Tiering group benefit programs

When it comes to a group benefit plan there are typically two trains of thought.  The first is to treat all employees the same and thus put in a benefit plan where everyone has the same benefits.

The second train of thought is to tier the benefit plan so that different groups of employees have different benefits.

Types of tiering

There are many different ways to tier a benefit plan.  Here are a few examples:

  1. By employee class.  Many companies give different benefits to different types of employees.  For example, many tiered plans give a higher level of benefits to managers and executives.  Other plans have a different set of benefits for hourly, salaried and commissioned employees.  Some companies distinguish their benefit structure based on whether their role is administration or sales.  Some employers need to be more competitive with some roles to attract and retain certain employees.
  2. By geographic location.  Some companies have offices in different provinces where the competitive landscape for hiring and retaining employees is different.  As a result, a company may have a different set of benefits for employees in Ontario than they do for employees in Quebec and even a different set of benefits for employees in BC or Alberta.
  3. By tenure.  One of my favourite ways to tier a benefit plan is to tier based on tenure.  In this strategy, the thought is that a long standing employees is more valuable that a brand new employee and one way to reward that employee is to enhance benefits the longer they work for the company.

Strategies to tier the benefit

When implementing a tiering strategy, it is also important to know some of the different benefits

  1. Employee/Employer share of cost.  Some employers share the cost of the benefit with their employees while other employers pay for the all benefits (except disability for tax reasons).  One way to tier the benefit plan might be to change the cost share.  For example, one set of employees might have a 50-50 cost share but for other employees, the cost share might change to 75-25 or even 100% employer paid.
  2. Addition of Benefits.  Recently we worked with a company that started with a very basic plan for new employees.  As they worked longer for the company, the got added benefits.  For example, they got basic dental for the first 2 years.  After 2 years, the dental plan included major work and after 5 years, the plan included Orthodontics.
  3. Health Spending accounts (HSA).  Health spending accounts have become increasingly popular benefits.  Health spending accounts make it really easy to tier benefits because you can allocate different amounts of money to different employees.  In the same example above, employees under 2 years did not get a Health Spending Account.  After 2 years, they got $300 per year in their Health Spending Account.  After 5 years, they got $450 per year in their HSA and after 10 years they got $750 per year.
  4. Group Retirement Plans.   When it comes to Group Retirement Plans like Group RRSPs and Pension Plans, the only cost to the employer is the employer contributions into the plan on behalf of the employee (often called matching).  The matching amount can be easily tiered as well.  For example, employees with less that 2 years got a 3% match, which means if the employee contributes 3% of their salary, the employer will also match by putting in 3%.  After 2 years, the matching might increase to 4% and after 5 years the matching could increase to 5% and after 10 years it might increase again.

This is far from a complete list in ways to tier a benefit program.  Instead it's a list to help understand that there are many different strategies to tier any benefit plan.

Keep it simple

When it comes to tiering a plan, there is no right or wrong.  If you prefer to treat all employees the same, then great.  That being said, tiering can be an integral part of the compensation structure to attract, retain and reward employees.

If you want to implement a tiered plan, remember that simple is usually better.

One of the ways to keep it simple is to make sure the health, dental, insurance and retirement benefits are coordinated.  I ran across a company that had one consultant that implemented a tiering plan that was completely different than their Group RRSP plan because the bank was managing the Group RRSP separately.

Too many tiers and too many rules can be confusing and counter-productive.  In my experience it’s ideal to have 3 or 5 teirs at the most otherwise it becomes increasing complex for employers to manage the plan and also for employees to remember all the tiers.

Clearpoint Benefit Solutions is a boutique benefit company based in Edmonton with clients in BC, Alberta, Yukon and Northwest Territories.  Contact Clearpoint Benefit Solutions if you are looking to improve or review your current benefit plan.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

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