Think Carefully Before Cutting Employee Benefits

As the labor market loosens, bargaining power shifts back toward employers, who are also seeing benefit costs climb. Mercer projects that employers' health benefit costs per employee will rise 6.5% in 2026, the steepest increase since 2010. This figure is after employers adjust their plans to control costs; left unchecked, it would approach 9%.

Many companies are reacting to this trend by cutting employee benefits. However, before your company follows suit, it's crucial to review what you cannot touch. Mandatory benefits — workers' compensation, Social Security, unemployment insurance and unpaid family and medical leave — cannot be reduced or eliminated. Fringe benefits such as paid time off, severance pay, and retirement plans are not legally required, but they carry their own constraints. PTO especially warrants a careful look. In many states, employees cannot forfeit hours they have already accrued, which could leave you owing a payout. Check your state's employment laws before modifying your PTO policies.

Why cuts may cost more than they save

Benefits that can still be modified or cut include minor perks such as free snacks, team dinners, or "fun Fridays." There are also more visible, though less common, perks such as on-site laundry, gym subsidies, or full-time remote work. The deepest cuts involve dental and vision coverage, tuition assistance, and even core benefits such as parental leave and pensions. While these benefits are on the table at some companies, they carry the most risk if modified or eliminated.

What's the risk? To many employees, benefits signal how much a company values its people. Consequently, removing any level of benefits will attract notice; even perks considered generous in 2021 have become baseline expectations in 2026. Clawing back benefits will be discussed in staff rooms, in online reviews, and on employer rating sites.

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It's also important to remember that benefits are a form of compensation, just like salary. Cutting them will be perceived by employees as a pay cut by another name. This can cost you the candidates you're trying to attract and the long-term employees you're trying to retain.

If you decide to cut, do it carefully

Surprising people with sudden cuts only worsens a bad situation. Here are a few ways to soften the impact.

Weigh the cost and value of each benefit. Bring your managers together to get the full picture. Look beyond the dollar figures to identify which perks employees actually use and would miss most, then get managers on board to help ease concerns.
Be transparent. The more advance notice employees have — especially for changes that affect their personal budgets — the smaller the fallout. Keep communication clear and accessible, meet with people in groups, and offer one-on-one conversations for anyone who wants more detail.
Lead with empathy. Help employees feel valued and understood, and acknowledge how the change affects them. Explain exactly what's changing, why, and how it will work, and provide the details in writing for reference.
Cover the essentials. Clearly spell out the timeline, including the last effective date and any grace or runout periods; who's affected and any proration rules; details such as reimbursements in progress, final-pay impacts and PTO balances; and any vesting or match impacts, portability and conversion options.

It also helps to be honest about the alternative. If the choice is between cutting a benefit and cutting salaries or jobs, say so — that context can build understanding. And tell employees whom to contact with questions and where to find answers.

Mind the legal lines

Many benefits, such as vacation and PTO, retirement savings accounts, and life insurance, are not mandated at all and can be cut for legitimate business reasons. But "voluntary" doesn't always mean "freely removable." Some perks are locked in by employment contracts, and others are governed by federal laws such as the Employee Retirement Income Security Act, which regulates most private-sector retirement and health plans and limits how freely you can change or end them.

Additionally, you cannot single out individuals or protected groups for different treatment, though you can offer different benefits to different classes of employees; full-time versus part-time, for example, or senior versus entry-level.

Before cutting anything, consult an employment attorney or a qualified HR expert.

Interested in learning more? Chat with a Connectify HR expert today.