Employers may find it easy to budget for fixed forms of employee compensation—namely employee salaries. But it's harder to put a number on non-salary benefits, such as health insurance, paid leave, and retirement plans.
Figure out the estimated costs of employee benefits for the upcoming year with these tips.
Why Forecasting a Non-Salary Budget Is Important
There are a few reasons why employers should figure out a benefits budget for employees before each new plan year:
Stay on Budget and Avoid Coverage Lapses
Knowing the estimated cost of benefits for an employee is vital for any organization because it helps to secure HR benefits budgets and ensure that firms have enough money in the bank to pay for benefits and maintain active coverage of plans your employees rely on.
The more in-depth the forecast is, the better prepared a company will be and the fewer financial surprises it will face.
Comply With Health Care Laws
Under the Affordable Care Act’s (ACA) employer shared responsibility provision, employers classified as applicable large employers (ALEs) have to provide full-time employees (and their dependents) with health insurance coverage that:
- Is affordable
- Provides “minimum value” (an acceptable minimum standard for medical services)
Otherwise, they must pay an employer shared responsibility payment to the IRS.
Figuring out the estimated cost of benefits for an employee allows employers to evaluate whether their proposed insurance plan meets ACA requirements. If it doesn't or they opt not to offer a plan, this helps employers put money aside to pay for any penalties incurred.
Evaluate and Strengthen Current Benefits
Estimating the costs of employee benefits every year helps companies determine what's in their benefits package, whether it's competitive, and whether it meets the needs of their workforce.
If a firm determines that its package isn't robust enough, it can replace it with other plans that suit the benefits budget.
Determine Full-Time Employee Classification
One of the first steps a company must take when forecasting a benefits budget for the upcoming plan year is to determine how many people it employs full-time. This helps the company determine important aspects of both its benefits offerings and potential tax liabilities.
Is It an ALE Under the ACA?
If a company determines that it has enough full-time employees to be considered an applicable large employer (ALE), it will know that it is subject to the employer shared responsibility provisions if it does not provide adequate health insurance coverage to its full-time employees.
In general, ALEs are employers that had at least 50 full-time employees on average during the prior year.
How Many Employees Need Insurance
The ACA requires ALEs to offer adequate insurance coverage to full-time employees to avoid paying one of two possible shared responsibility payments.
In general, the IRS defines a full-time employee as somebody who works at least 30 hours per week or 130 hours per month.
ALEs who want to avoid making employer shared responsibility payments have to provide minimum essential coverage to 95% or more of their full-time employees (and dependents). In addition, no full-time employees should have received a premium tax credit when buying insurance through the Health Insurance Marketplace.
A penalty may be owed to the Internal Revenue Service (IRS) if either of these terms is not met.
Penalties Under the ACA
The employer shared responsibility payments are calculated on the basis of how many employees a company has. Knowing the number of full-time employees can help companies predict the payment they owe the IRS. The IRS will generally notify a company if a payment is due.
Once a company knows how many full-time employees it has, it can begin to analyze its spending on benefits.
Calculate the Average Cost of Employee Benefits
When putting together a benefits budget, factor in both mandatory and optional benefits. Between the two benefits categories, employer costs averaged $12.18 per hour an employee worked and accounted for 31.2% of total employee compensation, according to U.S. Bureau of Labor Statistics (BLS) data.
However, it's helpful to reference the average employer costs for perks in these two categories as a starting point for a benefits budget.
Estimated Cost of Mandatory Benefits for an Employee
Mandatory benefits are those that employers are generally required to provide employees under federal or state law, including:
- FICA tax: This includes the employer contribution of Social Security and Medicare tax.
- Unemployment insurance: Employers generally must contribute to both federal and state unemployment insurance.
- Workers’ compensation: Most firms have to pay into this type of insurance that helps workers who become ill or get injured on the job.
According to BLS data, employers' median spend is $2.26 for every hour an employee worked for these legally required benefits spanning companies across the private sector and state and local governments. This accounts for nearly 8.4% of total employee compensation costs.
Forecasting the Optional Benefits Budget
Optional benefits are any perks an employer isn't legally required to provide its employees, including:
- Insurance: Health insurance makes up the bulk of insurance costs, but life insurance and short- and long-term disability are also common employee benefits.
- Paid leave: Paid vacation, statutory holidays, sick leave, and personal time off fall under this category.
- Retirement and savings: This includes defined benefit plans like 401(k) plans and associated employer contributions.
- Supplemental pay: This includes overtime pay, shift differentials, and bonuses.
Employers spend roughly $5.71 per hour an employee worked for these optional benefits, according to BLS data. This figure amounts to roughly 21% of total employee compensation.
Another expense to watch out for is the Cadillac Tax, a tax on high-value health care plans that could go into effect in 2022. Coverage providers would have to pay an excise tax of as much as 40% on the value of health insurance benefits that exceeds $11,200 for self-only plans and $30,150 for full family coverage plans.
Determine Costs of Benefits Versus Costs of Penalties
Companies can determine whether it will cost more to provide employees with benefits or to pay the penalties incurred by violating the employer shared responsibility provisions of the ACA.
There are two types of employer shared responsibility penalties under the ACA:
- Minimum essential coverage: Companies generally owe this payment if they don't provide minimum essential coverage to 95% or more of full-time employees (and dependents) and if one or more full-time employees get the premium tax credit when buying insurance through the Marketplace. The payment annually amounts to $2,000 per full-time employees, excluding the first 30 full-time employees.
- Affordable minimum essential coverage with minimum value: Firms that offer minimum essential coverage to employees usually still owe this type of payment for every full-time employee who gets a premium tax credit when buying Marketplace insurance. The annual payment is $3,000 for every full-time employee who got the tax credit.
In contrast, health insurance coverage costs employers roughly $2.55 per hour an employee works, according to BLS data.
For some companies, especially companies with a small full-time workforce, it might be more affordable to pay the penalties than to pay for benefits for full-time employees.
Update the Budget With Benefits Additions or Changes
The next step of forecasting a non-salary budget is to review the benefits package the company currently provides to its employees. A human resources department needs to determine if the package is sufficient for its employees or if something needs to be replaced or added.
If you add or change any items in the benefits package (for example, you might want to save money with a high-deductible health care plan or add a dental insurance plan), make sure that you crunch the numbers for the plan and change or add the corresponding line item(s) in your benefit budget for the coming year.
Other benefits your package might be missing today include:
- Vision insurance
- Flexible spending accounts
- Voluntary benefit programs
- Wellness perks
As optional benefits, none of these items have to be offered by the company but should be considered when putting together a comprehensive budget for employee benefits for the coming year.
Consult With an HR Advisor
Forecasting an employee benefits budget is often handled by someone in the HR department of a company. If that individual runs into trouble when forecasting employee benefits, whether in selecting a suitable health care plan or planning for the coming years, they can consult with the company's in-house HR advisor or an external advisor.
However, an in-house HR advisor will be more accessible. HR advisors can answer any questions a company might have when it comes to employee benefits, making it easier to create a bulletproof budget.
Present the Forecast
Once the employee benefits budget has been created, it can be presented to the person in the company who has the final say over the budget—be it an HR prime or one of the executives of the company. They will review the budget, make any additions or subtractions, and then sign off on it so that the new-and-improved benefits package can be used by employees in the coming year.