Inflation’s Impact on the Cost of Worker Benefits

Between April 2022 and April 2023, wages increased by 5.1 percent for production and nonsupervisory workers. However, according to the US Bureau of Labor Statistics, “real” average hourly earnings – calculated as wage growth minus inflation – decreased by 0.5 percent during that timeframe. In other words, they effectively received a pay cut.

That is the impact inflation has had on worker income, even those who received wage increases over the past year. Unfortunately, the rising cost of living has hit middle- and lower-income Americans where it hurts the most, such as groceries, gas prices, and housing. 

At the same time, inflation also increases the costs employers pay for benefits. For smaller employers, cutting back on generous benefits could help save jobs. However, the current job market is still quite competitive, so employers who cut back are likely to lose both recruiting advantages as well as incumbent workers. A recent LinkedIn survey found that the key priorities among today’s job seekers are compensation and benefits, followed by work-life balance.

The dilemma for employers is two-fold. First, it’s important to understand the factors that contribute to higher benefit costs. Second, they must devise strategies to remain competitive in the job market without sacrificing the bottom line.

Factors Increasing Health Insurance Premiums

There is a high probability that health insurance premiums will rise significantly relative to smaller increases over the past two years. With the federal government calling an end to the pandemic’s emergency status, consumers may be charged for Covid-19 testing, vaccine administration, and treatment going forward. Worse yet, health insurance companies may pass along those costs incurred over the past two years via higher premiums.

Bear in mind, too, that as provider network contracts renew, medical professionals may charge higher prices in response to higher inflation over the past year (during which time they’ve been locked into lower rates).

That goes for the wages of nurses, who suffered from overwork, health risks, and burnout during the pandemic. A wave of retirements and resignations forced hospitals to raise salaries – by as much as 15 percent – and hire travel nurses at higher rates. These overhead costs will have a ripple effect on all healthcare expenses moving forward, including premiums.

Defined Benefit and Defined Contribution Plans

The dramatic rise in inflation over the past year raises questions about past actuarial and cost of living assumptions. While pensions of yesteryear were the hallmark of a comfortable retirement, today’s recipients may find that higher inflation has eroded the value of their monthly benefits.

 As for 401(k) plans and other employer-sponsored retirement accounts, the prospect of a higher cost of living coupled with the potential for a longer lifespan behooves higher contributions. Congress responded to this reality when it passed its omnibus appropriations bill last December, also known as SECURE 2.0 (an update to the Setting Every Community Up for Retirement Enhancement Act of 2019). Some of the legislative changes that could potentially increase costs for employers include:

• Secure 2.0 authorizes tax credits for small businesses to allow military spouses to enroll right away in their plan and qualify for immediate vesting of any employer matches.
• In 2023, employers are allowed to create and make after-tax contributions to Roth accounts for SIMPLE and SEP retirement plans.
• In 2023, multiple employers can collaborate to offer a single plan as a multiple employer plan, including a pooled employer plan (PEP).
• Beginning in 2024, employers may make contributions to workplace savings plans on behalf of workers repaying student loans.
• Also in 2024, employers may create a savings “sidecar” account tied to workers’ retirement accounts; funded with worker-only after-tax contributions up to $2,500; invested in principal-protected assets; and allow for at least one withdrawal per month.
• Starting in 2025, most major employers will be required to implement an automatic enrollment program for their retirement plan.
• Also starting in 2025, retirement plan participation and contributions will be extended to part-time workers who have worked at least 500 hours for two consecutive years (reduced from the current three consecutive years requirement).

Employer Strategies

Employers can take a multi-pronged approach to combatting the impact of inflation on benefits. There is always the advantage of offering group rates on benefits that cost significantly more on the open market. That’s why voluntary benefits are still popular even in the midst of inflation: Workers can still purchase benefits they need at a reduced rate, which makes their current employment more valuable than job hunting.

Better yet, voluntary benefits empower companies to offer more to their workers without significant investment. It offers the ability for workers to customize their own benefits package instead of accepting a one-size-fits-all program that doesn’t meet their needs. Voluntary benefits may be offered at a group rate but are usually 100 percent funded by workers. The range of offerings is expansive, from pet and vision insurance to gym memberships to identity theft protection.

Lifestyle Benefits

Lifestyle benefits may be broadly defined as anything that helps enhance a worker’s lifestyle. For example, flexible options to work from home (WFH) on a permanent or hybrid basis can improve work-life balance and help prevent burnout. Post-COVID, many workers have decided they will no longer work for an employer that doesn’t offer at least a hybrid option.

The advantage of remote work is that it can reduce operational costs, from leasing large buildings to lowering utility bills based on fewer people working onsite at one time. Flexible work locations also allow employers to hire workers who live in areas with a lower cost of living, thereby reducing the level of wages necessary to compete in those markets. Lower salaries translate into other cost savings, such as lower premiums for life, accident, and disability insurance – which are typically based on coverage representing a percentage or multiple of salary.

Employee discount programs provide savings on one-time and ongoing expenses and services for local retailers, restaurants, tax, legal and financial services. Employers also may consider offering Lifestyle Spending Accounts, individual after-tax accounts funded exclusively by the employer that workers may use to reimburse benefits and expenses of their choice. Lifestyle benefit options may include a gym membership, student loan repayment, child, elder or doggie daycare. Employers may allocate Lifestyle Spending contributions based on specific categories. For example, they might contribute $2,000 a year toward certain voluntary benefit plans like premiums for group life, supplemental health or property & casualty insurance; plus, another $2,000 annually for wellness-specific services, such as nutrition and weight management programs, or mental and behavioral health support.

Shifting benefit choices to workers gives them the ability to tailor them for individual needs. It is a way to budget for a multitude of benefits with a set fee.

PTO Conversion

Another lifestyle benefit is giving workers the opportunity to decide whether more vacation or more money would improve their situation. Many would happily exchange a week of vacation to pay off their credit card debt. Others may feel the stress of workloads and deadlines and welcome the opportunity to purchase additional PTO. Benefits experts recognize the popularity of this benefit and predict that more companies will begin to offer some form of PTO conversion.

For employers facing the crunch of rising costs due to inflation, it is important to view benefits from each worker’s perspective. That is to say: No two workers are alike. While keeping health insurance costs down and maximizing retirement plan benefits are high priorities, perhaps the best way to combat the effects of inflation is to offer the flexibility of using employer funds to purchase benefits that address their personal circumstances.

Whether your plan is to enhance benefits or maintain the status quo, the current inflationary environment may increase your overhead. However, the pandemic is essentially over – at least from a legislative point of view. This is a good time to re-evaluate benefit offerings in a strategic manner, rather than a reactive one. Get to know what is important to your unique workforce and create a plan based on their needs, wants, and your investment in their future.

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