Should Colorado School Districts Get More Flexible with Their Benefits?

This post is rather long and detailed. The primary audience is probably folks who serve on district negotiations committees, on both the district side and the union side. But even if you aren’t in that capacity, if you are a school district employee you should consider reading this and then advocating with the folks who negotiate to perhaps offer all employees this greater flexibility.

In a previous life as a teacher and education blogger I frequently lamented the “one-size-fits-all” approach that we often took in K-12 education. Just as I feel like in K-12 education we can have high standards without being standardized, I feel like when it comes to offering compensation to our school district employees we can offer great (and likely) better benefits without adopting a one-size-fits-all approach. Just like each student is different and has different needs, each employee is different and has different (financial) needs. While individualizing instruction for students can be a daunting task, individualizing benefits for school district employees doesn’t have to be (primarily because software will handle it for us).

Important Caveat: This post may be wrong. I know that’s a weird thing to write on something I’m publishing, but hear me out. I am not an expert on employer taxes in general or on the specifics of school district (and other public employer) budgets. But as far as I can tell, public employers (unlike private ones) do not receive any kind of subsidy for contributing to their employee’s health/dental/vision insurance costs. The following assumes this is accurate, but it could be wrong. I’m publishing this anyway because I think it is accurate and, if it’s not, posting something on the Internet is a great way to find out you’re wrong :-).

So what does this look like? Well, we already individualize to a certain extent, by allowing employees to pick and choose some of their benefits. This often includes choosing which insurance company they want to use, including what type and level of coverage, whether to participate in Medical and Dependent Care FSAs and Medical HSAs, and whether to choose from supplemental benefits like disability and life insurance. But I think it would be easy to extend this choice just a bit further with great effect simply by giving employees more options on how to allocate their benefit dollars. While some employers do indeed allow this, most school districts that I know of don’t.

Why is this important?

I’m going to frame it this way: $100 is not always $100. For anyone who knows much about benefits this isn’t a controversial statement, but for those who haven’t thought about them much it might be. My assumption has always been that the school district finance people (and the people that serve on negotiations) are well aware of this, as are the folks who serve on the union negotiation’s team. (This may be a bad assumption.) But even if they do know this, it hasn’t translated into what I think we would be a more flexible – and therefore objectively more optimal – benefits system. Let’s demonstrate that “$100 isn’t always $100” with, what else, a spreadsheet (as always with my spreadsheets, choose File–>make a copy to get an editable version).

Important Caveat #2: This spreadsheet is specific to Colorado, which includes Colorado’s state tax rate (a flat 4.4%) and our pension system (Colorado PERA). In particular, our pension has a “quirk” for members who joined before July 1, 2019 that makes this flexible benefit option even more powerful. Having said that, the basic idea would hold true in every state and pension plan.

Spreadsheet Layout

In the top two rows of the spreadsheet are some default values that you can change to match your situation. They include an assumed marginal federal tax rate of 22%, a flat state tax rate of 4.4%, the Medicare tax rate of 1.45%, an employee contribution to the pension of 11%, an employer contribution to the pension of 21.4%, a default “amount” of $100 in benefit money we are talking about, as well as some items related to student loans and the percent of pension someone will get in retirement (more on those below).

Moving vertically, the spreadsheet is divided into four different categories. This division has to do with two specifics (membership date and the pension being based on Highest Average Salary years) of our pension plan. Due to these specifics, it makes sense to divide employees into four general categories to look at benefits:

Membership prior to 7/1/2019, years before their Highest Average Salary (HAS) years
Membership prior to 7/1/2019, years during their HAS years
Membership on or after 7/1/2019, years before their HAS years
Membership on or after 7/1/2019, years during their HAS years

PERA Membership Prior to 7/1/19, Before HAS Years

Moving horizontally, let’s describe each column for employees whose PERA membership is prior to 7/1/2019 and who are not in their HSA years (rows 4-8).

Columns A-F looks at the employer side of things:

Column B, Nominal Amount: This looks at examples within each of the four groupings imagining an employer has an extra $100 to devote to employees. (Note: You can change the amount to something different in cell F1). They can choose to put that $100 toward increased salary, toward increased coverage of the cost of insurance benefits for their employees, or they could contribute it directly to a Medical FSA, Dependent Care FSA, or HSA. This $100 is a “nominal” $100; as we’ll see, it may or may not actually cost the employer $100 (and the employee may or may not actually receive $100 worth of value).
Column C, PERA Contribution: This is the employer contribution to our pension plan, which is currently 21.4% of PERA-includable salary. (It’s that high because they are trying to pay off an unfunded liability.)
- Note that if the employer decides to allocate that extra $100 to salary, they will also have to allocate an additional $21.40 to the pension contribution.
- If they allocate it to pay for employee insurance premiums, they also will effectively be allocating an additional $21.40 to the pension contribution for those employees. (This is because employees will then contribute $100 less of their own salary toward insurance, which will no longer come out pre-tax and pre-pension, thereby increasing the PERA-includable salary and effectively increasing both the employer and employee pension contribution.)
- If they allocate it to the employee’s FSA (either medical or dependent care) or HSA, then it doesn’t cost them anything extra for PERA (it’s “invisible” to PERA).
Column D, Medicare Contribution: Employers contribute 1.45% of taxable income to Medicare (in addition to the employee contribution to Medicare). (Note: Colorado public employers do not contribute to Social Security.) If they allocate the $100 to salary or to insurance premiums, they will also have to allocate an additional $1.45 to Medicare. If they allocate it to the employee’s FSA (either medical or dependent care) or HSA, then it doesn’t cost them anything extra for Medicare (it’s “invisible” to Medicare).
Column E, Total Cost: This shows the total cost to the employer depending on whether they allocate the $100 to salary, insurance premiums, or FSA/HSA. Note that this total cost is $122.85 if allocated to salary/insurance premiums, but still only $100 if allocated to FSA/HSA.
Column F, Equivalent to FSA/HSA: This shows how much in nominal dollars the employer could offer in these categories that would actually cost them the same $100 it would cost to put it in the FSA/HSA. So employers could only add an extra $81.40 to salary or insurance premiums if they want to spend the same $100 total.

Columns G-S look at the employee side of things, with the same nominal $100 from the employer in the three different categories.
Column H, Federal Taxes: With the assumed marginal federal tax rate of 22%, if that $100 is allocated to salary or insurance premiums, $22 of it will have to be paid by the employee in federal taxes. If allocated to FSA/HSA, none of it will.
Column I, State Taxes: Same idea, if allocated to salary or insurance premiums, $4.40 in state taxes will need to be paid by the employee; none if allocated to FSA/HSA.
Column J, PERA Contribution: With an 11% employee contribution to their pension, $11 will be contributed to PERA with the $100 allocated to salary/insurance premiums; $0 if allocated to FSA/HSA.
Column K, Medicare Contribution: Employees also contribute 1.45% of their income to Medicare, so an additional $1.45 if allocated to salary/insurance premiums, $0 if to FSA/HSA.
Column L, Net Amount: This shows the net amount the employee actually receives of that extra $100. Note that if it’s allocated to salary or insurance premiums, they actually only see $61.15, as opposed to the full $100 if allocated to FSA/HSA.
Column M, Equivalent to FSA/HSA: This column shows how much the employer would actually have to contribute for the employee to get $100 in value (so they would have to contribute $163.53 if they allocate to salary or insurance premiums for the employee to get the same $100 in value).
Column N, “Efficiency”: This is a made up metric which I define as net benefit to the employee divided by total cost to the employer, expressed as a percentage. The “efficiency” of allocating that $100 to salary or insurance premiums is only 45.71%, which means that only 45.71% of the dollars the employer allocates is ultimately seen by the employee (as opposed to 100% of the dollars if allocated to FSA/HSA).
Columns O-R, Student Loans: These columns add in some additional factors to consider if the employee has student loans, is enrolled in PSLF, and is in the SAVE income-based repayment program. Depending on whether their loans are undergraduate or graduate, this can cost the employee another $5 or $10 and contribute to an even lower efficiency metric (because SAVE repayments are based on AGI, and $100 to salary or insurance premiums effectively increases AGI, $100 to FSA/HSA does not).
Column S, Impact on Yearly PERA Benefit: This does not apply to our first category, since the employees are not in their HAS years. But it will be used in the two categories of employees in their HAS years.

PERA Membership Prior to 7/1/19, During HAS Years

Most employees with PERA membership prior to 7/1/19 choose to stop pre-tax deductions for Section 125 plans during their Highest Average Salary (HAS) years in order to maximize their pension-includable salary and therefore their monthly pension benefit for the rest of their life. Rows 11-14 takes a look at those employees, because the calculations are different than for those not in their HAS years.

The Salary row (row 12) is exactly the same as it is for those employees not in their HAS years, except for Column S. Column S shows the impact of adding $100 to salary on their pension benefit in retirement. This uses the assumed percent of HAS from cell K1 (80% in the default). This is here to demonstrate that while adding $100 to salary in these HAS years is still not the most “efficient” during those three (or five for some employees) years, it is very likely to overcome that deficiency during their pension years. In this example, an extra $100 in salary turns into an extra $80 a year for life, which more than makes up for the “inefficiency” of the three to five HAS years.
The Health Insurance Premiums row (row 13) is different, because these employees will likely choose not to have insurance premiums come out pre-tax and pre-PERA. In fact, this ends up being identical for these employees (for these 3-5 years) as allocating to the FSA/HSA category (but they likely would choose to add it to salary instead).

PERA Membership On or After 7/1/19, Before HAS Years

For all PERA members with membership dates on or after 7/1/19 (rows 16-20), Section 125 contributions still come out pre-tax, but do not come out pre-PERA. This changes the calculation (for both the employer and the employee).

The Salary row (row 18) still doesn’t change. Since they are not in their HAS years, Column S is not applicable.
The Health Insurance Premium row (row 19) does change, as their Section 125 contributions, are coming out pre-tax, but no longer pre-PERA. This changes the total cost to the employer and the employee, and increases the efficiency (although it still costs the employer more and the employee gets less than if they allocate the $100 to FSA/HSA).

PERA Membership On or After 7/1/19, During HAS Years

Because PERA members with membership on or after 7/1/19 do not have Section 125 contributions come out pre-PERA, they have no need to stop these pre-tax contributions during their 5 HAS years. This is shown in rows 23-26.

So the Salary row (row 24) is unchanged, but again note that the increase in their pension for life is likely going to overcome the decreased efficiency during their HAS years.

What Does It All Mean?

So that is a whole lot of setup and explanation, so what’s the takeaway? The takeaway is that school districts (especially in Colorado) should consider allowing their employees at least some leeway in allocating their benefit dollars. Because all of this is done through the payroll software, it should be no more complicated than it is currently (other than some additional education for employees). Currently the payroll folks select the checkboxes for the various options each employee chooses, and then the software figures out the rest. This would be no different, and it could make a big difference to both the employer and the employee. Let me illustrate. Just for simplicity sake, we’ll stick with the $100, but in reality this could be the total amount the district contributes towards benefits, which is likely (and hopefully) a lot more (probably multiply by 5 or 10 or sometimes even more).

Example 1: Employee with PERA Membership Prior to 7/1/19

Before HAS Years: Employee chooses to have the $100 allocated to FSA/HSA. Costs the district $100 and provides a $100 benefit to the employee (100% efficiency). All of the other options costs the employer more and provide less to the employee. For those with student loans, it effectively provides more than $100 benefit due to the other options increasing their student loan payment by either $5 (undergrad loans) or $10 (graduate loans).
During HAS Years (3 years for most, 5 for some): Employees choose to have the $100 allocated to Salary. While this costs the employer more and provides less to the employee (lower efficiency) during these 3 (or 5 years), it is more than made up for with the increased pension for life. Since the HAS years are typically at the end of an employee’s career, student loans should be paid off or forgiven by now so you can safely ignore Columns O-R). (And, as discussed below, you could make this option budget-neutral to the employer by lowering the amount to $81.40.)

Example 2: Employee with PERA Membership On or After 7/1/19

Before HAS Years: Employee chooses to have the $100 allocated to FSA/HSA. Costs the district $100 and provides a $100 benefit to the employee (100% efficiency). All of the other options costs the employer more and provides less to the employee. For those with student loans, it effectively provides more than $100 benefit due to the other options increasing their student loan payment by either $5 (undergrad loans) or $10 (graduate loans).
During HAS Years (5 years): Employees choose to have the $100 allocated to Salary. While this costs the employer more and provides less to the employee (lower efficiency) during these 5 years, it is more than made up for with the increased pension for life. Since the HAS years are typically at the end of your career, student loans should be paid off or forgiven by now so you can safely ignore Columns O-R).

You’ll notice that neither of these examples include choosing to allocate the $100 to health insurance premiums, and that the employee’s PERA membership date doesn’t impact the optimal choice. That’s because in this simplified example, the other choices don’t make sense. But when you look at more realistic examples, where it’s more than $100 and where you are dealing with employees with a wide range of salary and/or hourly earnings, and a wide range of individual needs, having those options could make sense for some people some of the time.

Budget Neutral?

An obvious complication is that these “choices” are not budget-neutral to the school district (employer). For the two scenarios where the employee would likely allocate the money to salary, it actually costs the employer $122.85 instead of $100. I think there are two fairly easy ways to deal with this.

Data Driven Approach: Most school districts should have enough data on their employees to do a fairly good job predicting what they’ll choose, so they could figure out their total budget allocation to benefit dollars accordingly. While I think this is very doable, it would not be equitable across all employee groups. Therefore the second option is probably better.
Use Column F: Column F is the “Equivalent to FSA/HSA” amount column, where it shows that if the employer contributed $81.40 toward salary it would cost the same $100 to the employer (so budget neutral). Once the district decided on how much benefit dollars to allocate to each employee, and then the employee decided how to divvy it up between the three options (salary, health insurance premiums, FSA/HSA), it’s an easy enough calculation to adjust the amounts in each category to be budget-neutral to the employer and therefore an equitable distribution among employees.

Note: This also likely means that the advantage of allocating the benefit dollars to salary in the two scenarios where it makes sense would be slightly less, because they would only increase their salary by $81.40 instead of $100, which means their pension benefit would also be reduced from an extra $80 a year to $65.12 a year. But that still is going to be the better choice for the employee in the long run.

How Is This Different Than Current Practice?

For districts that currently don’t allow employees to choose how to allocate their benefit dollars, the district (in negotiation with the union) has to decide how to allocate that “extra” $100 in a one-size-fits-all approach. They might choose to allocate it to salary one year, FSA/HSA the next. Or they might allocate $60 to salary and $40 to insurance premiums.. The problem is that this is not optimizing the use of those dollars, so for at least some of your employees you end up paying more as the employer while at the same time they get less as the employee. By allowing them the flexibility to choose how to allocate the dollars (implemented through software), the employer dollars will be more efficiently spent by the employer and received by the employee.

I would highly encourage school district and union negotiation teams to explore this idea further, as I think it can lead to a much more optimal use of district benefit dollars (higher “efficiency”, to use my made-up metric). As I read back through this, I realize that it may seem complicated and that may discourage folks from looking into it. But while the explanation above may be complicated (sorry, I felt all the detail was necessary), the implementation itself should not be because the payroll software can handle all the calculations. The negotiation teams will do what they always do, which is figure out how much money can be directed toward “benefits.” The difference is now the employee will have the option to direct where those “benefit” dollars go so that they are more efficiently allocated to the employee instead of “lost” to federal, state, and medicare taxes, as well as to PERA contributions (and with the “gain” of increased PERA pension benefit for life).

Final Note: There are yearly limits on the amount of contributions to Medical FSA, Dependent Care FSA, and HSAs. Often those limits will be lower than the total benefit dollars that the school district will be allocating, so many employees will end up splitting their dollars between multiple categories depending on their individual needs. But, again, that’s mostly an issue of educating employees about their choices, the implementation will be handled by the payroll software.