Copyright© 2004 by School Services of California, Inc.
Volume 17 For Publication Date: December 17, 2004 No. 24
Are There Downsides to
Placing Health
Benefits on the Salary Schedule?
Q.
We are in the middle of negotiations with our teachers’
union. To get them to discuss total compensation, rather than tackling salaries
and health benefits separately, we are considering proposing that the amount we
pay for health benefits be placed on the salary schedule. Then if the employee
wants to buy benefits, we will offer an IRC Section 125 plan that will allow
them to purchase the benefits with “before tax” dollars. We don’t see any
downsides to this. Are there any?
A.
The concept to include health and welfare benefits as part
of an employee’s scheduled salary rather than providing benefits as a separate
package is not new. There are approximately seven districts in the Bay Area and
a few others that we are aware of that currently provide this type of single
compensation plan.
Some of the
advantages are that employees who do not
need health benefits are able to receive higher take-home pay, total
compensation is clearly reflected, district
compensation costs are more easily reflected, and final compensation for
retirement purposes is higher.
However,
to answer your question specifically, yes, we believe that there are potential
disadvantages that should be considered before going to a single compensation
plan. The first disadvantage we see is that both the district and the employees
will pay more to the State Teachers’ Retirement System/Public Employees
Retirement System (STRS/PERS) because the contributions are based on salaries,
which would be higher because of the inclusion of health benefits on the salary
schedule. Certificated employees and the district are required to
make contributions of 8% and 8.25% respectively to STRS, which is an added cost.
Remember, too, a young employee will make the 8% contribution for all his/her
career before receiving the higher retiree benefit.
Secondly,
districts considering starting with a single compensation plan may have
difficulty agreeing to a proper dollar amount to roll into the salary schedule.
An average health benefit amount, for example, may be significantly less than
the maximum district contribution the district will pay, and a roll-in of the
average contribution will force some employees, particularly high benefit users,
to have a lower total compensation. While bargaining units may argue that the
maximum contribution must be rolled into the salary base, districts may argue
that only the average should be rolled into the base in order to make the plan
cost neutral and prevent a windfall for employees who are low-cost users of
benefits. The difference in positions may preclude negotiations from ever
getting off the ground.
Another
possible disadvantage to moving to a single compensation model is that group
health benefits may be more costly to participating employees. Since
group participation would be optional with the employee, the adverse selection
that can occur may force the health benefit carrier to increase the premium cost
to the district. Employees needing the benefits are likely to enroll in the
plan, while those not currently facing a health crisis may find a convenient way
out by having inexpensive, alternative coverage. The health benefit carriers
may, in turn, find that the adverse selection creates a negative experience
factor which, in turn, forces a significant premium increase on the group plan.
Additionally,
recognize this plan might work for the certificated unit, but most likely will
not work for the classified unit. Adding health benefits to a typical classified
schedule could increase compensation costs by 30% to 40%. Adding the high amount
to the hourly salary calculations will increase costs across the board,
including for part-time employees who are not currently eligible for benefits.
Performing a few simulations with the district’s classified salary schedule
will reflect significant inequities and the high employee costs.
An uncertain
future also may be a disadvantage. Had it not been voted down by the electorate,
Proposition 72, the referendum on SB 2 (
If you do
decide to move to a single compensation model, we would recommend that you
require your teachers to certify to the district that they have other health
care coverage if they choose to not participate in your health options. We are
aware of some districts in which fewer than 30% of the employees opt for the
health coverage through the IRC Section 125 plan. Healthy employees are
important, so having them have health coverage is also important.
The pros and
cons, however, are just a starting point for districts and bargaining units to
consider when evaluating going to a single compensation model. Before taking the
leap, we would highly recommend contacting a district that currently uses the
single compensation model.
—John Gray and Ken Hall