We’ve all been there: you’re looking to buy something—a used car, a new computer, a piece of furniture, really just about anything—and the salesperson approaches you. Right away, you already know what’s about to happen. You can see those big commission numbers in their eyes as they try to sell you on whatever the most expensive thing in the showroom is, because it’s absolutely what’s best for you, and how have you gone so long without it? If you’ve ever created a benefits package, you’ve likely experienced this scenario. This obviously isn’t to say all salespeople or benefits brokers are out to squeeze every last dollar out of you—far from it. But that doesn’t change the fact that creating a benefits package can be a difficult, time-consuming process and, with the wrong broker, can become quite costly quite quickly.
At Payday HCM, we’re very familiar with the process of finding a health insurance plan and creating an employee benefits package. We have plenty of clients asking us questions every day about where to start, where to look, and who might be able to help. Starting by finding a benefits broker is often a great first step, but, for most businesses, you’ll want to know up front how much that’s going to set you back. To fully understand the cost of working with a benefits broker, you’ll need to understand how it is that benefits brokers make their money.
So, in this article, we’ll be going over how benefits brokers are actually compensated. We’ll first start by just briefly covering the basics of what a benefits broker does and how to select one. After that, we’ll dive into the specifics of how benefits brokers are typically paid, accounting for variances that may arise in terms of carriers and different brokers performing different services. Finally, we’ll go over what businesses can keep in mind when it comes to broker compensation and how this affects the plan selection process.
In this article, you will learn:
- Working With a Benefits Agency or Broker
- How Benefits Brokers Are Compensated
- What to Keep in Mind Regarding Benefits Broker Compensation
Working With a Benefits Agency or Broker
First, before we dive into the specifics on how benefits brokers are compensated, we’ll go over what the process of working with a benefits agency or broker looks like.
What Does a Benefits Broker Do?
Before you ask yourself how a benefits broker is paid, it’s first important to understand what a benefits broker does and how they might work with your business. In short, a benefits agency or broker provides benefits advice and services to employers and employees. Most work independently of any specific insurance carrier, serving as a middleman between you and the insurance company.
Of course, what a benefits broker does will vary slightly from broker to broker. Generally, though, benefits brokers can help you with:
- Information and guidance when selecting a health insurance plan or other benefits, such as vision, dental, or life insurance.
- Getting information from and communicating with the insurance carrier about costs and plan offerings.
- Providing insight into how your business can most effectively balance cost and coverage with different plan options.
- Assist employees with enrollment as well as other claims-related issues.
- Compliance assistance with different laws and regulations, such as the Affordable Care Act (ACA).
Ultimately, a good benefits broker will help your business with every step of the benefits process, communicating with the carrier and providing you with all available options while helping you to ensure you find the best solution for your business.
How to Select a Benefits Broker
A large component of what a benefits broker does (as well as how much it costs to work with one and, ultimately, how they are being paid) depends on which benefits broker you select. Again, while most benefits brokers perform the same function, there can be slight variations in the scope of their services, their proximity to insurance companies, and the kinds of businesses they serve.
When selecting a broker, you’ll want to look at things like the size of the businesses that they currently serve (to see if they are similar to your own business), as well as the industries of the businesses that the brokers' serve are in. Sourcing recommendations from other businesses in your industry can be a great way to find a benefits broker with known experience working with businesses in your industry.
How Benefits Brokers Are Compensated
Now that we have a general idea of what benefits brokers do, we can look more closely at how brokers are compensated for their services.
Do Benefits Brokers Make Commissions?
Benefits brokers are primarily paid through commissions from insurance carriers. These commissions are typically a percentage of the total premiums that are paid by an employer or group. While the percentage of the commissions will vary depending on the carrier, most will hover somewhere in the 2-10 percent range.
In some situations, brokers may earn flat per-employee-per-month (PEPM) fees from employers with self-funded plans. While, in a technical sense, employers aren’t paying commissions to benefits brokers, employers are paying the premiums, in which the commissions are a percentage. This is especially important to consider during the benefits renewal process, where an increase in the premium amount could potentially increase a broker’s commissions as well.
Do Benefits Brokers Receive Any Other Payments?
There are situations where a benefits broker may receive compensation in the form of other payments outside of commissions. Again, this will vary depending on the carrier as well as the broker or agency, but there are situations where brokers could be paid through other means aside from commissions.
For some carriers, brokers can receive additional PEPM payments for securing new clients. Brokers may also receive other PEPM payments following the renewal process, separate from their commission percentage, and whether premium amounts have changed with renewal. Other forms of insurance, like dental, vision, or life, may also provide additional commissions.
What to Keep in Mind Regarding Benefits Broker Compensation
The way your benefits broker is compensated should be a key consideration when selecting a broker.
Consulting Fees, State Regulations, and the CAA
When it comes to the cost of creating an employee benefits package, keeping in mind how your benefits broker is compensated can be crucial to securing a comprehensive but cost-effective benefits package. While this includes things like commissions, brokers may also charge consultative or administrative fees for their services.
When it comes to these kinds of fees, certain state-level rules and regulations apply to how much brokers can charge and whether both parties have agreed to the fees. On top of this, the Consolidated Appropriations Act of 2021 requires brokers to proactively disclose their compensation to clients prior to signing a contract.
Advocating For Your Business
As we mentioned above, brokers receive most of their compensation in the form of commissions from insurance premiums. Because of this setup, there is the potential for conflicts of interest to arise when it comes to your broker selecting a plan for your business—it’s possible they may be seeking higher commissions rather than advocating for your business.
This is where the process of selecting a benefits broker comes into play, and you can employ the strategies we mentioned earlier. Don’t be afraid to ask a potential broker about their compensation. The more transparent they are, the more likely it is that they’ll be working with your business’s interests first.
Clear Up Your Compensation Questions
Let’s face it: creating a benefits package can be a costly and time-consuming process. This is especially true if you’ve never created a benefits package before or if you don’t have any in-house benefits experts who can navigate the endless sea of insurance carriers. Working with a benefits broker is often a no-brainer for most companies, but how do you know you’re really getting what you pay for? Understanding how brokers are compensated can not only help you get a better understanding of the cost of creating a benefits package, but also ensure your broker is working with your business’s best interests at heart.
Creating a great employee benefits package starts with finding the right broker. Without the right partner by your side, creating a comprehensive and cost-effective benefits package can be much more time-consuming and costly than it needs to be. Of course, like a good benefits package, it can be hard to know what exactly separates a good benefits broker from a great one. Check out our article on the differences between a good benefits broker and a great benefits broker so you can find the right partner for your benefits journey.
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