Topic 3 Design Issues in Employee Benefit Planning
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. What would you like to do?
What benefits will be provided?
- Required benefits
- Basic set of benefits
What is meant by required benefits?
- Social Insurance Programs
- Health Insurance for "large employers"
What is meant by basic set of benefits?
- Needs analysis
- Loss exposures
- - Loss of Income
- - Medical Expenses
What is meant by going beyond the basic set of benefits?
- Competition in a particular industry for employees
- Benchmarking analysis
- Involves employees in the design process
- Different benefit packages for employees in different geographic issues
- Shift from favorable tax treatment to employee needs as a driving force in design decisions
What is Benchmarking Analysis?
- Compare employee benefits plan with top competitors
- Are you comfortable where you are?
- Do you want to be at the top, middle, bottom?
How can you involve employees in the design process?
- Employee surveys (Dangerous - can create bad blood)
- Focus Groups
- Benefit committees
What are some examples of work-life benefits?
- Food Court
- Shoe Repair
- Dry Cleaning
- Banking Services
What is an example of a Flexible Work Arrangement?
Leaving early to go to a kid's sports game
Who should be protected for life cycle benefits?
- Full-time, active employees
- Dependent of full-time, active employees
- Part-time, active employees
- Former employees and dependents
- Terminated employees and their dependents
- Disabled employees and their dependents
What is the definition of active?
What is the definition of full-time?
At least 30 hrs./week (ACA)
What is considered a dependent?
- - Legal marriage
- - Domestic partnership
- - Define maximum age of eligibility (26 yrs old)
Why are part-time employees protected?
Minimize a turnover
What do protected terminated employees and their dependents receive?
- Severance package
- Access to COBRA coverage
- Continuation of health insurance for a period of time
What do protected disabled employees and their dependents receive?
- Access to COBRA
- Continuation of health insurance
- Continue life insurance
- 401(k) contribution and matches from employer
What do protected former employees and their dependents receive?
- Retirement Plan (Pension)
- Post Retirement Health Benefits
- Post Retirement Life Benefits
What options will employees have in terms of plan design?
- Traditional Plan Design
- Plans with minimal choice
- Opportunity to purchase optional benefits or additional benefits
What is a Traditional Plan Design?
- One size fits all
- Employees have few options (if any)
- - Unionized Plans
- - Smaller employers
What types of insurance have plans with minimal choice (choice of health plans)?
- Retirement Insurance
- Life Insurance
- Disability Insurance
- Dental Insurance
What is an example of an additional benefit?
$12,000 of GTLI (employer provided) and the chance to purchase an additional $388,000 of GTLI on an employee-pay-all basis
What are examples of optional benefits?
- Option to purchase $100,000 of AD+D on employee-pay-all basis
- Long term disability insurance is usually optional and on an employee-pay-all basis
- Dependent life insurance coverage on a spouse or eligible child and usually on an employee-pay-all basis
What is a voluntary benefit?
Any benefit offered through an employer on a group basis and where employee pays the full cost
What are some examples of voluntary benefits?
- LTD, AD+D, dependent life insurance
- Only Voluntary Benefits
- -Group auto insurance
- -Group homeowners insurance
- -Group legal insurance
- -Pet insurance
- -Dread disease policies
- -Group universal life policy
When employers offer voluntary benefits, what might they also create and why may it be a problem for the employees?
ERISA Plan and because it creates a loss exposure for employees
What is a Section 125 Plan?
- A plan where employees have a choice between benefits normally considered taxable and benefits normally considered non-taxable
- Choice between types and levels of benefits
What are some examples of taxable benefits?
- GTLI with a face amount of more than $50,000
- Group auto insurance
What are some examples of non-taxable benefits?
- Health insurance
- GTLI with a face amount of $50,000 or less
- Group disability insurance
Is Section 125 Plan a benefit?
No, it is a frame in which you can choose benefits
If you have a healthcare plan choice between HMO(a) or HMO(b) or PPO(a) then is it flexible? Is it a Section 125 Plan? Why?
- Yes, it is flexible because it allows choice. Also known as "Flexible Benefit Plan"
- No, it is not a Section 125 Plan because all choices are non-taxable
What is another name for Section 125 Plans?
If you have a healthcare plan choice between HMO(a) or HMO(b) or $1,000 opt-out then is it flexible? Is it a Section 125 Plan? Why?
- Yes, it is flexible because it allows choice
- Yes, it is a Section 125 Plan because there are both taxable and non-taxable benefit choices
What is a Flexible Spending Account?
- When an employee agrees to take a pre-tax salary reduction to fund the accounts
- -Medical FSA
- -Dependent FSA
- Put money into one or both accounts and it is used to reimburse eligible expenses as defined by Section 125
What is included in a dependent care FSA?
What is included in a medical care FSA?
Any medical expenses that are not covered at all or are partially covered
What are some partially covered items in a medical care FSA?
- Coverage Limits
Why is a FSA an example of a Section 125 Plan?
Because if you have $2,550 in compensation you have to either take the money in cash (taxable) or put it into a medical FSA (non-taxable)
What is the Doctrine of Constructive Receipt?
- Pre-Section 125 Plan
- If you have a choice between $2,550 in cash (taxable) or to put it into a FSA and an employee chooses the FSA than you get an actual receipt for the FSA and a constructive receipt for the cash choice
- Employee is taxed as if they chose the maximum taxable benefit possible regardless of their actual choice
What blocks a constructive receipt?
Section 125 Plan
What happens if a Section 125 Plan is discriminatory?
There is a penalty, which is a constructive receipt
What are the advantages to placing funds in a FSA?
- Pre-tax dollars
- Tax savings (main advantage)
What is the use-it-or-lose-it rule?
- Any unused funds remaining at the end of the plan year are forfeited by employees
- An employer can either allow employees to submit claims for expenses incurred up to two and a half months beyond the end of the plan year or allow a $500 carry over of unused funds to next plan year
Who is at risk for any shortfall in medical FSA?
What is the maximum amount an employer can contribute to medical FSA's?
What is the maximum amount an employer can contribute to dependent FSA's?
What is the maximum amount the IRS can contribute to medical FSA's?
Prior to ACA, it was unlimited, but with ACA in effect it is $2,550 and that is an indexed number meaning it could change
What is the maximum amount the IRS can contribute to dependent FSA's?
What is the Premium Only Plan?
- Type of Medical Care (Section 125 Plan)
- FSA or POP (could have both)
- A.K.A. Premium Conversion Plan
- e.g. Medical Plan offered on a contributory basis
- Premium contribution by employees can be taken out of salary on a "pre-tax basis through salary reduction"
Why is a Premium Only Plan an example of a Section 125 Plan?
- If premium contributions were $10/month, then that $10 could either be an employees salary money (taxable) or the money they put into POP (non-taxable)
- Employer pays $1 in salary to employees to match OASDI (7.65%)
What is the cost of an insured plan?
What is the cost of a self-insured plan?
Per-capita cost of the plan
What are the possible financing options? In other words, who pays the cost?
- Non-contributory basis (employer pays the full cost of the benefit)
- Employer and employee share the cost
- -Financed on a contributory basis
- -Employer usually pays the majority of the cost
- -ACA makes employee pay on affordable basis
- -Optional for the employee
- Employee pays the entire cost
- -Employee-pay-all basis
- -Fully contributory
- -Voluntary benefits
Who is the risk bearer when it comes to funding? In other words, who guarantees the benefits?
- Government in Medicare and Medicaid program
- Employer in plan that is self-insured
- Under some type of managed care plans, provider of health care are at financial risk
What is the guaranteed cost in a guaranteed cost arrangement and who does it go to?
Premium and it goes to the employer
Who assumes all claims risk in a guaranteed cost arrangement?
For Guaranteed Cost Arrangement, who handles the fixed cost known as the cost of risk?
The employer as represented by the premium
What are the four different funding options?
- Guaranteed Cost Arrangement
- Experience Rating
- Alternative Funding Arrangements
What is the fully self-insured arrangement funding option?
There is no guaranteed cost to the employer and the employer bears all the claims and administrative risks
What is the experience rating funding option?
Claims/losses or "loss experience" for a given time period is used to determine a rate or a cost of coverage
Who handles the claims risk in the experience rating funding option?
Both the employer and insurer share in claims risk
What are the two types of experience rating methods?
- Retrospective Experience Rating
- Prospective Experience Rating
What is the initial cost to the employer in Retrospective Experience Rating?
Premium is the initial cost to the employer
When does Retrospective Experience Rating take place?
At the end of the coverage period
In terms of underwriting profit, what does it mean to have a positive balance?
- It means you have a favorable loss experience
- Can give a refund
- carry forward to a future year (interest)
In terms of underwriting profit, what does it mean to have a negative balance (deficit)?
- Either has to be paid immediately
- Make it up from a previous surplus
- Carry forward (charge interest)
What is the cost of risk for the year 2014 if the employer has a guaranteed cost arrangement?
Premium paid for year 2014
What is the cost of risk for the year 2014 if the employer is totally and completely self-insured?
Cost of claims and administrative costs
What is the cost of risk for the year 2014 under Retrospective Experience Rating?
- Premium for 2014 adjusted for the end of the year balance
- Lower cost of risk if positive
- Higher cost of risk if negative
What is a credibility factor?
Assigning a "weight" to the loss experience of a particular group or employer
What law is the credibility factor based on?
Law of large numbers
Who is like to be fully credible?
- Larger employers (1,000+ lives)
- Lots of past information
Who is likely to be not credible at all?
- Smaller employers
- New account
- No experience rating
How do you calculate the claims for experience rating purposes?
Employers own loss experience X credibility factor + Expected loss experience as reflected by the manual rate X (1-credibility factor)
When does the Prospective Experience Rating take place?
At the rate renewal process
What could could influence or change the rate from year to year?
- Health care cost inflation
- Significant changes in employee demographics (turnover)
- Changes in plan design from one year to next that are significant
How predictable/credible is an employer that is using an alternative funding arrangement?
- Fully credible
- Very predictable losses (Insurer's take advantage of predictable losses and cash flow or time value of money)
What is a minimum premium arrangement?
An example of an alternative funding arrangement
What is an example of a minimum premium arrangement?
- Employer has a large medical plan and expected total claims equals $2 million per year
- Employer is 100% credible
- Premium = exp. loss (at least $2 million) + adm. costs + risk charge
- Employer will self fund up to $2 million ("large deductible plan")
- Risk is if claims exceed $2 million
- Employer buy insurance for claims more than $2 million by a significant amount
- Insurer provides catastrophic coverage and claims management services for ALL claims
- Employer funds an account for the first $2 million and the insurer pays claims from that account
- Premium is substantially reduced because of the big deductible
- Premium taxes are also reduced
- Potential cash flow advantage as well
What is the importance of communication?
- To improve/enhance employee satisfaction with their benefits
- Enhance the value to employers and employees
- Helps with discrimination testing
What are the required communication activities?
- Under ERISA, firms must provide
- -Summary of Plan Description (SPD)
- -Summary of Material Modifications (SMM)
- Under ACA, employers must provide
- -Summary of Benefits and Coverage (SBC)
What are some possible communication options?
- Electronic Communication
- Face to face meetings
- -New employee orientations
- Benefits news letters
- Personalized Benefit Statements (expensive)
What are the four types of Administrative activities?
- Enrollment Activities
- -Open Enrollment
- -Premium collection
- -Insurance ID cards
- Claims Handling
- Communication Activities
- -e.g. discrimination testing (HIPAA, COBRA, ACA)
What is In-House Administration?
When the employer (e.g. Comcast) handles not all, but most of their own administrative activities
What is outsourcing?
Obtaining help (goods/services) from offshore companies in order to lower operational costs and improve efficiency
Who can outsource?
- Could be an insurer --> as a part of providing coverage
- Non-insurance firms
- Insurance brokers (e.g. Brown & Brown, Trion, Conner Strong)
- Consultants (e.g. Towers Watson, Mercer, Aon Hewitt)
What is similar between Administrative Services Only (ASO) and Third Party Administrators (TPA) and what is different?
- Someone else is doing administrative services is what they have in common
- If it is a consulting company, then TPA
- If it is insurer, then ASO (no risk bearing and more health related)
What type of experience rating is it when the current (2014) loss experience influences future (2015) cost of risk?
Prospective Experience Rating
What type of experience rating is it when the current (2014) loss experience influences current (2014) cost of risk?
Retrospective Experience Rating
What would you like to do?
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