1
Q
Definition of employee benefits
A
Broad definition: includes virtually any form of compensation other than direct wages, including:
1. ER’s share of legally-required payments (ex: Social Security)
2. Payments for time not worked
3. ER’s share of medical and medically-related payments
4. ER’s share of retirement and savings plan payments
5. Miscellaneous benefits (ex: EE discounts, severance pay, educational expenditures)
Limited definition: excludes legally-mandated benefits
2
Q
Reasons for the growth of employee benefit plans
A
- Business reasons
- Collective bargaining
- Favorable tax legislation
- Efficiency of the employee benefits approach
- Wage increase limits
- Legislative actions
3
Q
Characteristics of the group technique of providing employee benefits
A
All but the last are meant to minimize adverse selection
- Only certain groups are eligible
- Steady flow of lives through the group
- Minimum number of persons in the group
- Minimum portion of the group must participate
- Eligibility requirements and waiting periods are imposed
- Maximum limits for any one person
- Automatic determination of benefits
- Central and efficient administrative agency
4
Q
Questions to ask in evaluating employee benefit plans
A
- What are the objectives of the ER and EE?
- What benefits should be provided?
- Who should be covered under the benefit plan?
- Should employees have benefit options?
- How should the benefit plan be financed?
- How should the benefit plan be administered?
- How should the benefit plan be communicated?
5
Q
Reasons for using the functional approach to designing and evaluating employee benefits
A
- Benefits must be organized to be as effective as possible in meeting EE needs
- Avoiding waste in benefits can be an important cost-control measure for employers
- It is important to analyze where current benefits may overlap and costs may be saved
- A systematic approach is needed to keep benefits current, cost effective, and in compliance with regulations
- A systematic approach is needed to ensure that the various benefits can be integrated with each other
6
Q
Steps in applying the functional approach to employee benefit plan design and evaluation
A
- Classify EE and dependent needs or objectives into logical functional categories
- Classify the categories of persons the ER may want or need to protect
- Analyze current benefits with respect to EE needs and desired categories of covered persons
- Determine any gaps in benefits or overlapping benefits in the current plan
- Consider recommendations for plan changes to meet any gaps in benefits and to correct any overlapping benefits
- Estimate the cost or savings from each of the recommendations made
- Evaluate alternative methods of financing or securing benefits
- Consider other cost-saving or cost-containment techniques for both current and recommended benefits
- Decide upon the appropriate benefits, methods of financing, and sources of benefits based on the prior analysis
- Implement the changes
- Communicate benefit changes to EEs
- Periodically reevaluate the EE benefit plan
7
Q
Common loss exposures covered by employee benefit plans
A
- Medical expenses for EEs (active and retired) and their dependents
- Losses due to EEs’ disability (STD and LTD)
- Losses due to the death of active EEs, their dependents, and retired EEs
- Retirement needs of EEs and their dependents
- Capital accumulation needs or goals
- Needs arising from unemployment or from temporary termination or suspension of employement
- Needs for financial counseling, retirement counseling, and other counseling services
- Losses resulting from property and casualty exposures
- Needs for dependent care assistance
- Needs for educational assistance for EEs and their dependents
- Needs for LTC for EEs (active and retired) and their dependents
- Other EE benefit needs or goals (such as incentive programs)
8
Q
Categories of persons the ER may want to or be required to provide benefits for
A
- Active full-time EEs
- Dependents of active FT EEs
- Retired former EEs
- Dependents of retired former EEs
- Disabled EEs and their dependents
- Surviving dependents of deceased EEs
- Terminated EEs and their dependents
- EEs (and dependents) on temporary leaves of absence
- Active EEs who are not full time
9
Q
Typical elements of CDHPs
A
- A high-deductible health plan
- An individual health account to pay for expenses not covered by the HDHP
- Info and tools to provide health education and help find the highest-quality providers at the lowest cost
- Communications program to encourage consumerism and healthy behaviors
- Health coach or consultant to help individuals use available info and provide guidance on use of health care providers
- For serious chronic conditions, a proactive medical professional to coordinate care for the patient
10
Q
Basic plan structures of CDHPs
A
- First-dollar coverage provided through a health care account
- EE is responsible for the difference between the account amount and the deductible
- After the deductible, the plan coinsurance and copays apply
- Deductibles, coinsurance, and copays differ for single vs. family coverage and IN vs. OON services
11
Q
Types of health care accounts
A
- HSA:
a. Must accompany a HDHP with minimum deductible ($1200, 2x family) and maximum OOP limit ($5950, 2x family; 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 EE, who gets to keep the unused amount upon terminating employment - HRA: can be used to pay for qualified medical expenses, health insurance premiums, and LTC premiums
- 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 EE can use the full amount at any time in the coverage period
c. Funds not used by the end of the period are forfeited
12
Q
Comparison of key features of health care accounts
A
- HSA:
a. Who can set up account: Individuals and EEs covered by HDHP and no other health insurance
b. Who can contribute: ERs and EEs
c. Contribution limits: $3,050 for individuals, $6,150 for families (2011 values, indexed)
d. Carryover of unused balances: Yes
e. Portability: Yes - HRA:
a. Who can set up account: Only ERs
b. Who can contribute: Only ERs
c. Contribution limits: No federal limit, ERs usually set limits
d. Carryover of unused balances: Yes, subject to ER limits
e. Portability: No - FSA:
a. Who can set up account: Only ERs
b. Who can contribute: ERs and EEs
c. Contribution limits: Through 2012 - no limit; $2,500 (indexed) starting in 2013
d. Carryover of unused balances: No
e. Portability: No
13
Q
Tax treatment of health care accounts
A
- HSA:
a. ER Contributions: Contributions excluded from gross income and not subject to FICA; funding limits
b. Individual contributions: Funding limits; contributions are deductible
c. Earnings on accounts: Generally not taxable
d. Distributions: Permissible reimbursements are not taxed; o/w 20% penalty (some exceptions) - HRA:
a. ER Contributions: Contributions excluded from gross income and not subject to FICA
b. Individual contributions: EEs cannot contribute
c. Earnings on accounts: Accounts are generally notional, so there are no earnings
d. Distributions: Distributions only allowed for qualified medical expenses - FSA:
a. ER Contributions: Contributions excluded from gross income and not subject to FICA; funding limits
b. Individual contributions: Generally pretax & not subject to FICA
c. Earnings on accounts: Accounts are generally notional, so there are no earnings
d. Distributions: Distributions only allowed for qualified medical expenses
14
Q
Plan design considerations for CDHPs
A
- Establishing the parameters of the HDHP
- Selecting a type of health care account
- 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 - Whether the CDHP will be a full replacement plan or one of multiple options
- ER contribution strategy:
a. Must decide how much to contribute to the EEs’ accounts
b. CDHP contributions are often set to compare favorably with other options - For HRA plans, whether to permit carryovers of unused balances
15
Q
Advantages of voluntary benefits
A
Voluntary benefits are offered by ER but EEs purchase them on their own
ER advantages:
1. More benefits can be offered without significant added cost
2. Can supplement or replace ER-sponsored benefits that have been reduced or eliminated
3. Can act as an EE recruitment or retention tool
4. Can offer to EEs that meet performance targets
EE advantages:
1. Can get the ER’s group discount
2. In some cases, can purchase with pretax dollars
3. Convenience of obtaining benefits through the workplace and during work time
4. They are often portable
16
Q
Types of voluntary benefits
A
- Group term life
- Dependent life insurance
- Supplemental life insurance
- LTD and/or STD insurance
- Dental insurance
- LTC coverage
- Adoption assistance
- Accidental death and dismemberment insurance
- Automobile insurance
- Homeowners insurance
- Benefits under a legal services plan
- Vision benefits coverage
- Critical care insurance
- Cancer insurance
- Group homeowners and automobile insurance
- Hospital indemnity insurance
- Travel accident insurance
- Student medical insurance
17
Q
Common functions for administering EE benefits
A
- Benefits plan design
- Benefits plan delivery
- Benefits policy formulation
- Communications
- Applying technology
- Cost management and resource controls
- Management reporting - needed to:
a. Compare to the competition
b. Measure achievement of HR objectives
c. Assess and manage program risks - Legal and regulatory compliance
- Monitoring the external environment
Must comply with ERISA and COBRA standards
18
Q
Activities required for serving plan participants
A
- New EE benefits orientation
- Policy clarification on benefits eligibility, coverage, and applicability of plan provisions
- Dealing with exceptional circumstances and unusual cases
- Collection and processing of enrollment data, claims info, and requests for plan distributions
- Benefits counseling and response to EE inquiries for active EEs
- Benefits counseling for EEs who are terminating, retiring, disabled, or on leave
19
Q
Technological tools used by benefits directors to support customer-driven processes
A
- Executive information systems
- Imaging and optical storage
- Access to information over the internet
- Client-server technology
- EE self-service
20
Q
Methods for comparing benefit programs to the competition
A
- Compare benefits payable to representative EEs under different circumstances
- Compare actual costs to the ER for different benefit plans
- Calculate relative values of the different benefits based on uniform actuarial methods and assumptions
- Compare benefit plans feature by feature to isolate specific provisions that may be appealing to certain EE groups
21
Q
External factors that impact benefit management activities
A
- General business and competitive conditions
- Governmental policy
- Workforce demographic shifts
- New product development
- New organizational structures
- Technological enhancement and innovation
22
Q
Reasons plans are outsourcing benefits administration
A
- Complexity of administering benefits
- Efficiencies of specialized service providers
- Abilities of specialized providers to obtain favorable pricing due to volume
- Ability of service providers to more readily implement technology and monitor regulations and market trends
23
Q
Cafeteria plan advantages and disadvantages to the EE
A
Advantages:
1. EEs can pay for benefit expenses on a tax-favored basis
2. EEs can have more control over their health spending
Disadvantages:
1. Benefit elections must be made prior to the beginning of the year and the decision is irrevocable
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
24
Q
Cafeteria plan advantages and disadvantages to the ER
A
Advantages:
1. The ER does not have to pay FICA or FUTA taxes on contributions
2. Deferred amounts do not count when counting workers’ compensation premiums
3. Creates increased awareness of the overall cost and value of EE 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 EE’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
25
Types of cafeteria plans in the US
1. Premium conversion plans - no ER contributions
2. FSAs - permitted for medical reimbursements, dependent care, and adoption
3. Full flex plans - wide range of benefits for EE to choose from
26
Objectives of EE benefits communications
1. Adhere to statutory reporting and disclosure requirements
2. Support EE benefits cost-containment strategies
3. Support human resources recruitment and retention objectives
4. Educate plan participants on the programs' provisions
5. Demonstrate the value of benefits to the EE's total compensation package
27
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. Wellness program disclosure
10. Women's Health and Cancer Rights Act notices
11. Medical child support order notices
28
Categories of information included in the summary plan description
1. Plan administration
2. Plan eligibility requirements
3. Summary of benefits, rights, and obligations, including:
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
6. ERISA rights
29
EE groups for benefits communications
1. New hires
2. All EEs
3. EEs who experience life changes
4. Retirees
5. EEs with 401(k) plans
30
Most common EE benefits for small companies
1. Medical
2. Disability income insurance
3. Life and AD&D
4. Dental
5. Cafeteria plan - either premium-only plan or full-range cafeteria plan
31
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 EEs 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
32
Reasons a small company should require EE contributions for medical insurance
1. Most EEs today are accustomed to paying some level of contribution
2. Requiring a contribution motivates EEs who have other coverage options to use those options
3. It is easier to require contributions beginning at the plan's inception than 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 vs. who opted out
33
Eligibility and amounts for the PPACA small employer tax credit
1. To be eligible, employers must:
a. Have no more than 25 FT employees (FTEs)
b. Have average annual wages of $50,000 or less
c. Pay at least 50% of the premium for EEs
2. The credit is a % of the ER-paid premium. It is on a sliding scale, with the maximum available to ERs with fewer than 10 FTEs and average annual wages of less than $25,000. The maximum credit is:
a. 35% from 2010-2013
b. 50% beginning in 2014, and can only be taken for up to 2 consecutive years and if EEs are covered under a state-based exchange
34
Types of flexible accounts in Canada
1. Health spending account (non-taxable if requirements are met)
2. Personal account (taxable)
3. Executive perquisite account (taxation depends on the taxability of the covered expense
35
Advantages to the ER 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 EE population
4. Contain costs (by setting a defined contribution) while providing EEs with flexibility over how funds are spent
5. Test the appeal of flexible benefits without committing to a full-choice program
36
Additional advantages of health spending accounts
1. Deliver compensation tax effectively
2. Encourage EEs to self-insure predictable and budgetable expenses (such as dental and vision)
3. Soften the impact of higher EE cost sharing
4. Replace existing coverage, allowing the EE to gain control of future cost increases
5. Obtain the maximum value from health benefits under the Quebec tax system
37
Requirements for Canadian health spending account reimbursements to be tax-free
1. An EE's election to allocate funds to the account must be made in advance of the plan year and must be irrevocable. (except for family status changes)
2. Plan must require forfeiture of any unused account balances, using one of these methods:
a. 1-yr rollover of unused balances
b. 1-yr rollover of unpaid claims
38
Sources of funds for health spending accounts
1. New contributions by the ER
2. ER savings from reducing medical plan costs
3. EEs directing ER-provided flexible credits to the account
4. EEs allocation a part of annual bonuses or company savings plan matches to the account
39
Considerations for designing flexible accounts
1. Type of approach - whether to add account, which type(s)
2. How will the presence of the account impact other benefit choices
3. Funding considerations - monthly vs annually
4. Should there be limits on how much the EE can allocate to the flexible account?
5. How will mid-year changes be handled?
6. Disposition of funds at the end of year - forfeited, rolled over, or paid in cash (personal or perquisite only)
40
Advantages and disadvantages of health spending accounts replacing health and dental plans
Advantages for the ER:
1. Fixed contribution
2. Contributions to the account are tax deductible
3. Accounts are easy to administer and communicate
Advantages for the EEs:
1. Accounts provide flexibility as to how the money is spent
2. Benefits are non-taxable to the EE
3. Can be used to buy insurance
4. The EE can decide what expenses are covered
Disadvantages:
1. Benefits are inadequate since there is no insurance
2. Inequities:
a. Flat per EE contribution means families receive relatively less protection than individuals
b. % of pay contribution means lower-paid EEs receive less protection than higher-paid EEs
3. Inflation is borne by the EEs
41
Pricing objectives for flexible benefit programs
Generally impossible to achieve all 4 at once
1. Realistic prices
2. Equity
3. No losers
4. No additional company cost
42
Pricing approaches for flexible benefit programs
1. Flat credits - an equal amt of credits are allocated to all EEs (achieves equity):
a. Family credits: credits = current company cost for family coverage; price tags are based on expected claims; fails obj 4 - no additional company cost
b. Average credits: credits = current average company cost for all EEs; price tags are based on expected claims; fails obj 3 - no losers
c. Single coverage credits: credits current company cost for single coverage; price tags for family coverage are reduced so no losers; fails obj 1 - reasonable prices
2. Buy-back pricing - credits are allocated based on avt cost to ER of singles and families prior to the flexible benefit program; fails obj 2 - equity
3. Election-based pricing - same as buy-back but families who opt down are given fewer credits, such that singles and families in those options have the same net cost; closer but still fails obj 2 - equity
43
Steps in the flexible benefit option pricing process
1. Data collection and analysis
2. Preliminary option pricing
3. Preliminary subgroup pricing
4. Anticipation of changes - adjust for:
a. Medical & dental inflation
b. Technological improvements
c. Plan (benefit) changes
d. Adverse selection
e. Shifts in gov't benefits
f. Smarter consumers
5. Taxes and admin fees
6. Adjustment to realistic price tags:
a. Subsidized pricing
b. Carve-out pricing
7. No coverage option pricing
8. Pricing by business unit or location
44
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 EE 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 ER cost because the price tags no longer equal expected claims
45
Decisions needed for developing the credit structure of the flexible benefit program
1. Sources of credits
2. Amount of credits
3. Allocation of credits, with consideration to:
a. Equity
b. Allowing repurchase of the current program
c. Organizational objectives
46
Sources of credits for flexible benefit programs
1. Current benefits
2. Benefit reductions
3. Additional ER money
4. Wellness credits
5. Renegotiation of compensation
6. EE after-tax payroll deductions
47
Organizational objectives of credit allocation
1. Cost management
2. Profit sharing
3. Service recognition
4. Social responsibility
5. Benefit value equity
6. EE performance
7. Health awareness
48
Analyses for testing the pricing structure of the flexible benefit plan
1. Winners and losers analysis
2. ER cost analysis of the following categories:
a. Credits
b. Price subsidies
c. Adverse selection
d. Dependent coverage
e. Benefit utilization
3. Reasonableness
49
Plan design approaches for controlling adverse selection
1. Parallel design should be maintained
2. Delay full payment
3. Certain coverages can be grouped together
4. Offer a health spending account instead of insurance
5. Not allow a large spread between options
6. Test the program with EEs
7. Require proof of insurability for increases in coverage
8. Only allow mid-cycle changes if a life event occurs
9. Limit the frequency of choice
10. Limit the degree of change
50
Pricing strategies for controlling adverse selection
1. Risk-based pricing
| 2. ER subsidization
51
Options for spreading the cost of adverse selection
1. Load the prices of the lesser-valued options
2. Load the prices of the highest-valued option
3. Spread the cost of the adverse selection over the price of all the options
52
Suggestions for successfully launching flexible benefits plans
1. Get buy-in from senior management
2. Listen to EEs
3. Make communication a priority
4. Make sure the administration system is robust
5. Get the necessary help
53
(Added) PPACA reporting requirements
1. 60 day advance notice of material plan modifications
2. Uniform explanation of coverage documents
3. Disclose enrollee info such as claims payment policies and practices
4. Report info on initiatives to improve health outcomes
5. MLR reporting and rebates
6. Provide an effective internal appeals process for coverage determinations and claims
7. Report aggregate cost of employer-sponsored health coverage on W-2
8. Employers must provide EEs info on the Exchanges
9. ERs with 200+ FT EEs must automatically enroll new FT EEs in the plan
10. ERs must provide a statement of minimum essential coverage and ER contribution to the IRS and insureds
Group & Health Core
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Decks in class (7)
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