[email protected] / September 8, 2026

The New Reality of Employee Benefits 

Many employers are facing the rising cost of employee benefits. Across the United States, employers are grappling with the challenge of aligning employee expectations with mounting financial pressures. Employee benefits, long considered essential for attracting and retaining valued employees, are now being reassessed as costs escalate at a rate exceeding both wage growth and inflation. In the current landscape, the pace of cost escalation has accelerated notably in recent years. Health and employee benefits costs are increasing, driven by inflation, prescription drug claims, and high-cost specialty medications. Benefit plan costs are projected to rise by an average of 6.7% in the United States.   

For many employers, benefits have shifted from a predictable operating expense to one of their fastest-growing costs. What was once a well-managed and highly valued component of an organization’s total rewards strategy has become an increasingly difficult expense to sustain. As costs continue to outpace inflation and wage growth, employers are being forced to rethink how they deliver competitive benefits while maintaining long-term financial sustainability. 

Cutting Benefits Isn’t the Answer 

Eliminating employee benefits is not a viable option to reduce company costs. Benefits have become a core component of the employee relationship, influencing an organization’s reputation and ability to attract, retain, engage, and support employees. 

Additionally, benefits are a major reason employees stay with an employer. Reducing or eliminating coverage can increase employee turnover, which is costing employers more than ever. According to the Express Employment Professionals-Harris Poll survey, the average cost of employee turnover has climbed to $45,236, up nearly $10,000 from $36,723 a year earlier. Half of U.S. hiring managers also expect turnover at their companies to rise in 2026, up from 39% in 2024. 

Rethinking Benefits  

Due to the significant price increases, a change in structure is needed for employers to provide their employees with benefits while not digging their businesses into a financial hole. The current shift many leading companies are adopting to protect their budgets while still maintaining benefits programs is a risk management model that acts as a “front line of defense.”   

By improving employee health, preventing illness, and addressing issues before they become costly claims, organizations can tackle the underlying drivers of rising benefits costs. This shifts the conversation from “How do we pay for rising premiums?” to “How do we reduce the factors driving those premiums in the first place?”  

As the cost of employee benefits continues to increase, employers are also looking for ways to encourage employees to take a more active role in managing their benefits and the associated costs. The Federal Insurance Contributions Act (FICA) tax savings program provides an additional incentive for employees to take greater responsibility for their benefits by allowing certain employee benefits and wellness plans to be paid for on a pre-tax basis through payroll. By contributing to eligible benefits before taxes are applied, employees can reduce their taxable income while contributing to their benefits package. This can be particularly important as greater utilization of group benefits including prescription medications, frequent doctor visits, and various therapies can contribute to increased costs for employers.  

Two Models  

When rethinking benefits programs there are two ways of restructuring: a FICA Payroll Tax savings strategy that acts as a front line of defense or a defined contribution plan. 

1. FICA Payroll Tax Savings Opportunities  

In the United States, FICA payroll tax savings programs allow employees to apply a deductible that generates tax savings that will cover the cost of benefits through payroll. The Federal Insurance Contributions Act (FICA) tax includes a 6.2% Social Security tax and a 1.45% Medicare tax, shown as deductions on employees’ pay stubs. Because FICA taxes are based on taxable wages, benefits strategies that reduce taxable compensation can lower FICA costs for both employees and employers.  

For employees, these savings are used to fund a new benefit and wellness program with any leftover savings resulting in an increase in take-home pay.  

For employers, these payroll tax savings can offset the cost of implementing a group benefits program, often making it cost-neutral while generating measurable savings. Employers may realize FICA payroll tax savings of approximately $573.60 per participating employee each year, directly improving their bottom line. By providing a new set of benefits to employees that include unlimited coverage for most plan inclusions at a net-zero cost, usage will be diverted from the existing benefits plans.  

2. Defined Contribution Plan  

Another option is a defined contribution benefits plan, although it offers some advantages, it can be limiting to employees. A Defined Contribution (DC) benefits plan offers advantages for both employees and employers. By providing employees with a set contribution to use toward eligible health and wellness expenses, the plan encourages more thoughtful spending and greater personal responsibility in benefit decisions. 

For employees, a DC plan can help reduce out-of-pocket costs, such as deductibles and co-payments, while offering greater flexibility to choose the benefits that best meet their individual needs it does have its limits on how much employees can spend. 

For employers, a DC plan can help manage benefits costs more effectively by reducing pressure on the primary benefits plan and encouraging more efficient use of healthcare resources. While a DC offers predictable benefit expenditures and greater cost control, employees are limited to the amount they can spend annually and may need to be more frugal in their benefits usage. 

Supplemental Plans Reduce Claims at Renewal Time?  

Lower claims experience can have a positive impact when an employee benefits plan comes up for renewal. When overall claims costs are well managed, employers may benefit from:  

• Greater flexibility in plan—employers may choose to adjust the scope of coverage or redirect benefits spending to better meet the needs of their workforce.  

• Stronger negotiating position—a healthier claims history can provide more leverage when discussing renewal terms with pricing insurers.  

• Reduced pressure for premium increases—while many factors influence renewal rates, lower claims costs can help minimize the likelihood or size of premium increases.  

• Improved long-term cost management—predictable claims trends make it easier to budget for benefits and support the long-term sustainability of the benefits program. 

Conclusion 

Rising employee benefits costs do not mean employers have to choose between protecting their bottom line and providing meaningful benefits to their employees. Instead, organizations should look for ways to manage the underlying drivers of benefits costs increases while continuing to offer programs that support employees. 

A sustainable benefits strategy starts with shifting the focus from simply paying for higher claims and premiums to proactively managing the factors that contribute to those costs. Defined contribution plans, and FICA payroll tax savings opportunities can give employers greater control over their benefits spending while giving employees more flexibility and responsibility in how they use their benefits. 

The goal is not to cut benefits, but to make benefits more cost-effective. By taking a proactive, risk-management approach, employers can create a benefits program that is financially sustainable and beneficial to both employee and employer.  

For more information on how your organization may be able to reduce costs through FICA tax savings, contact Schooley Mitchell.