Copyright© 2007 by School Services of California, Inc.

                                      Volume 20                   For Publication Date: April 27, 2007             No. 10

Ask SSC . . . 

Is It Permissible to Include Health Benefits
as Part of the Salary Schedule? 

Q.        Is it permissible to provide health benefits as part of our salary schedule? If so, can we use an IRC Section 125 plan to fund it? 

A.        First, it is permissible to do this for any entire group of employees (for example, management is a group). Second, use of an IRC 125 is permissible and is the preferred option. Third, the State Teachers’ Retirement System (STRS) and Public Employees’ Retirement System (PERS) both allow conversion of benefits to salary for computation of retirement benefits, but our understanding is that both make it very difficult to ever go back. 

The benefits to the employee include a higher base salary for retirement purposes, greater flexibility in purchasing or not purchasing benefits, and better coordination with a spouse’s benefit plan. 

The downside for employees is that district benefit contributions grow at the rate of salary increases, even if benefit costs grow faster. Over time, fewer people generally buy district benefits, making the pool “less standard” and resulting in higher costs for those who do buy the benefits. 

The upside for the district is that benefit costs grow at the rate of salary increases, not the rate of healthcare cost increases, and it may be easier to attract certain new employees, particularly senior ones looking to the retirement benefit. 

The downside for the district is that it must pay the district’s share of all statutory benefit costs on the amount added to salary. Also, conversion can be difficult and costly since, if you add the average cost of benefits to the schedule, some people will pay more out of pocket and if you add your maximum benefit contribution, many will get a large windfall. 

Many districts have had this implemented for management for years. Some have done it successfully for teachers and fewer for classified staff.  

We hope some of this helps in your decision.

—Ron Bennett