Jul 01, 2026
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.
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.
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 who 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.
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