How to Build a Two-Tier Benefits Strategy for Salaried and Hourly Employees

Most mid-size employers offer a single health plan to every employee, regardless of whether that person is a salaried project manager or an hourly warehouse worker. On the surface, this seems fair. Everyone gets the same coverage. But underneath that one-size-fits-all approach is a math problem that costs employers hundreds of thousands of dollars every year and often leaves both employee groups underserved.

A two-tier benefits strategy is not about giving some employees worse coverage. It is about designing a benefits structure that matches the actual needs, utilization patterns, and cost profiles of different workforce segments. When done right, it saves the employer significant money, keeps the company in full compliance with the ACA, and can actually improve the benefits experience for employees in both tiers.

If your company has 20 or more employees with a mix of salaried and hourly workers, this guide will walk you through how to build a two-tier benefits strategy from the ground up, what it costs, how it works, and what your employees need to hear to understand why it is the right move.

Why One Plan for Everyone Costs More Than You Think

The economics of a single-plan approach are deceptively expensive. When you put every employee on the same major medical plan, you are paying $500 to $900 per employee per month regardless of how much each person uses the plan. For salaried employees who visit specialists, manage chronic conditions, and use the full range of medical services, this cost makes sense. For hourly employees who are generally younger, healthier, and less likely to use expensive medical services, you are overpaying dramatically.

The Utilization Gap

Health plan utilization data consistently shows that salaried employees use more medical services than hourly employees. According to Mercer's National Survey of Employer-Sponsored Health Plans, salaried employees generate 20 to 40 percent more claims per capita than hourly workers in the same organization. The reasons include higher awareness and usage of preventive care, greater willingness to seek specialist referrals, more complex chronic condition management, and higher prescription drug utilization.

When both groups are on the same plan, the hourly workers' low utilization subsidizes the salaried workers' higher utilization. The employer pays the same premium for everyone, but the cost is driven disproportionately by one segment. A two-tier design aligns cost with utilization, which is more efficient for the employer and more equitable across the workforce.

The Turnover Factor

Hourly positions in industries like construction, logistics, manufacturing, and hospitality often have annual turnover rates of 40 to 80 percent. When you are paying $700 PEPM for major medical coverage on an employee who stays for an average of 8 months, your annualized cost per retained employee is substantially higher than the stated rate. A MEC plan at $100 PEPM on the hourly tier means your turnover cost exposure drops by 85 percent for that segment of the workforce.

Understanding the Two Tiers

Tier 1: Major Medical for Salaried Employees

The salaried tier is a traditional employer-sponsored health plan. It includes a PPO or HMO network, standard deductibles (typically $1,000 to $3,000 for individual coverage), comprehensive coverage for hospitalization, specialist visits, prescription drugs, mental health services, and preventive care. This is the plan that competes with what larger employers offer and is a key tool for recruiting and retaining salaried talent.

Employer cost for the salaried tier typically ranges from $500 to $900 per employee per month, depending on plan design, geography, and the age and gender mix of the salaried population. The employer can choose to fund this tier through a fully covered plan, a level-funded plan, or a self-funded arrangement with stop-loss protection.

Tier 2: MEC or MEC Plus MVP for Hourly Employees

The hourly tier uses a Minimum Essential Coverage plan, which provides preventive care services at no cost to the employee (as required by the ACA) plus basic medical coverage. MEC plans satisfy the employer mandate's coverage offer requirement, preventing penalty A exposure under IRC Section 4980H(a).

For employers who want to provide more comprehensive coverage to hourly workers without paying major medical rates, a MEC plus Minimum Value Plan (MVP) combination is available. The MVP adds hospitalization and physician services that bring the plan up to the ACA's 60 percent actuarial value threshold, which protects the employer from penalty B under IRC Section 4980H(b). The combined cost of MEC plus MVP typically runs $100 to $200 PEPM, which is still 70 to 85 percent less than major medical.

The ACA Compliance Framework

Employer Mandate Basics

The ACA employer mandate applies to applicable large employers, defined as those with 50 or more full-time equivalent employees. If your company meets this threshold, you must offer minimum essential coverage to at least 95 percent of your full-time employees (those working 30 or more hours per week on average). Failure to offer coverage triggers penalty A, which in 2026 is approximately $2,970 per full-time employee (minus the first 30).

If you offer coverage but it is not affordable or does not provide minimum value, employees who decline your plan and obtain subsidized marketplace coverage trigger penalty B, which in 2026 is approximately $4,460 per affected employee.

How Two Tiers Satisfy the Mandate

A two-tier design satisfies the employer mandate because both tiers offer minimum essential coverage to all eligible full-time employees. The MEC plan on the hourly tier meets the coverage offer requirement. If you add a minimum value component (MVP), you also meet the affordability and minimum value tests, which protects against penalty B.

The key compliance point is that the MEC plan must be offered to all full-time hourly employees, not just some of them. And if you have hourly employees who work 30 or more hours per week, they are full-time for ACA purposes and must be offered coverage, even if they are classified as hourly. Variable-hour employees require careful tracking using the lookback measurement method or the monthly measurement method to determine their full-time status.

Safe Harbors for Affordability

The ACA provides three safe harbors for demonstrating affordability: the W-2 safe harbor (employee-only cost does not exceed 9.02 percent of Box 1 W-2 wages in 2026), the rate of pay safe harbor (employee-only cost does not exceed 9.02 percent of the employee's hourly rate times 130 hours), and the federal poverty line safe harbor (employee-only cost does not exceed 9.02 percent of the mainland federal poverty line divided by 12). Most employers with hourly workers use the rate of pay safe harbor because it is the easiest to calculate and apply consistently.

Related reading: benchmarking your health plan costs | the hidden cost of renewing without shopping | voluntary benefits and employee retention

Building the Supplemental Benefits Layer

Why Voluntary Benefits Matter for the Hourly Tier

A MEC plan by itself provides preventive care and basic coverage, but it does not cover hospitalization, specialist visits, or prescription drugs at the level most employees expect. This is where voluntary benefits fill the gap. By offering affordable voluntary benefits alongside the MEC plan, the employer gives hourly workers the ability to build a customized coverage package that meets their individual needs.

The most effective voluntary benefits for hourly workers include dental coverage (typically $15 to $40 per month for employee-only), vision coverage ($8 to $20 per month), accident coverage ($10 to $30 per month, pays a lump sum for injuries), critical illness coverage ($15 to $50 per month, pays a lump sum upon diagnosis of a covered condition), and short-term disability ($10 to $30 per month, replaces a portion of income during a medical leave).

Using a Section 125 Plan to Maximize Value

All voluntary benefits should be offered through a Section 125 (cafeteria) plan, which allows employees to pay premiums on a pre-tax basis. This reduces the employee's taxable income and also reduces the employer's FICA tax obligation. For every dollar of voluntary benefit premiums paid pre-tax through Section 125, the employer saves 7.65 percent in FICA taxes. On a workforce of 140 hourly employees averaging $100 per month in voluntary benefit premiums, that translates to approximately $12,852 per year in employer FICA savings.

Captive Voluntary Benefits

An emerging option is to offer voluntary benefits through a self-funded captive arrangement. In this model, the employer sponsors a captive that underwrites the voluntary benefits at lower premiums (often 40 to 50 percent below traditional voluntary carriers) and returns any surplus to the employer. This means the hourly tier gets better benefits at lower employee cost, and the employer generates revenue from the captive surplus. Companies with 50 or more employees are typically eligible for captive voluntary programs.

Implementation Roadmap for a Two-Tier Strategy

Step 1: Classify Your Workforce

Start by clearly defining which employees are in the salaried tier and which are in the hourly tier. The ACA allows employers to create distinct employee classes based on job category, hourly vs. salaried status, geographic location, and other bona fide employment-based criteria. Document these classes in your plan documents and apply them consistently.

Step 2: Select Your MEC and MVP Providers

Not all MEC plans are created equal. Evaluate providers based on preventive care network quality, telemedicine access (a critical benefit for hourly workers who cannot easily take time off for doctor visits), ACA reporting and compliance support (1094-C and 1095-C filing), employee enrollment and support services, and integration with your payroll system for deduction management.

Step 3: Design Your Voluntary Benefits Package

Work with a benefits advisor who specializes in voluntary programs for hourly workforces. The package should be simple (no more than 5 to 6 product options), affordable (most hourly workers will not spend more than $100 to $150 per month on voluntary benefits), and communicated clearly (enrollment materials should be available in Spanish and other relevant languages for your workforce).

Step 4: Build Your Communication Plan

This is the most important step. Employees need to understand why the company is moving to a two-tier design, what it means for their specific coverage, and how the voluntary benefits work. Hold in-person or virtual enrollment meetings for each tier. Provide one-page benefit summaries in plain language. Offer one-on-one enrollment assistance for employees who need help choosing voluntary benefits. And be honest: explain that the two-tier design helps the company manage costs sustainably, which protects everyone's jobs and benefits long-term.

Step 5: Monitor and Adjust Annually

After the first plan year, review utilization data for both tiers. Look at enrollment rates in voluntary benefits, claims patterns on the MEC plan, employee satisfaction surveys, and turnover rates compared to the prior year. Use this data to adjust the voluntary benefits package, consider upgrading the MEC plan to MEC plus MVP if utilization warrants it, and refine your communication approach for the next enrollment period.

Real-World Cost Comparison: Single Plan vs. Two-Tier

Let us walk through a concrete example for a company with 180 total employees: 55 salaried and 125 hourly.

Scenario A: Single major medical plan at $680 PEPM. Total annual cost: 180 employees times $680 times 12 months equals $1,468,800.

Scenario B: Two-tier design. Salaried tier at $680 PEPM: 55 times $680 times 12 equals $448,800. Hourly tier (MEC plus MVP) at $120 PEPM: 125 times $120 times 12 equals $180,000. Voluntary benefits administration cost: approximately $2,000 per year. Total annual cost: $630,800.

Annual savings: $838,000 (57 percent reduction).

Even if the employer chooses to invest $100,000 of those savings back into enhanced voluntary benefits, signing bonuses, or wage increases for hourly workers, the net savings is still $738,000 per year. Over three years, that is over $2.2 million in cumulative savings.

Model Your Two-Tier Strategy with the Health Funding Projector

Frequently Asked Questions

Is it legal to offer different health plans to salaried and hourly employees?

Yes. The ACA allows employers to create different employee classes and offer different levels of coverage to each class. The classes must be based on bona fide employment criteria such as job category, salaried vs. hourly status, full-time vs. part-time, or geographic location. As long as all full-time employees in each class are offered coverage that meets minimum essential coverage requirements, the employer is compliant with the employer mandate.

What if an hourly employee wants to buy the salaried plan?

Under most two-tier designs, employees are offered the plan that corresponds to their employee class. An hourly employee would not have the option to enroll in the salaried tier's major medical plan. However, the hourly employee can supplement their MEC coverage with individual health plan coverage purchased on the ACA marketplace. Depending on their income, they may qualify for premium tax credits to help offset the cost. The employer should inform hourly employees of this option during enrollment.

Does a MEC plan satisfy the ACA employer mandate?

A MEC plan satisfies the coverage offer requirement under IRC Section 4980H(a), which prevents the "sledgehammer penalty." However, a standalone MEC plan without a minimum value component does not protect against penalty B under IRC Section 4980H(b). If a full-time hourly employee declines the MEC plan and obtains subsidized marketplace coverage, the employer may owe a penalty for that individual. Adding a Minimum Value Plan (MVP) to the MEC plan protects against both penalties.

How do I handle employees who move from hourly to salaried?

When an employee transitions from hourly to salaried status, they should be moved to the salaried tier and offered the major medical plan. This transition is a qualifying life event that allows the employee to enroll in the new plan outside of the regular open enrollment period. Document your tier transition policy in your plan documents and communicate it clearly to HR staff and managers.

What voluntary benefits have the highest enrollment rates among hourly workers?

Dental coverage consistently has the highest voluntary enrollment rate among hourly workers, typically 40 to 60 percent. Accident coverage is second at 25 to 40 percent, which makes sense given that hourly workers in industries like construction and manufacturing face higher injury risk. Vision comes in third at 20 to 35 percent. Critical illness and short-term disability have lower enrollment rates (10 to 20 percent) but provide critical financial protection for the employees who elect them.

Can I use a two-tier design if I have fewer than 50 employees?

Yes. The ACA employer mandate only applies to employers with 50 or more full-time equivalent employees, but employers of any size can offer different plan tiers to different employee classes. If you have fewer than 50 FTEs, you are not subject to the employer mandate penalties, which gives you even more flexibility in plan design. However, you should still ensure that your tier classifications are based on legitimate business criteria and applied consistently to avoid discrimination claims.

How does a two-tier strategy affect recruiting for hourly positions?

In industries where hourly workers are accustomed to having no employer-sponsored benefits at all, offering a MEC plan with voluntary benefits is actually a competitive advantage. Many small employers in construction, hospitality, and logistics do not offer any health coverage to hourly workers. A two-tier design that includes a MEC plan plus affordable voluntary options positions your company as a better employer than competitors who offer nothing. The key is to communicate the total value of the package, not just the MEC plan alone.

References

1. Kaiser Family Foundation. "2025 Employer Health Benefits Survey: Plan Offerings by Worker Classification." kff.org
2. Mercer. "National Survey of Employer-Sponsored Health Plans 2025: Utilization by Employee Category." mercer.com
3. Internal Revenue Service. "Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act." irs.gov
4. Society for Human Resource Management. "Minimum Essential Coverage and Minimum Value Plan Design Guide." shrm.org
5. Bureau of Labor Statistics. "Employee Benefits Survey 2025: Access to Healthcare Benefits by Occupation." bls.gov