now spending on the employee-only premiums, let's say 75%-100% of the individual premium, reduce the contribution level some, and take the difference and contribute it towards the dependent coverages. This makes the employee-only coverage just costly enough that it weeds out those employees who take it only because the employer is paying for most if not all of it, but it also brings the cost down for the dependent coverages and will typically increase participation at the dependent levels. By increasing dependent participation, especially children, the carrier collects additional dollars but typically pays out less in claims overall which equates to healthier renewals for the employer. To get some additional statistics on employer contribution trends, click this link and view The Kaiser Family Foundation and Health Research & Education Trust's 2008 Summary of Findings.

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