Personalized benefits are a new way to offer benefits. Until now, most small businesses have been unable to offer traditional group benefits because they’re too expensive, too complicated, and too one-size-fits-all. Most people believe benefits are the services a company offers, such as a health insurance plan or 401(k). With personalized benefits, it’s the opposite. Companies give employees tax-free money to spend on the consumer services they find most valuable. It’s as simple as wages. The company sets a monthly benefit allowance, and employees buy what fits their personal needs. This saves companies and employees an average of 35 percent in taxes compared with wages while avoiding the pains of offering traditional group benefits.
Group health insurance costs have tripled in the last 15 years, and costs are expected to continue to rise.
Over time, increasing regulation and complexity mean business owners and their staff waste more and more time, thought, and stress on their group benefits every year.
Minimum participation and contribution requirements are unworkable for many small businesses, especially if they have employees in multiple states or employees on parent, spouse, or individual plans.
As a result, small businesses are finding themselves pushed out of the traditional group benefits market. With personalized benefits, small businesses can fix their benefits budget with no minimum contribution, hand off administration to a personalized benefits automation solution, and allow their employees to buy what fits their personal needs.
Sometimes, small businesses feel they can’t offer any benefit at all, especially when they think their only other option is traditional group benefits. These businesses look for other approaches, and they often settle on increasing an employee’s pay. When a business offers a raise in place of a formal benefit, they expect employees to spend the extra cash on what they need. Unfortunately, employees don’t see it that way. That means those funds most likely aren’t going to benefits services, and employees still think their company doesn’t offer benefits. What’s more, nearly 80 percent of employees say they would prefer better benefits to a pay increase.
Another problem with raises? They’re subject to taxes. Companies and employees pay a combined 35 percent in taxes, on average, on that pay increase. Increasing wages instead of offering traditional group benefits is not the solution small businesses are looking for. What else can they do?
Many companies simply do nothing. However, after wages, benefits are the top influencer for where we work. Offering nothing is a huge detriment to a company’s hiring and retention efforts. And since the hiring market is more competitive than ever, companies need to offer something valuable in order to stand out.
The personalized benefits approach is the new, better option that small businesses didn’t know they had. It allows companies to offer a benefit their people value—staff and prospective hires alike. In a BusinessWire survey, almost 75 percent of employees said benefits personalized to their needs was an important consideration for a new job. A further 72 percent said customized benefits would increase their loyalty to their current company. Employees get to keep the services they use, too, which means they won’t change doctors with every new job.
Instead of paying too much, spending too much time and effort, and wasting taxes, companies who use personalized benefits offer a tangible benefit that helps hire and keep employees. It’s much simpler, and it’s all tax-free.
Personalized benefits allow companies to decide how much they want to contribute to employee benefits. That cash is then available tax-free to the employees. They get to use that money toward the services they choose instead of benefits the company sticks them with. Then, they request reimbursement for the expenses they incur with those services and get reimbursed from their allowance through their paycheck.
The personalized benefits category is already diverse and is growing rapidly. Several types of benefits can be transitioned into a personalized method, including health, cell phone, education, transportation, and retirement.
Personalized benefits mean your employees get to pick the health insurance policy that fits them best. They get to keep their doctor and make sure their conditions and prescriptions are covered. And when they choose from the individual market, that policy stays with them, even if they move on from the company. Even employees who qualify for a federal premium tax credit can get a personalized health benefit allowance with a little bit of coordination. If an employee chooses not to have individual insurance coverage, is on a spouse’s policy, or participates in a health care sharing ministry, they can still get a lot out of personalized benefits. They can use their allowance for medical expenses like checkups, dental procedures, prescription sunglasses, and more.
BYOD (bring your own device) programs are exploding in the U.S. job market. They’re expected to increase 15 percent between 2015 and 2022, and for good reason. Employees who use their own device for work tend to put in 240 hours more per year, and employees whose companies offer cell phone support are 83 percent more satisfied in their work. This type of benefit is an especially good fit for a personalized benefits framework. Employees can use their allowance toward phone bills, new devices, Internet expenses, and more.
Lack of personal growth in the workplace is one of the number-one causes of employee turnover. When a company offers a tax-free, personalized education benefit, employees can use that money for things like certifications, classes, books, and seminars. Employees who are encouraged to work on personal development are happier at work, and they become better qualified the more they use their education allowance. That’s a win-win for your business.
Given the rise of BYOD, it’s natural that employees are more spread out. For the times they need to be in the office, your company can make it a little easier for them to get there. Employees appreciate flexibility in how they get to work. When businesses offer a tax-free transportation allowance as part of their personalized benefits, employees can take advantage of other options besides the daily grind of traffic. Buses, trains, bikes, and more are eligible for this benefit. Employees often work on the bus or the train, and employees who exercise before work (like on a bike!) are happier and more productive at work than their counterparts.
Since the introduction of pensions in the 1940s, life expectancy in the United States has skyrocketed, leading to ever-higher costs per retired employee. As a result, companies began shifting costs onto their employees, paying only a portion of the retirement benefit, which got smaller and smaller over time. With personalized benefits, employees can apply their allowance to any retirement account from any provider. And since making contributions to an IRA is tax-free, companies and employees are free from payroll and income taxes on the allowance.
Businesses pay the full cost of health and retirement benefits to claim tax advantages and avert government-issued wage controls.
Health insurance companies start introducing exclusions and higher deductibles into group policies, and businesses respond by using the first health reimbursement arrangements (HRAs) to reimburse employees for individual insurance and medical expenses.
1974: The Employee Retirement Income Security Act (ERISA) creates individual retirement accounts (IRAs) and formally incorporates HRAs.
1978: The Revenue Act of 1978 creates 401(k)
The Tax Reform Act of 1986 allows businesses to contribute up to $5,250 tax-free toward employees’ education.
1993: Internal Revenue Code Section 132(f) allows businesses to provide transportation benefits to employees tax-free, up to certain limits.
1996: The Small Business Job Protection Act introduces the Savings Incentive Match Plan for Employees (SIMPLE) IRA.
2002: The IRS formally defines HRAs in Notice 2002-45 and Revenue Ruling 2002-41.
2003: The Medicare Prescription Drug, Improvement, and Modernization Act creates health savings accounts (HSAs).
2010: President Obama signs the Affordable Care Act into law.
2010: The Small Business Jobs Act of 2010 allows businesses to provide employees with cell phones on a tax-free basis, without complicated substantiation requirements applied to “listed property.”
2011: IRS Notice 2011-72 announces that personal cell phone use for
2013: The Departments of the Treasury, Health and Human Services (HHS), and Labor issue Notice 2013-54, which states that some HRAs didn’t comply with the Affordable Care Act.
2016: The 21st Century Cures Act creates the qualified small employer health reimbursement arrangement (QSEHRA), effectively reintroducing HRAs to the marketplace.