Contribution modeling is when employers choose a health plan for their employee population, then determine the dollar amount they’ll cover and the premium amount employees will be responsible for according to a cost-share model. For example, if an employer covers 80 percent of the cost of the plan, the employee would be responsible for the remaining 20 percent.
As healthcare costs continue to rise, employers are looking for effective ways to contain costs. One way is to leverage contribution models to allow both employers and employees to share the cost of ever-rising health insurance premiums so it’s easier for both to afford.
So, what is contribution modeling?
Contribution modeling is when employers choose a health plan for their employee population and then determine the dollar amount they’ll cover and the premium amount employees will be responsible for according to a cost-share model. For example, if an employer covers 80 percent of the cost of the plan, the employee would be responsible for the remaining 20 percent.
In 2022, employers contributed an average of 80 percent of the premium cost for individual health insurance coverage and 67 percent for family coverage.
Given today’s war for talent, finding an optimal premium cost-share arrangement is key. Striking the right balance between reining in costs and offering valued health insurance benefits can make a difference for successful talent acquisition and retention.
3 Questions Employers Can Ask When Considering Contribution Models:
- How can you leverage benchmarking to choose the right contribution model for your organization?
90/10? 80/20? 75/25? Knowing how similar-size companies in the same industry and location are sharing the cost for health insurance premiums with employees can provide a valuable baseline for thinking about the type of model to consider. This important data not only gives a window into what peer organizations are doing, but it can also begin to pave the way for developing an effective long-term strategy.
- What is the organization’s view of benefits offerings?
Some employers are focused on offering offer the best of everything to their employees, including high salaries and robust, albeit expensive, benefits. Others want to offer their employees high salaries only coupled with the best possible health benefits they can afford. Still others seek to minimize salary and benefits spend (in favor of offering equity in the company, for example) and consider price as the number one factor when deciding about benefit offerings and how to share costs. The point is how an employer views benefits can be a major factor in ultimately deciding what contribution model to use.
If offering the “best of the best” to employees is the main focus, for instance, then it’s likely that an employer will choose a model that picks up a bigger share of the cost.
- How do benefits fit in an overall compensation strategy?
Since employee benefits typically fall within the top three line items for an organization, it’s not only an important part of employees’ health and well-being, but it’s also a vital part of a company’s finances. So, making sure any contribution model is in synch with an organization’s overall philosophy for compensation can be an important part of an employer’s story and corporate culture, especially meaningful for attracting and retaining talent.
While the answers to these strategic questions can help provide a foundation for establishing an appropriate contribution model, employers should also consider other factors, including:
Demographics. In general, younger workforces can be healthier and need fewer health services while older workforces typically need more medical care for conditions developed over time. So, knowing the demographic makeup of an employee population can help employers make decisions about how to structure the most appropriate model for their organization along with what benefits may be most appreciated. For example, older employee populations tend to value health plans with lower deductibles and out-of-pocket maximums since they likely have a greater need for services versus younger workers. (But those types of plans typically come with a higher premium cost.)
Affordable Care Act (ACA). In designing a contribution model, employers must also keep in mind ACA regulations to offer a “qualified” plan and avoid penalty fees. For organizations with 50+ employees, ACA mandates the following:
- provide affordable, comprehensive health insurance coverage to 95 percent of employees
- cover at least 60 percent of employees’ medical care
- substantially cover doctor and inpatient hospital care
- provide minimum essential coverage that meets all ACA requirements and follows limits on cost sharing
For complete details and requirements, visit: irs.gov.
Employee Education. No matter how an employer ultimately decides to share health plan costs with its employees, it’s crucial to educate employees about it. Communicating how the model fits the organization’s philosophy about health insurance benefits allows an organization to tell its story to potential new recruits and demonstrate its commitment to existing talent.
The Bottom Line
There are many factors to consider when structuring an appropriate contribution model for sharing health plan costs with employees. If you need assistance, contact one of our benefits advisors who can help guide you through a comprehensive process to tailor a strategy that meets your organization’s goals.
This material has been prepared for informational purposes only. BRP Group, Inc. and its affiliates, do not provide tax, legal or accounting advice. Please consult with your own tax, legal or accounting professionals before engaging in any transaction.