For employers preparing for annual healthcare benefits enrollment, premium costs, employer contributions, and employee preferences are familiar considerations. But open enrollment can also provide an opportunity to evaluate payroll-related expenses and explore ways to improve employee benefits with little to no increased costs.

In some cases, businesses may be overlooking strategies that could reduce payroll tax liability while adding employee benefits and potentially increasing employees' net take-home pay.

One such approach involves employee health and wellness benefit arrangements structured under federal tax and benefits rules. In a qualifying arrangement, a portion of an employee's compensation may be structured differently for tax purposes. Because an employer's FICA tax liability is tied to taxable wages, reducing taxable wages can create payroll tax savings for the employer.

The employee may also experience tax savings. At the same time, the employee can receive additional health and wellness benefits, which may include preventive care, primary and urgent care services, virtual care, prescription benefits and other wellness resources.

A different approach to cost optimization

For employers, the potential value extends beyond the immediate payroll tax calculation.

Some benefit arrangements are designed to complement, not replace, the employer's existing major medical coverage. By encouraging greater use of preventive and other lower-cost healthcare services, they may also help shift certain healthcare utilization away from a company's primary health plan.

The potential benefit is broader than simply reducing a line-item expense. The objective can be to improve the overall value of the employee benefits package while identifying opportunities to make payroll-related costs more efficient.

Payroll is one of the largest expenses for many companies, and employee benefits can represent a significant component of the overall cost structure. Even relatively small improvements across payroll taxes, benefits utilization, and employee retention can add up over time.

Looking at both the benefits and the trade-offs

One question employers should ask is whether an arrangement produces genuine value for employees. A program may generate payroll tax savings, but decision-makers should understand exactly how employees' paychecks will change, what additional benefits they receive, and whether their actual net take-home pay increases.

The employee experience matters. A strategy that looks attractive on a spreadsheet may be less valuable if employees do not understand the benefits, find them useful, or believe the changes to their compensation are not in their best interests.

Employee choice and participation should also be considered. Employers should understand opt-in or opt-out provisions, any ongoing participation requirements, and what employees must do to remain eligible for program benefits.

There are also questions that require more individualized analysis. When an employee's taxable wages are reduced, for example, employers and employees may want to understand how that change could affect the documentation of income for a mortgage, automobile loan, or other financial transaction.

A lower taxable wage figure does not necessarily mean an employee has less economic value or less cash available. At the same time, lenders use their own underwriting standards. Employers should avoid assuming a payroll or benefits change will have no implications for every employee's financial circumstances.

This is not necessarily an argument against such arrangements. Rather, it illustrates a broader principle: Cost optimization is most effective when potential savings are evaluated alongside potential consequences.

Making open enrollment more strategic

A payroll-related strategy may be attractive because it reduces the employer's tax liability. It may be even more valuable if it also gives employees access to benefits they will use, improves retention, or helps reduce pressure on other benefit costs. But the best decisions require understanding how the pieces fit together for the business and for the people who work there.

The objective should not be to pursue a tax-saving strategy simply because it reduces a line-item expense. It should be to look for approaches that create a better overall outcome, one that responsibly improves cost efficiency while maintaining or strengthening the employee experience.

Open enrollment is often treated as an annual administrative exercise. It can also be a strategic review of whether a company's benefits and payroll structure are working as efficiently as possible.

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About the author

Renee Griffin is a business optimization specialist and Houston-based franchise owner of Schooley Mitchell, North America’s largest independent cost reduction consulting firm helping businesses uncover hidden savings and improve profitability across a wide range of operating expense categories. Schooley Mitchell analyzes expenses, identifies opportunities for savings and billing corrections, and conducts continuous monitoring of invoices to help ensure accuracy, typically at no upfront cost to clients. For more information, visit https://www.schooleymitchell.com/rgriffin.