A raise can look good on paper and feel very different in a paycheck.
That’s a real challenge heading into 2027. Employer health costs are projected to rise roughly 8% to 11%, while merit budgets sit around 3%, according to Payscale’s 2026–2027 Salary Budget Survey. When employees pay more for coverage, part of that raise is already spoken for.
We own both compensation and benefits, so we see compensation planning and the health insurance renewal side by side. In many organizations, different owners make those decisions at different times. Employees see the outcome of both in the same way.
We need to plan that way, too.
The renewal is only part of the story
Major forecasts put 2027 employer health insurance costs increases between 8% and 11%, depending on whether employers change their plans. Marsh projects an 8.2% increase after changes, while WTW expects 11.1% before changes (Fierce Healthcare, PlanAdviser).
High-cost claims, specialty drugs, and growing use of glucagon-like peptide-1 (GLP-1) medications are all contributing. These costs are also proving difficult to predict, with the Business Group on Health finding that actual costs exceeded employers’ forecasts three years in a row.
For total rewards leaders, that means a renewal can quickly consume dollars we hoped to put toward pay, hiring, or other benefits. Holding the organization’s budget flat still requires decisions about where that cost goes.
And every option affects someone.
Employees will do the combined math
The Kaiser Family Foundation (KFF) 2026 survey puts the average family premium at $28,303, up 5%. Employees’ contributions rose faster: 9%, to $7,471. Wages rose 3.7%.
Now put that next to a merit cycle.
On a $70,000 salary, a 3% raise is $2,100 a year before taxes. The average increase in employee contributions for family coverage was $621, close to a third of that gross raise, before considering any changes to deductibles or copays.
As I’ve written before, a merit increase isn’t a cost-of-living adjustment. But employees will still compare what comes in with what goes out. An organization can invest more in both pay and benefits while an employee feels no further ahead.
And that's precisely why I want the merit budget and the projected benefits to increase on the same page with Finance.
Before we go any further, though, we need to understand what those two things mean together for the employee's pay packet and their out-of-pocket cost.
Work through your options before asking employees to pay more
A renewal is a negotiation, not a bill. Before you think about how much of the cost you'll pass on to the employee, you need to know what you can influence.
Challenge the renewal. If you're fully insured, then get the insurer to explain the increase (the trend and claims assumptions, any large claim pooling, and how much of it is your own experience versus the market at large). If you're self-funded, then look at the claims data yourself and review the stop-loss and admin fees. Either way, you need to understand what the number is based on and where there is scope to move.
Review what you're already buying. Look for overlaps, low uptake, and benefits that employees are clearly having difficulty accessing. Look at low uptake properly before you consider cutting it. The benefit may simply be unvalued, or people may not know it exists.
Make deliberate pharmacy decisions. Understand what's driving the spend, how the coverage criteria work, and what support members will get. Make any changes with the people on those medications in mind, along with the anticipated savings.
Model who pays under each option. Look beyond the average employee. Look at the different coverage tiers, pay levels, and levels of care use. A change that may seem trivial at the population level can make a massive difference for a family or someone managing a chronic condition.
Then comes the real difficulty: how to share the remaining cost.
Premiums go up, which reduces your take-home pay whether you use care or not. Higher deductibles and copays mean the individual who needs care bears more of the cost. It's a mix, of course, but someone still feels it.
I really do place a lot of emphasis on safeguarding paychecks. People have immediate outgoings, and a higher deduction means they have less every pay period. The other side of the coin is that when someone does need care, the cost can be hard to manage, particularly in the early years before they've built up any savings.
There isn’t a painless choice. The work is understanding those trade-offs well enough to choose deliberately.
How much do employers pay for health insurance?
Employers pay about $20,800 of the average $28,303 family premium for employer-sponsored health insurance, nearly three-quarters of the total, according to KFF. Employees should be able to see that investment.
But showing someone what the organization pays doesn’t make their higher deduction easier to afford. Both things can be true: the organization is spending more, and the employee is feeling more financial pressure.
Our communication needs to acknowledge both.
Show the employer and employee contributions side by side. Explain what changed, why it changed, and what you chose to protect. If you considered other options, share enough of that reasoning to help people understand the decision.
Next, make the information useful: if deductibles are increasing, help employees understand their potential costs and how a health savings account (HSA) or flexible spending account (FSA) could fit into their planning. Be clear about any employer funding, available support, and when costs may come due. An account can help someone prepare, but it doesn’t make it carefree.
The same applies to pay conversations. Managers should understand how benefits changes affect the broader picture, while keeping the merit conversation focused on performance and pay. A bigger investment in health coverage won’t answer an employee’s question about their salary.
People handle hard news better than unexplained news, so give them a clear explanation and something practical they can do with it.
Start before the renewal forces the decision
A sound employee benefits strategy starts before renewal. By the time a difficult renewal arrives, the options and timelines can already be tight.
Bring Finance into the conversation early. Ask employees what they value before deciding what to change. Model pay and benefits together, including how the choices affect different employees.
The question I want us to answer before we sign off is simple: after all of these decisions, what will employees actually experience? That answer should shape the budget as much as the budget shapes the plan.
