The link between your salary and health insurance

Is your health insurance plan costing you a raise? The majority of Americans have employer-based health coverage, but not everyone understands the link between salary and benefits. As health care costs continue to rise, an increasing percentage of compensation is in health insurance rather than wages.

A new study released by HCMS Group found that in 2014, average health care expenses at more than 300 employers rose 10 percent, while wages increased just 4 percent. The study also found that the relationship between salary and insurance has a disproportionate negative impact on lower-income workers. Employees earning less than $30,000 per year had their wages increase just half a percent, while health plan expenses rose an average of 16.6 percent.

But how did health care costs get tied to salaries in the first place?

Compensation is not just the wages you get through your paycheck. It can also include health coverage, as well as other benefits like 401(k) contributions or other taxes or services paid by your employer.

When employers are budgeting for their employees’ compensation, all of the above is included in the calculations. As a result, the significant growth of health care expenses has directly impacted wage growth. Many believe health care spending is a driving factor of the United States’ 35-year wage stagnation trend.

Taxes and health insurance

There is a motivation for employers to provide compensation in the form of health benefits — funds spent on those group health plans are exempted from taxes.

This gives employers an incentive to provide more of the total compensation package as health insurance rather than wages, which are taxed. Over time, employer-sponsored health insurance became the national standard. Today, the Congressional Budget Office estimates 153 million Americans have employer-sponsored health coverage. In Tennessee, the Kaiser Family Foundation estimates half of the state’s population has employer-based insurance.

Would you slash your benefits for a raise?

Given the choice, your employer would probably to prefer to pay a greater portion of your compensation through benefits, because of the tax incentives. This dynamic created a trend of larger and more expansive health plans. The government has tried to curb this trend with the “Cadillac Tax,” a new tax on high-cost health plans that goes into effect in 2020. The 40 percent tax will apply to plans over certain price thresholds, and is intended to discourage employers from offering “luxury” coverage, hopefully lowering health care costs in the process.

It is not clear whether this change would have an impact on wage growth, but a growing number of employees say they would sacrifice some of their benefits for a raise. According to a study by Employee Benefit Research Institute, 20 percent of workers would slash their coverage for more take-home pay, and that number has steadily grown since 2012.

Younger employees tend to be the most willing to scrap benefits in favor of cash, as they likely expect to have less health care needs than older employees, and also tend to receive lower wages than their older colleagues.

As previously mentioned, lower-income workers are hit particularly hard by rising health care spending, as the expanding costs take up larger percentages of their compensation than higher-income workers’.

U.S. employers are still several years away from implementing the Cadillac Tax, and health care costs continue to rise. It remains to be seen whether company health plans will shrink in response to the new tax, and whether wages will subsequently grow.

Alex Tolbert is the founder of Bernard Health, a company that provides non-commissioned, expert advice on health, Medicare and COBRA insurance and medical bill consulting. To learn more about Bernard Health, visitwww.bernardhealth.com.