In recent years many organizations have shifted from offering traditional employee benefits to a new model: personalized benefits. This new model allows organizations of all sizes to provide sustainable benefits that deliver real value to employees.
While the shift toward personalized benefits may seem new, the trends fueling it aren’t. However, the ever-increasing rates of traditional employee benefits and the rise in healthcare consumerism have pushed personalized benefits to the forefront.
This article will explain what personalized benefits are, what’s driving the shift to personalized benefits, and how to offer these flexible benefits to your employees.
What are personalized benefits?
Every employee has individual wants and needs. This is especially apparent when it comes to generational differences in the workplace. The benefits a Gen Z worker values are often different from those of a Baby Boomer employee. How do you reconcile these differences without your employee benefits becoming too complicated or costly?
Instead of relying on traditional employee benefits that offer the same benefits to all of your employees, you can offer personalized employee benefits. These benefits empower your employees to use their benefits the way they want to, rather than being forced into a one-size-fits-all benefits plan.
This personalized experience is often accomplished by providing employees with a monthly or annual expense allowance. Common methods of the allowance model include employee reimbursements and benefit expense cards, such as lifestyle savings accounts (LSAs).
With a reimbursement plan, you can review employee expenses and reimburse your workers for the medical expenses, employee perks, and remote work costs that they choose.
Offering personalized benefits helps your organization attract and retain top talent while allowing your employees more freedom to use their benefits the way they want. This also increases employee satisfaction and can lead to you becoming an employer of choice.
What causes the shift to personalized benefits?
Many factors led to the shift from traditional benefits to personalized benefits in the United States. However, some of the main causes were the shrinking group health insurance market, the rise in healthcare consumerism, and changing priorities following the COVID-19 pandemic.
The shrinking of the group health insurance market
When businesses began offering employee benefits in the 1940s, low costs and significant tax advantages allowed them to be generous with their benefits packages. Group health insurance policies typically covered the total cost of employees’ medical needs, and company-sponsored pension plans fully funded former employees in retirement.
As Americans began to live longer, retirement costs accelerated. Healthcare costs also rose, fueled by longer life expectancies, competitive business interests, and government regulations.
Between 1999 and 2021, the average annual premium for single employees under a group health insurance policy grew from $2,196 to $7,739. Family coverage under a group health insurance plan increased from $5,791 in 1999 to $22,221 in 2021.
These cost increases helped to shrink the small business group health insurance market in favor of offering more personalized health benefits.
Affording to the Kaiser Family Foundation, in 2000, 65% of businesses with fewer than 200 employees offered a group health insurance policy. By 2015, that number dropped to just 55% of businesses. According to the 2021 report, 41% of organizations with 3 to 199 employees offered health insurance.
Recognizing that health benefits were crucial to employee retention and recruiting, many organizations compromised by cutting back on their offered benefits. Instead of covering the total cost of employees’ healthcare, they sponsored group health policies with higher deductibles and more exclusions.
Newly introduced programs allowed employers to provide employees with more choices in how their benefit dollars were spent. The health reimbursement arrangement (HRA) was among the first widely used personalized benefits. We’ll cover these more in-depth later in the article.
Another cause for the rise in personalized benefits is the healthcare consumerism movement. In this case, healthcare consumerism is where employees take more control over their health benefits and healthcare decisions in search of personalized care.
With healthcare consumerism, employees looking for health benefits act more like consumers shopping for a hotel or product online. They want quality, affordable options for their healthcare that works best for their needs.
The effect of COVID-19 on employee benefits
Following the COVID-19 pandemic, employees value flexibility and individualized benefits more than ever.
The pandemic introduced many employees to remote work and flexible work schedules for the first time. Traditional employee benefits didn't provide enough personalization with employees out of the office and living more widespread than ever. Employees who worked remotely couldn’t take advantage of office wellness programs, for example, as it would inconvenience these employees.
As a result, organizations began to provide employees with more flexible benefits such as reimbursements for wellness expenses.
What personalized benefits are available to employees?
With employee benefits playing a crucial role in employee retention and recruiting, many organizations now offer personalized benefits. You can provide personalized benefits for healthcare, wellness, remote work, retirement, and more.
The following section will share some of the most common personalized employee benefits available, such as HRAs and employee stipends.
Personalized health benefits
Due to rising group health insurance costs and complexity, many new health benefits have emerged for organizations of all sizes. This includes HRAs, health savings accounts (HSAs), and health stipends.
HRAs were introduced through the Employee Retirement Income Security Act (ERISA) in 1974 as a way for businesses to reimburse employees for medical expenses not covered by a company’s group health insurance policy.
As the cost of health insurance continued to rise, HRAs evolved to be able to reimburse employees for individual health insurance policies and other qualified medical expenses. This meant employers could offer HRAs in place of group health insurance.
Though the Affordable Care Act (ACA) limited HRAs in 2014, the 21st Century Cures Act reintroduced them to the small business market beginning in 2017 with the qualified small employer HRA (QSEHRA).
You can reimburse your employees for their qualifying medical expenses with an HRA. You can choose whether to allow reimbursements for individual health insurance premiums only or out-of-pocket medical expenses. Simply set a monthly allowance for your employees to use and approve their eligible expenses.
The best part about offering an HRA to your employees is that it is tax-free for both you and your employees.
HSAs were also introduced to complement less generous health policies and to encourage people to make more personal choices about their care. Created in 2003, HSAs allow employees to save and spend tax-free money on certain medical expenses.
These accounts can be funded by employees, their company, or both. Because employees can keep their HSA after they leave your organization, some people use their HSA as more of a retirement fund than a way to pay for medical expenses.
If you want to ensure that your employees use their monthly allowances for medical expenses, offering an HRA is often a better choice.
Another option for providing personalized health benefits to your employees is a health stipend. Health stipends allow you to reimburse employees for medical expenses like an HRA. However, health stipends offer more flexibility thanks to fewer regulations from the IRS.
For example, with a health stipend, you can reimburse an employee for mental health counseling even if your employee isn’t diagnosed with a mental illness.
You can offer a health stipend to any employee, including 1099 contractors and international workers. They are also an excellent option for employees who receive advance premium tax credits because they can still use their health stipend without affecting their APTC eligibility.
But, there’s a catch. Health stipends are taxable for both the employer and the employee.
Personalized wellness benefits
Wellness benefits are a great addition to any employee benefits package. While health benefits are essential for attracting and retaining employees, they generally don’t cover other aspects of employee well-being such as fitness, stress management, or inclusion.
When crafting an employee wellness program, you aim for holistic employee wellness. One of the best ways to do this is by providing personalized wellness benefits such as a wellness stipend.
With a wellness stipend, you can reimburse employees for their wellness expenses such as gym memberships, fitness classes, yoga, meditation mobile apps, and more. This empowers your employees to take charge of their physical and mental wellness, which will improve productivity at work.
Just like with a health stipend, wellness stipends are taxable. However, they provide the most flexibility for your employees compared to offering in-office wellness perks.
Other personalized benefits
Personalized benefits can take many forms. Retirement benefits began evolving toward personalization with the creation of IRAs in 1974. These incentivized employees to start saving for retirement on their own. These accounts weren’t tied to the organization, and investment options were endless.
The federal government extended tax advantages toward other benefits that allowed personalization during this time. In 1986, the Tax Reform Act gave businesses the power to contribute up to $5,250 tax-free toward their employees’ education.
Tax-free transportation benefits followed in 1993. In 2010, the Small Business Jobs Act allowed employers to contribute tax-free money toward employees’ cell phones if employees used the phones for business purposes.
If your organization has remote workers, you can provide them with a monthly remote work stipend to help them pay for their home internet bills, cell phones, or home office setup costs. Employees only need to request a reimbursement and submit their receipts for approval. This enables your employees to use their remote work stipend for whichever expense is most meaningful to them.
While each of the benefits discussed above are used for different expenses, they all share a common thread: they allow your employees more freedom in choosing which expenses they want your organization to reimburse. This will enable you to offer reimbursement toward benefits they find most valuable.
At the same time, personalized benefits allow businesses of all sizes to define their budget and escape the complexity of traditional employee benefits.
If you’re ready to offer personalized benefits such as HRAs or employee stipends to your workforce, PeopleKeep can help. Our personalized benefits administration software enables you to easily set up a new employee benefit in minutes.
This blog article was originally published on August 17, 2017. It was last updated on April 21, 2022.