According to a recent survey, 57% of U.S. employers plan to reevaluate their employee benefits strategies due to rising costs of benefits such as healthcare. Additionally, among the barriers to implementing an effective benefits strategy, benefits costs had increased from #6 to #1 within three years.
This data highlights the need for companies to rework their benefits strategies to continue delivering premium perks while still ensuring sustainability.
But how can you achieve this? By prioritizing high-impact, low-cost benefits that help you balance cost, value, and employee engagement.
In this guide, you’ll learn how to budget for employee benefits without overspending, including how to address common pitfalls you might face when redesigning your benefits package.
Let’s get to it.
The Importance of Strategic Budgeting for Employee Benefits
As an HR lead or top-level manager, you are already aware and likely concerned about the costs of maintaining benefits, which seem to balloon annually. Strategic budgeting enables you to allocate resources efficiently and effectively to high-priority benefits that deliver the most value to your team and company goals.
Other ways strategic budgeting can be beneficial to your company include:
- Forecasting Expenses: Strategic budgeting enables you to anticipate how much you will likely spend on employee benefits over a specific period, usually annually. This helps you account for benefits costs when planning the company’s operating expenses.
- Alignment with the Company's Long-Term Business Strategy: Strategic budgeting ensures you allocate adequate resources to initiatives that support the company’s business goals. For example, you could provide premium health insurance benefits to attract and retain talent, which can help your company achieve its long-term goals, such as market expansion and new product development.
- Optimization, Not Reduction: Strategic budgeting can help you identify resource wastage in your employee benefits programs, such as inflated vendor costs or underutilized benefits. You can then redistribute the recovered resources to high-impact benefits to maximize employee outcomes.
- Adapting to Changing Workforce Needs: Unlike in the past, companies must continuously evolve their benefits packages to meet employees’ changing needs and preferences. For example, there is an increased demand for corporate mental wellness programs to help employees manage stress and burnout. Strategic budgeting enables you to restructure your funding model to accommodate such benefits without increasing your spending.
- Accountability: Strategic budgeting improves transparency, as it tracks your benefits expenditure more efficiently than traditional budgeting methods. Additionally, employees can contextualize how much money goes into funding their benefits, which improves trust.
Mandatory vs. Optional Benefits
To create a strategic budget that effectively curbs your business's runaway benefits costs, you need to understand the various types of benefits.
The table below provides a side-by-side comparison of mandatory vs. optional benefits and how they affect the budgeting process:
| Mandatory Benefits | Optional Benefits | |
| Definitions | These are legally-mandated employee benefits that you must provide under federal and state law, such as ERISA and ACA. | These are extra perks offered at your discretion to boost employee satisfaction and reduce employee turnover. |
| Examples |
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| Legal Expectations | Compliance is mandatory; otherwise, you may face legal consequences, including fines and penalties. | There are no legal requirements since they are voluntary. However, competitiveness among rivals makes them a necessity |
| Impact on Employee Retention | Minimal to moderate impact on employee retention since most employees expect them. | There is a significant impact on employee retention, as these additional perks improve your employees' work-life balance. |
| Cost Implications | Determining the costs of your employees' mandatory benefits is straightforward since calculations are based on fixed payroll percentages or predetermined formulas. For example, you should match the 6.2% and 1.45% contributions your employees make to Social Security and Medicare, respectively. |
Determining the costs of your employees' mandatory benefits, such as wellness programs and student loan repayment assistance, is challenging since they vary based on vendor rates, employee enrollment and usage, and plan designs. |
| Tax Implications | Mandatory employee benefits, such as Social Security, Medicare, unemployment, and workers' compensation insurance, are tax-deductible as a business expense. | Some optional employee benefits, such as retirement benefits planning, offer tax advantages to employers, while most other optional benefits are taxable. |
| Long-Term Cost Predictability | Cost predictability is straightforward because rates and percentages depend on payroll figures, making long-term planning relatively straightforward. | Cost predictability is challenging because your contributions depend on several factors, including employee usage, vendor rates, and the extent of coverage offered by various plans. |
| Coverage Flexibility | You have little wiggle room to adjust these costs without violating labor laws. | You have significant control over how much you can spend on optional benefits since you determine the perks your employees receive, the contribution criteria, and employee eligibility. |
| Strategic Value | They ensure compliance with federal and state laws, thereby avoiding legal repercussions. | They differentiate you from your competitors, enhancing your business's brand and increasing your attractiveness to workers in the labor market. |
Strategic budgeting should account for both mandatory and optional benefits, as each category has its unique contributions to employee satisfaction and retention rates.
How to Budget for Employee Benefits
Think of it this way: budgeting for employee benefits should never be guesswork. You should focus on building a benefits package that meets employee expectations and exceeds industry standards, while also ensuring its long-term sustainability.
Discover how to balance value and cost when planning the next round of employee benefits:
1. Outline Employee Benefits Goals
Understanding what you want to achieve with your employee benefits is the first step to creating a budget that meets your company's and your employees' needs. The primary goal of providing employee benefits is to ensure your employees' physical, mental, and financial well-being.
Other employee benefits goals include:
- Guaranteeing compliance with federal and state regulations by providing mandatory employee benefits.
- Differentiating your company from competitors helps you attract and retain top talent.
- Boosting employee productivity.
2. Partner with a Benefits Broker (Optional)
While working with a benefits broker is optional, if you intend to hire one, you should introduce them early in the budget-making process. A benefits broker will help you create a budget that enables you to meet your employees' needs while balancing costs.
Additionally, the benefits broker will help you negotiate with health insurance vendors and retirement plan providers to get the best value for your money.
3. Assess Employee Needs
Knowing what your team wants from the employee benefits is crucial to ensuring their participation and satisfaction.
The best way to assess your employees' benefits needs is to ask them directly through various engagement methods, such as employee surveys and focus groups.
4. Audit Current Costs and Usage
Part of budgeting for employee benefits is determining the cost implications of offering certain benefits and perks. Begin by assessing the cost of servicing your current employee benefits package. This will help outline which benefits demand the most of your budget and identify opportunities for cost savings.
Next, evaluate your employees' engagement metrics to determine which benefits they signed up for the most and which benefits had the least participation. This will help identify underutilized benefits to remove from the program and reallocate the funds to more impactful benefits.
5. Categorize and Prioritize Benefits
Once you have a clear picture of your employees' preferences, it is essential to prioritize benefits based on their impact on your team’s well-being and the company’s goals.
For instance, most employees prioritize health insurance benefits over hybrid work arrangements. This means you should first improve your current medical coverage, then introduce flexible working policies over time.
6. Account for Wellness Incentives
Many organizations often overlook wellness gifts when budgeting for employee benefits, which is usually ill-advised. Remember, employees in the modern workplace often experience high stress and burnout, which discourages them from enrolling in benefits programs, as they associate them with increased workload.
Adding a wellness incentive program enables you to offer thoughtful wellness gifts to help your employees overcome psychological barriers to participation. This boosts your team’s enrollment and utilization of employee benefits, maximizing the ROI.
Download our free ebook to discover how you can leverage psychology-backed incentives to get the most value from your employee benefits budget.
7. Calculate the Benefits Costs
Determine your monthly, quarterly, and annual benefits costs by aggregating the anticipated fixed and variable costs. For example, health insurance and retirement benefits are considered fixed costs because they are predictable and recurrent.
On the other hand, optional benefits such as health and wellness in the workplace comprise variable costs that depend on employee participation.
Additionally, you might incur costs for running employee benefits, such as payroll management services or benefits administration software.
8. Set a Budget
Now that you have the forecasted cost of funding your employee benefits, you can set a budget and express it as a percentage of your operating expenses or revenues.
For example, you could allocate 15% of your annual revenue to employee benefits, meaning the available optional perks will vary based on the company's performance. Alternatively, you could allocate a fixed budget with provisions for periodic review.
9. Monitor and Adjust
Once the budget is fully implemented, begin gathering data to quantify the effectiveness of the employee benefits in achieving company goals.
For example, you could monitor employee retention rates to determine whether the benefits have enticed more members to stay at your company. Other metrics to measure include changes in employee satisfaction, absenteeism, and benefits costs.
The collected data should give you insights into how to adjust your employee benefits to your team’s expectations.
Key Challenges in Budgeting for Employee Benefits
The budget-making process can be a nightmare for employers, especially small businesses. This is because challenges like rising healthcare costs, shifting workforce expectations, and economic uncertainty can render even the most well-thought-out employee benefits unsustainable within a few months.
However, you can reduce your risk exposure by avoiding these common pitfalls the next time you review your employee benefits budget:
- Budget constraints: Funding limitations on your employee benefits can significantly affect the budget-making process. For example, you may have to cut back on attractive benefits, which will negatively impact employee satisfaction and retention rates, as well as hamper your talent recruitment efforts.
- Rising Healthcare and Insurance Costs: The increasing cost of healthcare and insurance premiums means that every year, you have to increase the portion of your budget dedicated to receiving the same level of employee coverage.
- Balancing Costs and Employee Satisfaction: Staying within your budget while providing valuable benefits that increase employee satisfaction can be substantially challenging. This is because employees are accustomed to certain benefits like PTO, which, if removed, would hurt employee net promoter scores.
- Evolving Employee Expectations: When employees demand more personalized and comprehensive benefits packages, it strains your budget-making process. This forces you to allocate more to your employee benefits program than initially intended, which could hurt your cash flow.
- Measuring ROI and Utilization: Determining the value of your employee benefits package can be challenging because it is difficult to quantify the financial returns.
Effective Strategies for Budgeting Employee Benefits
Even with the highlighted funding challenges for employee benefits, you can still optimize your budget to meet employee expectations without hurting your cash flow.
Let’s outline some proven strategies below:
- Incremental budgeting: Use your previous year's employee benefits budget as a benchmark for the following year. Increase the previous year's budget by a slight percentage to account for external factors that influence costs, such as inflation. It is a simple, easy-to-implement strategy that guarantees consistent, stable funding for your employee benefits.
- Clear Cost Breakdown: Keep detailed records about your historical spending on employee benefits. This provides data to support your decisions when allocating funding to various benefits packages. It also promotes transparency and accountability, as stakeholders can track how and where the company is spending the benefits budget.
- Encourage Employee Participation: Engage your team during the budgeting phase to learn their benefits expectations. This is also an opportunity to explain why you prioritized some benefits over others, or why some perks will be added/removed.
- Implement Preventive Health and Wellness Initiatives: One way to manage your benefits budget is to support employees in leading healthy lifestyles, reducing your health insurance costs. Provide benefits like subsidized gym memberships and healthy office snacks to help your team stay in shape, reducing illnesses and workplace injuries.
Frequently Asked Questions (FAQs)
Got more questions? Let’s address pending questions you might have about budgeting for employee benefits.
What Are Fringe Benefits, And How Do They Affect Budgeting?
Fringe benefits are additional, non-monetary forms of compensation that you may offer your team to improve their work-life balance.
Examples include commuter allowance, paid time off, and wellness programs.
How Often Should Companies Re-Evaluate Their Benefit Budgets?
Companies should reevaluate their benefits budgets at least once a year during budget planning and when preparing to renew vendor agreements.
However, quarterly reviews can also help you identify and seal budget leaks early by removing unutilized benefits.
What Are The Most Cost-Effective Benefits For Employee Retention?
The most cost-effective benefits for employee retention include recognition and rewards, flexible work arrangements, and training and development opportunities.
Conclusion
The budgeting process is among the most crucial steps in planning employee benefits, as it determines the perks you offer. This, in turn, impacts employee engagement and your company’s ability to pursue and achieve its business goals.
Budgeting should never be about how much money you allocate to employee benefits, but rather how you utilize it to drive maximum impact for your team.
Companies seeking to refine or relaunch their employee benefits programs should partner with a benefits provider to help design packages that strike a balance between cost and value.
At SoHookd, we have nearly a decade of experience partnering with organizations to deliver employee benefits to their teams. We’ll help you budget for employee benefits that align with your organizational culture and are personalized for your members.
Our packages are flexible and customizable, allowing you to roll out the benefits within 2 weeks. Also, we don’t tie you down with contracts and PEPM fees - our packages are procurement-friendly.
Offer premium employee benefits to your team without straining your budget. Schedule a personalized call today.
