There’s a shift occurring in the small business benefits market—one that takes companies away from traditional group benefits and toward a new model.
This new model is called personalized benefits, and it allows companies to offer sustainable benefits that deliver real value to employees. Discussed in last week’s blog post, under the personalized benefits model, small businesses set aside a certain amount of money, tax-free, per employee per month. Employees then use that money to select and pay for programs and services that provide them with the greatest value.
Depending on the framework the business sets up, employees can choose to put that money toward health insurance, retirement plans, commuting, education, or their personal devices they use for work.
Today, more than 5,000 businesses use the personalized benefits model. By 2020, that number will reach 100,000.
While the shift toward personalized benefits may seem new, the trends fueling it are not. In fact, the evolution of personalized benefits can be traced to the mid-19th century and centers on two trends: the shrinking of the group health insurance market and the increased personalization of benefits.
To truly understand personalized benefits—and employee benefits in general—it’s necessary to start there.
The shrinking of the group health insurance market
When businesses began offering employee benefits in the 1940s, low costs and large tax advantages allowed them to be generous. Group health insurance policies typically covered the full cost of employees’ medical needs, and company-sponsored pension plans fully funded former employees in retirement.
This approach to employee benefits couldn’t last, however. As people began living longer, retirement costs accelerated.
Health care costs also rose, fueled by longer lifespans, competitive business interests, and government regulation. Between 1999 and 2016, the average annual premium for single employees under a group health insurance policy shot up from $2,196 to $6,435—an increase of almost 200 percent. Family coverage under a group policy increased just as dramatically, rising 213 percent, from $5,791 in 1999 to $18,142 in 2016.
These cost increases, which began as early as the 1960s and continue today, shrank the small business benefits market considerably. In 2000, 65 percent of businesses with fewer than 200 employees offered a group health insurance policy. By 2015, that number had dropped to just 55 percent of businesses of that size offering group health insurance.
If this trend continues, just 47 percent of businesses with fewer than 200 employees will offer group health insurance in 2030.
Group benefits trends are similarly poor for traditional, company-sponsored retirement plans. The percentage of small businesses offering 401(k) plans declined nearly 50 percent between 2014 and 2016—from 24 percent to 13 percent.
By 2020, if this trend continues, just 7 percent of small businesses will offer a 401(k).
The rise of personalized benefits
Of course, not all businesses took this all-or-nothing approach when benefits costs began to rise.
Recognizing that benefits were key to employee retention and recruiting, many compromised by simply cutting back on the benefits they offered. Instead of covering the full cost of employees’ health care, they sponsored group health policies with higher deductibles and more exclusions. They switched to 401(k)s, created in the late 1970s, to trim retirement benefits costs.
And, in addition, they took advantage of newly introduced programs and accounts designed—in the absence of more generous benefits—to give employees greater choice in how their benefits dollars were spent. Frequently called consumer-driven accounts, these programs became some of the market’s first personalized benefits.
Among the first widely used personalized benefits was the Health Reimbursement Arrangement (HRA). 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 the company’s group health insurance policy.
HRAs grew in popularity through the 2000s, and eventually evolved to reimburse employees for individual health insurance policies in addition to other qualified medical expenses. This meant businesses could offer HRAs in place of group health insurance.
Though HRAs were seriously limited by the Affordable Care Act in 2014, the 21st Century Cures Act reintroduced them to the small business market beginning in 2017 as the Qualified Small Employer HRA (QSEHRA).
Health savings accounts (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 allowed employees to save and spend tax-free money on certain medical expenses. These accounts could be funded by employees, their company, or both.
Due to the increased use of high-deductible health plans (HDHPs), a prerequisite to establishing an HSA, HSA participation has increased by more than 500 percent since 2006.
Retirement benefits began evolving toward personalization as well. Individual retirement accounts (IRAs) were created through ERISA in 1974, incentivizing employees to start saving for retirement on their own. These accounts weren’t tied to the employee’s company, and investment options were almost endless. IRAs evolved into several forms, including Simplified Employee Pension (SEP) IRAs, which allowed businesses to contribute toward employee accounts.
During this time, the federal government extended tax advantages toward other benefits that allowed personalization. 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, and in 2010, the Small Business Jobs Act allowed businesses to contribute tax-free money toward employees’ personal cell phones, if the phones were used for business.
The future of personalized benefits
While each of these benefits operate differently and are governed by separate regulatory structures, they share a common thread: They allow employees more freedom in directing their finances and their company’s finances toward the benefits they find most valuable.
At the same time, they allow businesses to define their own budget and escape the unsustainable cost increases that dog the traditional group benefits market.
As small businesses grow increasingly unable to handle those cost increases, the personalized benefits market has grown, and will continue to grow.