9 Ways to Lower Your Employee Benefits Cost

Employee Benefits Note Pad Next to Coffee and Glasses

Persistent fears of a looming economic slowdown have companies in all sectors searching for ways to trim the fat. Rather than reducing salaries or resorting to layoffs, one area some employers are eyeing as a cost-saving measure is benefits. At the same time, access to affordable healthcare is more important than ever, with a reported 41% of American adults having debt from unpaid medical or dental bills in 2024. Retirement planning is equally paramount, with the financial future of Social Security uncertain and a concerning number of workers needing more retirement savings.

The situation calls for employers to take a carefully measured approach that strikes a balance between controlling costs and providing adequate employee benefits. While it’s not a fun exercise, it’s a reality thousands of organizations are faced with, and confronting it head-on will put you and your employees in a more favorable position.

Read on to learn nine ways to lower your employee benefits cost without making dramatic sacrifices in the quality of your programs.

The Average Employee Benefits Cost

Benefits represent a substantial cost for employers. On average, a non-government employer costs $12.77 per hour worked per employee to cover benefits like paid leave, health insurance, retirement, and disability. That accounts for around 30% of total compensation. That number jumps to 38% or $23.03 per hour for state and local government workers.

Health insurance is the most costly employee benefits line item, accounting for about 3.4% of overall compensation. It is followed by paid leave and legally required benefits like Social Security and Medicare, each of which makes up around 2 to 3%. 

How to Reduce the Cost of Employee Benefits

If you’re considering slashing benefits as a way to reduce expenses, don’t make any decisions before considering one or more of the following strategies to reduce how much your employee benefits cost you.

1. Analyze employee use of programs

The first step in lowering your benefits spending should be carefully analyzing how the programs you currently offer are being used. If you’re like many organizations, it’s been a while since you’ve done such an assessment.

Take a look at the numbers to see what proportion of employees are taking advantage of every program in your current benefits package. Is there a wellness program that’s not getting much engagement? A new offering you recently rolled out that has failed to pick up steam? A subsidized gym membership that only a handful of people use? These under-utilized benefits should be the first to go since they can be cut with minimal impacts on most of your staff.

Next, look to healthcare, representing the greatest and most complex benefits expenditure. Are you offering a low-deductible, high-premium plan that only a small portion of employees choose? You might be able to alter it or cut it out entirely. What about weight loss and smoking cessation programs? These particular programs typically cost employers an arm and a leg but don’t generally get a lot of buy-in because of the high level of commitment they require. These, too, could be candidates for elimination.

2. Don’t over-insure

To determine how much your company will pay for health benefits from one year to the next, insurers rely on something called a trend. Trend uses your past claims history, known as the experience period, to project your future costs, known as the projection period.

However, like individuals, companies don’t always follow a consistent trend regarding their healthcare needs. If you had a year where a disproportionately high number of employees opted into a high-cost plan, for example, it could lead to unnecessarily high costs in the year ahead. Employers can reduce healthcare costs by making sure they’re choosing benefits packages based on what employees actually need and want versus going with a pre-packaged, one-size-fits-all benefits solution offered by a carrier.

Additionally, it can pay to shop around among carriers every few years to make sure you’re still getting the best available coverage for the price.

3. Promote the right healthcare plans

Many employers expend a great deal of effort putting together benefits packages for their employees, only to need to do more to educate employees on said benefits. Organizations can help staffers—and reduce healthcare costs—by working to inform employees about the most cost-effective plans.

For example, high-deductible plans, sometimes referred to as “bronze” plans, are often sufficient to meet the healthcare requirements of low-need employees. Such plans cost less in premiums for both the employee and the employer. Companies can encourage more employees to choose bronze plans by upping the employer’s contribution to the premium (which may still be more affordable for your organization than if those employees opted into “silver” or “gold” plans).

Even high-need employees, who are likely to meet the out-of-pocket maximum on any plan they select, can come out ahead financially by choosing bronze plans with a high employer contribution. Once again, employers must allocate resources to educate employees on how such cost savings work.

4. Increase employee cost-sharing

Healthcare costs are projected to rise at four times the rate of general inflation over the next four years. One way employers can offset the rapid rise in expenses is to increase the portion employees pay. 

In a survey conducted by professional services firm AON, one-third of employers say they plan to pull this lever in 2024 in response to increased healthcare costs. Employers raised the amount that comes from employees’ paychecks for healthcare premiums by an average of 5% going into 2024. 

5. Offer an HSA

A health savings account, or HSA, allows employees to set aside money specifically for their healthcare expenses. Any money saved through an HSA and subsequently used on medical expenses is pretax, meaning your employees will get more mileage out of every dollar when paying for healthcare.

HSAs come with another interesting benefit—any unused funds in them roll over from one year to the next, and some plans pay interest or allow for investing those dollars into mutual funds and other investment vehicles. Interest or investment earnings are tax-free. If employees don’t plan to touch their HSA funds for several years, it’s a lucrative way to build a nice healthcare nest egg with significant tax savings.

This is all good news for employees, but how does this reduce healthcare costs for employers? Health insurance plans that include a health savings account often come with lower premiums, which means the employer’s portion of those premiums will also be lower.

6. Rein in prescription drug spending

Prescription drugs are the fastest-growing area of healthcare benefits spending. The increase is driven in large part by the rise of GLP-1s, a class of diabetes medications that includes drugs like Ozempic, as well as other specialty drugs. There are several strategies employers can use to rein in prescription drug spending, like adding an additional coverage tier with a different employee cost share for specialty drugs and prioritizing generic drugs over more expensive “name-brand” versions that achieve the same results. 

7. Encourage the use of telemedicine 

One thing we can thank the global pandemic for is the rise of telemedicine, which is both convenient for patients and cost-effective for employers. Encouraging the use of virtual health services can save on healthcare plan expenses while preventing unnecessary visits to urgent care centers and the ER, which can drive up costs. 

8. Reduce or defer retirement contributions

In a candidate’s market, employer-matched retirement contributions are considered a must-have employee benefit if you want to attract top talent. As we’ve seen, though, changing economic circumstances have forced many companies to reconsider this offering. Reducing the amount of your employer match is one way to lower your overall retirement benefits costs; deferring your contributions is another option.

Though employers shouldn’t consider deferment a long-term cost-saving strategy, it can be an effective stopgap to get through a particularly challenging season or avoid making other, more dire cuts. Generally speaking, employers can make the agreed-upon contributions to their employees’ retirement plans at any time before that year’s tax filing deadline.

If your company uses a calendar tax year, this would mean you could defer your employer matching contributions until April 15, 2025. Filing for an extension would further prolong this deadline. Prolonging the deadline is the key phrase here—you’re not eliminating the expense, but merely putting it off until a later date (and not following through can get you in a lot of hot water).

Your specific cost-deferral options will depend mainly on the type of plan you’ve already selected. For example, some plans specify a different date by which employers must make their portion of the contributions. So, be sure to check with your plan administrator about what your plan allows you to do when it comes to deferring or suspending matching, and review it with your accountant to make sure you comply with IRS requirements.

9. Cut down on administrative costs

The sticker price of benefits isn’t the sole factor that makes them such a substantial cost for employers. Benefits administration is also incredibly costly. To cut down on these fees, take advantage of automation wherever possible.

Use online portals to allow employees to complete their own benefits enrollment rather than assigning this task to a team member, which costs labor hours. Offer other self-service benefits options, like informational webinars, that help remove manual duties from your HR team’s plate.

You can also save on administrative costs by outsourcing your benefits management to a third-party provider. Benefits consultants are well-versed in the nuances of the field and can help you make sure you’re offering what your employees truly need without any excess expenses. Plus, they can tackle employees’ tough technical questions that HR staffers might not be fully prepared to answer.

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Leave Benefits Enrollment to the Pros

4 Corner Resources is a staffing firm, but did you know our clients also enjoy access to our convenient payrolling and benefits services? This offering can be added onto any staffing contract and facilitates rapid new hire onboarding, reducing the amount of paperwork you’re responsible for and the number of hours you spend getting new staffers up to speed.

Schedule your complimentary staffing consultation today to learn how our recruiting experts can help you reduce costs and maximize the efficiency of your hiring process.

Pete Newsome

About Pete Newsome

Pete Newsome is the President of 4 Corner Resources, the staffing and recruiting firm he founded in 2005. 4 Corner is a member of the American Staffing Association and TechServe Alliance, and the top-rated staffing company in Central Florida. Recent awards and recognition include being named to Forbes’ Best Recruiting Firms in America, The Seminole 100, and The Golden 100. Pete also founded zengig, to offer comprehensive career advice, tools, and resources for students and professionals. He hosts two podcasts, Hire Calling and Finding Career Zen, and is blazing new trails in recruitment marketing with the latest artificial intelligence (AI) technology. Connect with Pete on LinkedIn