Learning Objective 3
Categories of persons the employer may want to or be required to provide benefits for
1. Active full-time employees. 2. Dependents of active full-time employees. 3. Retired former employees. 4. Dependents of retired former employees. 5. Disabled employees and their dependents. 6. Surviving dependents of deceased employees. 7. Terminated employees and their dependents. 8. Employees (and dependents) on temporary leaves of absence (such as for military duty). 9. Active employees who are not full time (such as part-time employees and directors).
Objectives of employee communications
1. Adhere to statutory reporting and disclosure requirements. 2. Support employee benefits cost-containment strategies (e.g. controlling medical costs by promoting preventive care and emphasizing healthy lifestyles). 3. Support HR recruitment and retention objectives. 4. Educate plan participants on the programs' provisions. 5. Demonstrate the value of benefits to the employee's total compensation package.
Typical elements of CDHPs
1. An HDHP. 2. An individual health account to pay for expenses not covered by the HDHP. 3. Information and tools to provide health education and help find the highest-quality providers at the lowest cost. 4. A communications program to encourage consumerism and healthy behaviors. 5. A health coach or consultant to help individuals use available information and provide guidance on use of health care providers. 6. For serious chronic conditions, a proactive medical professional to coordinate care for the patient.
Requirements for Canadian health spending account reimbursements to be tax-free
1. An employee's election to allocate funds to the account must be made in advance of the plan year and must be irrevocable. An exception is allowed for family status changes. 2. The plan must require forfeiture of any unused account balances, using one of the following methods: a) One year rollover of unused balances - funds allocated to the account can be used to reimburse current year expenses or rolled over to next year's account. Unused amounts are forfeited at the end of the second year. b) One year rollover of unpaid claims - roll over unpaid claims from the prior year to be paid by this year's account balance. Funds remaining at the end of the year are forfeited.
Challenges for small companies offering group medical plans
1. Because small companies are most often fully insured, they are subject to state-mandated benefits. 2. Because employees are usually in a relatively small geographic area, plans must be designed using options available in that area. 3. Small companies may have to provide additional documentation so that insurers can verify the existence of the company. 4. Most states do not allow companies to join forces to form larger purchasing pools in order to get group discounts.
Reasons for using the functional approach to designing and evaluating employee benefits
1. Benefits must be organized to be as effective as possible in meeting employee needs. 2. Avoiding waste in benefits can be an important cost-control measure for employers. 3. It is important to analyze where current benefits may overlap and costs may be saved. 4. A systematic approach is needed to keep benefits current, cost effective, and in compliance with regulations. 5. A systematic approach is needed to ensure the various benefits can be integrated with each other.
Common functions for administering employee benefits
1. Benefits plan design - create a benefit program that addresses the needs of the organization and can be effectively administered and communicated. 2. Benefits plan delivery - involves serving plan participants through various activities (see separate list). Must meet legal standards for quality service (e.g. complying with ERISA and COBRA standards). 3. Benefits policy formulation - management must make decisions on questions and issues that arise. These decisions must be codified into policies. 4. Communications - must effectively communicate benefit programs and plan provisions, which is challenging due to workforce diversity and plan complexity. Legal standards require certain communications (e.g. summary plan descriptions, benefit statements, and statement of COBRA rights). 5. Applying technology - involves setting up a database containing information on all the employer's different benefit plans. This information should be secure and easily accessible to the employer and its employees.
Reasons for the growth of employee benefit plans
1. Business reason - good benefit plans help the employer attract and retain capable employees, and can improve employee morale and productivity. 2. Collective bargaining - the Taft-Hartley Act requires good-faith collective bargaining over conditions of employment (including benefit plans). 3. Favorable tax benefits - many plans are designed to maximize available tax benefits. 4. Efficiency of the employee benefits approach - marketing of benefits through the employer is a cost-effective and administratively efficient distribution channel. 5. Wage increase limits - wage increase limits during WW2 and the Korean War led to an expansion of employee benefits as a way in which employers could increase the employees' total compensation. 6. Legislative actions - the government has encouraged employee benefit plans through various legislative actions.
Steps in applying the functional approach to employee benefit plan design and evaluation
1. Classify employee and dependent needs or objectives into logical functional categories (see separate list of common loss exposures). 2. Classify the categories of persons the employer may want or need to protect (see separate list). 3. Analyze current benefits with respect to employee needs and the desired categories of covered persons. 4. Determine any gaps in benefits or overlapping benefits in the current plan. 5. Consider recommendations for plan changes to meet any gaps in benefits and to correct and overlapping benefits.
Methods for comparing benefit programs to the competition
1. Compare the benefits payable to representative employees under different circumstances. 2. Compare actual costs to the employer for different benefit plans. 3. Calculate relative values of the different benefits based on uniform actuarial methods and assumptions. 4. Compare benefit plans feature by feature to isolate specific provisions that may be appealing to certain employee groups.
Benefits that cannot be offered in a cafeteria plan
1. Contributions to medical savings accounts. 2. Qualified scholarship and education assistance. 3. Certain fringe benefits. 4. Qualified LTC insurance (although an HSA fund can be used to pay for LTC). 5. Athletic facilities. 6. De Minimis benefits. 7. Cash value or dependent life insurance. 8. Employee discounts. 9. Lodging on the business premise. 10. Meals. 11. Moving expense reimbursements. 12. No-additional-cost services. 13. Parking and mass transit reimbursement. 14. Contributions to a college savings account. 15. Legal or financial assistance. 16. 403(b) plans. 17. Deferred compensation. 18. Reimbursement for cosmetic surgery. 19. Retirement health benefits paid for working employees.
Organizational objectives of credit allocation
1. Cost management. 2. Profit sharing - allocate credits based on the profitability of the company. 3. Service recognition - vary credits based on length of service. 4. Social responsibility - may require a minimum level of coverage. 5. Benefit value equity - may want to give the same number of credits to everyone. 6. Employee performance - may link credits to performance. 7. Health awareness - link credits to a health awareness campaign.
Sources of credits for flexible benefit programs
1. Current benefits - employer costs of current benefits that will continue as part of the program. 2. Benefit reductions - a plan may be eliminated and the savings may be used as credits. 3. Additional employer money - to provide a new benefit plan or make the program more attractive. 4. Wellness credits - employees may have to earn credits through health or wellness initiatives, such as not smoking and completing a health risk assessment. 5. Renegotiation of compensation - employees can direct a portion of their bonus into flex credits. 6. Employee after-tax payroll deductions.
Steps in the flexible benefit option pricing process
1. Data collection and analysis. 2. Preliminary option pricing - determine a fair price (based on relative values) for each option, using the claims data collected. 3. Preliminary subgroup pricing - divide into smaller groups, such as single vs. family. 4. Anticipation of changes - adjust preliminary prices for the following: a) Medical and dental inflation b) Technological improvements c) Plan (benefit) changes d) Adverse selection e) Shifts in government benefits - causing private plan costs to increase. f) Smarter consumers - upon seeing the cost of care, they stop using some unnecessary care.
Additional advantages of health spending accounts
1. Deliver compensation tax effectively. 2. Encourage employees to self-insure predictable and budgetable expenses (such as vision and dental). 3. Soften the impact of higher employee cost-sharing. 4. Replace existing coverage, allowing the employer to gain control of future cost increases. 5. Obtain max value from health benefits under the Quebec tax system.
Benefits that can be offered in a cafeteria plan
1. Employer-provided accident or health coverage - this includes medical, dental, vision, disability, AD&D, business travel and accident plans, hospital indemnity, cancer policies, Medicare supplements, and reimbursements for FSAs. 2. Individually-owned accident or health policies. 3. Employer-provided group term life insurance coverage (only the first $50,000 is nontaxable). 4. Employer-provided dependent care assistance. 5. Employer-provided adoption assistance. 6. Contributions to a 401(k) plan. 7. Contributions to an HSA. 8. Coverage under a qualified group legal plan. 9. Post-retirement life insurance (only for employees of educational organizations). Permissible benefits (these can be offered, but are taxable): 1. Cash 2. Paid vacation days 3. Group term life insurance over $50,000
Plan design considerations for CDHPs
1. Establishing the parameters of the HDHP. 2. Selecting a type of health care account. 3. Level of preventive care coverage. a) Most offer an initial health screening or physical at no, or very low, cost. b) Also included are immunizations, routine annual physicals, and well-mother and well-baby visits. 4. Whether the CDHP will be a full replacement plan or one of multiple options. A full replacement plan will minimize adverse selection and maximize cost savings, but may face employee resistance. 5. Employer contribution strategy. a) Must decide how much to contribute to the employees' accounts. b) CDHP contributions are often set to compare favorably with other options. 6. For HRA plans, whether to permit carryovers of unused balances.
Technological tools used by benefits directors to support customer-driven processes
1. Executive information systems - provide management information in summary format. 2. Imaging and optical storage - eliminates paper records and allows sharing of documents over a network. 3. Access to information over the internet - facilitates paper-less communication from the plan sponsor to insurance carriers, investment custodians, and third-party administrators. 4. Client-server technology - integrates networked applications with desktop and mobile tools, allowing decentralized management and supporting self-sufficient plan participants. 5. Employee self-service - allows customer-driven benefits modeling, retirement planning, and updating of personal data.
Advantages to the employer of offering flexible accounts
1. Expand the types of benefits offered with little or no additional employer cost. 2. Add a new benefit without subsidizing an expensive coverage area. 3. Offer a benefit that might appeal to only a small segment of the employee population. 4. Contain costs (by setting defined contribution) while providing employees with flexibility. 5. Test the appeal of flexible benefits without committing to a full-choice program.
Basic plan structure of CDHPs
1. First-dollar coverage provided through a health care account. 2. Employee is responsible for the difference between the account amount and the deductible. 3. After the deductible, the plan coinsurance and copayments apply. 4. Deductibles, coinsurance, and copayments differ for single versus family coverage and in-network versus out-of-network services.
Pricing approaches for flexible benefit programs
1. Flat credits - an equal amount of credits are allocated to all employees. Achieves objective 2 (equity). Variations include: a) Family credits - each employee receives credit equal to the current company cost for family coverage. Price tags are based on expected claims. Fails objective 4 (no additional company cost). b) Average credits - each employee receives credits equal to the current average company cost for all employees. Price tags are based on expected claims. Fails objective 3 (no losers). c) Single coverage credits - each employee receives credits or subsidies equal to the current company cost for single coverage. In order to have no losers, price tags for family coverage are reduced. Fails objective 1 (realistic prices). 2. Buy-back pricing - credits are allocated based on the average cost to the employer of singles and families prior to the flexible benefit program. Fails objective 2 (equity) because families get more credits. 3. Election-based pricing - same as buy-back pricing except families who opt down are given fewer credits, such that singles and families in those options have the same net cost. Comes closer to achieving objective 2 (equity), but still fails.
External factors that impact benefit management activities
1. General business and competitive conditions - benefit programs are increasingly important for attracting and retaining employees. There is a trend toward benefits outsourcing. 2. Governmental policy - requires monitoring laws and subsequent regulations, as well as proposed legislation. 3. Workforce demographic shifts - greater diversity has led to flexible benefit plan offerings. The aging of the workforce has created greater interest in retirement programs. 4. New product development - must develop a means to evaluate new products and services, and to integrate them into existing plan offerings. 5. New organizational structures - must redesign plans to fit the new structures and remain compliant. 6. Technological enhancement and innovation - must keep abreast of technological changes and proactively plan the introduction of new technologies.
Suggestions for successfully launching flexible benefit plans
1. Get buy-in from senior management - make sure they understand and endorse the plan. 2. Listen to employees - this includes the use of focus groups. 3. Make communication a priority - before, during, and after the launch. 4. Make sure the administration system is robust. 5. Get the necessary help - consult with professionals who have designed flex plans in the past.
Type of voluntary benefits
1. Group term life 2. Dependent life insurance 3. Supplemental life insurance 4. LTD/STD income insurance 5. Dental insurance 6. LTC coverage 7. Adoption assistance 8. Accidental death and dismemberment insurance 9. Car insurance 10. Homeowner's insurance 11. Benefits under a legal services plan 12. Vision benefits coverage 13. Critical care insurance 14. Cancer insurance 15. Group homeowners and car insurance 16. Hospital indemnity insurance 17. Travel accident insurance 18. Student medical insurance
Types of health care accounts
1. HSA a) Must accompany an HDHP with a minimum deductible ($1,200 individual $2,400 family) and maximum OOP limit ($5,950 individual $11,900 family) (year 2011 amounts, indexed for inflation). b) Can be used to pay for qualified medical expenses, health insurance premiums in limited circumstances, LTC premiums, and LTC services. c) Owned by the employee, who gets to keep the unused balance upon terminating employment. 2. HRA - can be used to pay for qualified medical expenses, health insurance premiums, and LTC premiums. 3. FSA a) Can be used to pay for qualified medical expenses. b) The contribution amount must be specified at the beginning of the period, and the employee can use the full amount at any time in the coverage period. c) Funds not used by the end of the period are forfeited.
Types of flexible accounts in Canada
1. Health spending account (non-taxable is requirements are met) - may cover any health care expense that would be tax deductible under the Income Tax Act, as long as they are not covered by the provincial plan or other private insurance. 2. Personal account (taxable) - may cover a wide range of benefits, at the employer's discretion, such as child care, financial counseling, or even sports equipment or gym memberships. 3. Executive perquisite account (taxation depends on the taxability of the covered expense) - normally administered separately from the flexible plan.
Options for spreading the cost of adverse selection
1. Load the prices of the lesser-valued options - reduces the reward for opting down. 2. Load the prices of the highest-valued option - this may cause more employees to opt down. 3. Spread the cost of the adverse selection over the price of all the options.
Most common employee benefits for small companies
1. Medical - plan design options usually include HMOs, PPOs, POS plans, direct-access POS plans, and CDHPs. 2. Disability income insurance - LTD, STD, and supplemental. 3. Life and AD&D - for companies with fewer than 10 employees, it may be cheaper to buy individual policies than a group policy. 4. Dental - may not be cost effective, especially for the smallest of employers. But it can be cost-effective for employees because the employer is paying some of the cost and tax savings can result if a pretax spending account is used. 5. Cafeteria plan (aka Section 125 plan or flex plan) - this can include an FSA to provide tax benefits. Types include: a) Premium-only plans - includes only pre-tax premium payments. b) Full-range cafeteria plan - may offer 3-4 options in each benefit area. Small companies generally not able to offer these due to cost and lack of availability.
Common loss exposures covered by employee benefit plans
1. Medical expenses for employees (active and retired) and their dependents. 2. Losses due to employees' disability (short-term and long-term). 3. Losses due to the death of active employees, their dependents, and retired employees. 4. Retirement needs of employees and their dependents. 5. Capital accumulation needs or goals. 6. Needs arising from unemployment or from temporary termination or suspension of employment. 7. Needs for financial counseling, retirement counseling, and other counseling services. 8. Losses resulting from property and liability exposures. 9. Needs for dependent care assistance (e.g. child-care or elder-care services). 10. Needs for educational assistance for employees and their dependents. 11. Needs for LTC for employees (active and retired) and their dependents. 12. Other employee benefit needs or goals (such as incentive programs).
Reasons a small company should require contributions for medical insurance
1. Most employees today are accustomed to paying some level of contribution. 2. Requiring a contribution motivates employees who have other coverage options to use those options. 3. It is easier to require contributions beginning at the plan's inception than it is to start requiring contributions at a later date. 4. Requiring a contribution can help avoid legal problems since the contribution makes it clear who is covered by the plan versus who opted out.
Sources of funds for health spending accounts
1. New contributions by the employer. 2. Employer savings from reducing medical plan costs. 3. Employees directing employer-provided flexible credits to the account. 4. Employees allocating a part of annual bonuses or company savings plan matches to the account.
Activities required for serving plan participants
1. New employee benefits orientation. 2. Policy clarification on benefits eligibility, coverage, and applicability of plan provisions. 3. Dealing with exceptional circumstances and unusual cases. 4. Collection and processing of enrollment data, claims information, and requests for plan distributions. 5. Benefits counseling and response to employee inquiries for active employees. 6. Benefits counseling for employees who are terminating, retiring, disabled, or on leave.
Employee groups for benefit communications
1. New hires - problems include benefit misunderstandings, missing applications, and vendor enrollment delays. A good communications process will anticipate and reduce some of these problems. 2. All employees - during the annual open enrollment, must communicate plan design modifications, plan cost increases, and changes in family members' eligibility statuses. Challenges include communicating benefit cutbacks and securing employee participation. 3. Employees who experience life changes (e.g. marriage, adoption, or divorce) - the "life-events approach" extracts information whenever a life event occurs, and then communicates the options available and actions required to make benefits changes. 4. Retirees - clearly state what has and has not changed, and the actions the retiree must take. Should use short sentences, avoid jargon, give examples when possible, and avoid small font sizes. 5. Employees with 401(k) plans - provide information that allows participants to exercise control over their own investment decisions. Includes financial planning seminars throughout the year and other sessions for specific groups (such as sessions on Social Security benefits and retiree medical for those nearing retirement).
Characteristics of the group technique of providing employee benefits
1. Only certain groups are eligible - groups formed solely for the purpose of obtaining insurance should not be offered coverage. 2. Steady flow of lives through the group - to maintain a fairly healthy group. 3. Minimum number of persons in a group - to prevent less-healthy lives from being a major part of the group. 4. A minimum portion of the group must participate - such as 75% of employees must be covered in plans where the employee must pay a portion of the premium. 5. Eligibility requirements and waiting periods are imposed. 6. Maximum limits for any one person - to prevent the possibility of excessive amounts of coverage for any particular unhealthy individual. 7. Automatic determination of benefits - some benefits may be determined based on a formula (such as a multiple of salary) to prevent unhealthy lives from obtaining large benefit amounts. 8. A central and efficient administrative agency - to minimize expenses and handle the mechanics of the benefit plan.
Categories of information included in the SPD
1. Plan administration. 2. Plan eligibility requirements. 3. Summary of benefits, rights, and obligations, including: a) A statement identifying circumstances that may result in loss or suspension of benefits. b) Cost-sharing provisions and provisions governing the use of network providers. 4. For pension plans, information on the Pension Benefit Guaranty Corporation. 5. Claims and appeals processes - including the procedures for submitting claims and the remedies available for claim denials. 6. ERISA rights.
Types of cafeteria plans in the US
1. Premium conversion plans - there are no employer contributions. The plan is offered so that employees can pay for their employee-paid insurance costs on a tax-favored basis. 2. FSAs - these accounts are permitted for medical reimbursements, dependent care, and adoption. 3. Full flex plans - participants can select from a wide range of benefits. The employer selects an amount to give for benefits, which is put towards the cafeteria plan or into an account.
Pricing objectives for flexible benefit programs
1. Realistic prices - option price tags should reflect the value of the coverage. 2. Equity - credits should be allocated based on an equal dollar amount or percentage of pay for all employees. 3. No losers - each employee should be able to repurchase prior coverage with no increase in costs. 4. No additional company cost - the new plan should cost the same as the old plan would have in the next plan year.
Pricing strategies for controlling adverse selection
1. Risk-based pricing - price options in a way that reflects the expected cost of the benefit (e.g. vary rates by age, gender, and health status). 2. Employer subsidization - subsidize prices to encourage broad participation, which will cause a better spread of risk.
Decisions needed for developing the credit structure of the flexible benefit program
1. Sources of credits (see separate list). 2. Amount of credits - for the upcoming year and develop a strategy for future years. 3. Allocation of credits - considerations include: a) Equity (objective 2) b) Allowing repurchase of the current program (objective 3 - no losers). c) Organizational objectives (see separate list)
Benefits communications that group health plans must provide to plan participants
1. Statement of ERISA rights. 2. Summary plan description within 90 days after the person becomes a participant, describing the rights, benefits, and responsibilities under the plan. 3. Summary of material modifications to the plan (at least 60 days before the effective date of the change). 4. Summary annual report. 5. Notification of benefit determination. 6. Summary of material reduction in covered services or benefits. 7. COBRA notices. 8. HIPAA notices. 9. Welness program disclosures. 10. Women's Health and Cancer Rights Act notices. 11. Medical child support order notices.
Reasons plans are outsourcing benefits administration
1. The complexity of administering benefits. 2. The efficiencies of specialized providers. 3. The abilities of specialized providers to obtain favorable pricing because of their business volume. 4. The ability of service providers to more readily implement technology and monitor regulations and market trends.
Eligibility and amounts for the ACA small employer tax credit
1. To be eligible, employers must: a) Have no more than 25 FTEs. b) Have average annual wages of $50K or less. c) Pay at least 50% of the premium for employees. 2. The credit is a percentage of the employer-paid premium. It is on a sliding scale, with the max available to employers with fewer than 10 FTEs and average annual wages of less than $25K. The max credit is: a) 35% from 2010-2013 b) 50% beginning in 2014, and can only be taken for up to two consecutive years and if employees are covered under a state-based exchange.
Considerations for designing flexible accounts
1. Type of approach - decide whether to introduce a flexible account and which types of accounts to offer. 2. How will the presence of the account impact other benefit choices? 3. Funding considerations - for example, decide if contributions to the accounts will be monthly or annually. 4. Should there be limits on how much the employee can allocate to the flexible account? 5. How will mid-year changes be handled? - this will vary by account type and the reason for the change (family status change, termination, retirement, or death). 6. Disposition of funds at year end - funds are forfeited, rolled over, or (for personal or perquisite accounts) paid in cash.
Questions to ask in evaluating employee benefit plans
1. What are the objectives of the employer and employee? 2. What benefits should be provided? 3. Who should be covered under the benefit plan? - retirees, dependents? 4. Should employees have benefit options? 5. How should the benefit plan be financed? 6. How should the benefit plan be administered? - by the employer, an insurer, or a TPA? 7. How should the benefit plan be communicated?
Analyses for testing the pricing structure of the flexible benefit plan
1. Winners and losers analysis - a comparison of an employee's situation before and after implementing the program. 2. Employer cost analysis - involves identifying costs in the following categories: a) Credits b) Price subsidies c) Adverse selection d) Dependent coverage - will the program cause employees to change their coverage? e) Benefit utilization - will the new plan cause employees to change the services they use? 3. Reasonableness - test whether the options are understandable, if the price tags make sense, and if the credits are adequate for employee needs.
Steps in the flexible benefit option pricing process (continued)
5. Taxes and administration fees - decide whether to include these in the price tags. 6. Adjustments to realistic price tags. a) Subsidized pricing (see separate list of reasons for and against using subsidized pricing). b) Carve-out pricing - subsidize all options by the cost of the lowest option, so that option then costs $0. 7. No coverage option pricing - decide whether to allow employees to waive coverage, and calculate opt-out credits. 8. Pricing by business unit or location - may be done to reflect local costs or competition.
Common functions for administering employee benefits (continued)
6. Cost management and resource controls - benefit directors must evaluate proposals from insurers and develop the firm's risk-management approach. 7. Management reporting - information systems are needed to monitor financial results, utilization, and compliance. Reports are needed in order to: a) Compare to the competition (see separate list of comparison methods). b) Measure achievement of human resources objectives (through industry services, employee surveys, and focus groups). c) Assess and manage program risks. 8. Legal and regulatory compliance - must comply with fiduciary, funding, and other requirements as prescribed by law. Many standards were codified as part of ERISA. 9. Monitoring the external environment - involves monitoring various factors that impact benefit management activities (see separate list).
Steps in applying the functional approach to employee benefit plan design and evaluation (continued)
6. Estimate the costs or savings from each of the recommendations made. 7. Evaluate alternative methods of financing or securing the benefits. 8. Consider other cost-savings or cost-containment techniques for both current and recommended benefits. 9. Decide upon the appropriate benefits, methods of financing, and sources of benefits, by using the preceding analysis. 10. Implement the changes. 11. Communicate benefit changes to employees. 12. Periodically reevaluate the employee benefit plan.
Cafeteria plan advantages and disadvantages to the employee
Advantages 1. Employees can pay for benefit expenses on a tax-favored basis. 2. Employees can have more control over their health spending. Disadvantages 1. Benefit elections must be made prior to the beginning of the year, and the election is irrevocable (with limited exceptions). 2. The use-it-or-lose-it rule means benefit dollars unused at the end of the year are forfeited. 3. Since there is no FICA tax, participants may see a slight reduction in social security benefits.
Cafeteria plans and disadvantages to the employer
Advantages 1. The employer does not have to pay FICA or FUTA (Federal Unemployment Tax Act) taxes on contributions. 2. Deferred amounts do not count when determining workers' compensation premiums. 3. Creates increased awareness of the overall cost and value of employee benefits. 4. Helps to contain health care costs and prevent wasting benefit dollars on duplicate or unneeded benefits. Disadvantages 1. The large cost of administration and operation of a cafeteria plan. 2. If a medical reimbursement account is included in the plan, the total amount of the employee's account must be available at any time in the year. 3. Adverse selection can result in increased costs. 4. Plans are subject to complex coverage and nondiscrimination testing.
Advantages and disadvantages of health spending accounts replacing health and dental plans
Advantages to employer: 1. Fixed contribution (gives employer control over benefit cost increases). 2. Contributions to the account are tax deductible. 3. The accounts are easy to administer and communicate. Advantages to employee: 1. The accounts provide flexibility as to how the money is spent. 2. Benefits are non-taxable to the employee. 3. Can be used to buy insurance. 4. The employee can decide what expenses are covered. Disadvantages 1. Benefits are inadequate since there is no insurance. 2. Inequities a) A flat contribution per employee means families receive relatively less protection than singles. b) A % of pay contribution means lower-paid employees received less protection than higher-paid employees. 3. Inflation is borne by the employees.
Definition of employee benefits
Broad definition - includes virtually any form of compensation other than direct wages, including: 1. The employer's share of legally-required payments (such as Social Security). 2. Payments for time not worked (such as paid sick leave, paid vacations, and holidays). 3. The employer's share of medical and medically-related payments. 4. The employer's share of retirement and savings plan payments. 5. Misc. benefits (such as employee discounts, severance pay, and educational expenditures). More limited definition - excludes legally mandated benefits.
Plan design approaches for controlling adverse selection
PDCONTROLL 1. Parallel design should be maintained - e.g. include vision and ortho at the same coverage in all plans. 2. Delay full payment - have lower benefits during a waiting period of 6-12 months. 3. Certain coverages can be grouped together - predictable expenses (such as dental or vision) could be grouped with less predictable expenses (such as supplemental medical). 4. Offer a health spending account instead of insurance - useful for vision and dental. 5. Not allow a large spread between options - could be done by requiring a core coverage level. 6. Test the program with employees - to bring to light potential weaknesses. 7. Require proof of insurability for increases in coverage. 8. Only allow mid-cycle changes if a life-changing event occurs. 9. Limit the frequency of choice - allow benefit changes only every 2-3 years, instead of annually. 10. Limit the degree of change - restrict changes to one level of coverage per year (staircase rule).
Reasons for and against using subsidized pricing
Reasons to use subsidized pricing: 1. To encourage selection of cost-efficient options. 2. To limit potential for adverse selection by encouraging broader participation. Reasons to avoid subsidized pricing: 1. Can skew employee choices by masking the true value of each option. 2. Can restrict cost management effectiveness since some costs are hidden and are therefore harder to control. 3. Re-pricing can be harder if prices are artificially derived in the first place. 4. It is harder to determine employer cost because price tags no longer equal expected claims.
Advantages of voluntary benefits
Voluntary benefits are offered by the employer but employees purchase them on their own. Employer advantages: 1. More benefits can be offered without significant added cost. 2. Can supplement or replace employer-sponsored benefits that have been reduced or eliminated. 3. Can act as an employee recruitment or retention tool. 4. Can offer to employees that meet performance targets. Employee advantages: 1. Can get the employer's group discount. 2. In some cases, can purchase with pretax dollars. 3. Convenience of obtaining benefits through the workplace (not having to shop around) and during work time. 4. They are often portable (employees can keep them upon changing jobs).
