Flexible Benefits Plans

1
Flexible Benefits Plans

• Group 10
• Cecilia Martinez
• Melissa Martin
• Ravi Arman
• Jas Sangha

2
Why offer Benefits plans?

• Many employers have implemented flexible benefit
  plans to respond to their workers deferring
  needs
• Competitive advantage
• Retain existing staff

3
Flexible Benefits

• Central idea is to let employees choose among
  cash or nontaxable benefits provided by their
  employers
• To maximize the cost-effectiveness of the plan
  sponsors expenditures for all employee benefits
  it is important to incorporate work and family
  issues.

4
The Process of Developing a Flexible Benefits
Program

• Examination of all benefits and compensation
  issues.
• Maximizing savings.
• Communicating the program.
• Compliance with regulatory issues.
• Plan implementation must be accompanied by
  administrative system.

5
Developments In The Flex Program

• Flex programs will involve employees in benefit
  costs.
• Optional benefits can create costly adverse
  selection.
• Flexible spending accounts if not designed
  properly can increase costs.
• Redesigning certain programs can create
  significant administrative savings.

6
Overall Purpose of Flex Benefit Programs

• Improve compensation effectiveness.
• Increase perceived value.
• Contain costs.
• Manage compensation more effectively.

7
Flexible Benefits Effects on Employees

• Participation
• Employee Ownership
• Employee Appreciation
• Budgets

8
Participation

• All participants must be employees.
• Spouses and beneficiaries may receive benefits
  due to employees participation.

9
Employee Ownership

• Basic prerequisite for success.
• Important for employees to feel sense of
  ownership.
• Acceptance, understanding, and usage will be
  enhanced.

10
Employee Appreciation

• Plan sponsors feel employees will be more
  appreciative if given a choice.
• Employees reactions are favorable to flex
  benefits programs.

11
Budgets

• Flex benefits help solve budget problems.
• The plan sponsor can set specific dollar amounts
  as the plan credits for a given year.

12
Reasons for Popularity

• Historically, plans have been more uniform, and
  had few choices.
• Radical changes in the work environment have led
  to
• More individualized plans.
• Greater degree of choices.

13
The Changing Workforce

• The major reason plan sponsors implement flex
  programs is to meet the need of the changing
  workforce.
• The need to address the diversity in the
  workforce.
• Family compensation has also dramatically
  changed.
• Rising levels of education also affect the
  motivation for flex programs.
• Plan sponsors face competition for their
  customers and their staff.

14
Present Demographic of Family Composition in the
U.S. Is

• Married-both spouses work, 45.
• Single-head of household-no dependent, 25.
• Married-husband works, wife does not, 20.
• Single-head of household-with dependents, 10.

15
Issues Addressed For Effective Flex Programs

• Issues for both activities and retirees
• Eligibility
• Communication/Education
• Paid time off ( Sick Leave, Holidays, Vacation)
• Define benefits
• Define contribution
• Salary compensation

16
Types of Flexible Benefit Plans Include

• Flexible Spending Accounts
• Job Sharing
• Section 125
• Cafeteria Accounts

17
Flexible Spending Accounts (FSA)

• Generic term for reimbursement accounts.
• Allows employees to be reimbursed on a pretax
  basis for out-of-pocket health care and dependant
  care expenditures.
• Two types of spending accounts
• Health care spending account for your family
  health care costs which are not covered by
  insurance.
• Dependant day care spending account for eligible
  expenses incurred for dependant daycare while you
  are at work.

18
Health FSA

• Allows employees to be reimbursed for eligible
  health care expenses.
• Ex insurance deductibles, co-payments, dental
  work, eye glasses etc.
• Employees elect at the beginning of the plan year
  how much they wish to have withheld on a pre-tax
  basis each pay period.

19
Health FSA Continued

• Amounts set aside which are not used can NOT be
  rolled over.
• City may establish a maximum contribution amount
  to limit risk, since IRS does not provide it.
• Health FSAs may be subject to federal
  requirements such as COBRA.

20
Dependant Care Assistance Plan (DCAP)

• EE reimbursed up to max of 5000 per year.
• EE cannot be reimbursed through a flex plan and
  then claim child-care credit on their tax return.
• Health FSAs and DCAPs fall under different
  section of the IRS tax code.

21
How FSAs Work

• Deduction from paycheck set aside
• When expense incurred file claim for
  reimbursement (tax free)
• Help reduce participants taxes
• Risk incurred if funds not used
• Funds dont rollover to next year
• Account can ONLY be made within 31 days of
  divorce, or the birth of the child

22
Which Expenses Are Reimbursed Under FSA?

• Fees paid to doctors, dentists, surgeons,
  chiropractors, etc
• Fees for hospital services
• Acupuncture treatments
• Inpatient treatment
• Dentures, hearing aids, crutches, wheelchairs
• Deductibles
• Braces
• Prescription drugs
• NON-elective cosmetic surgery

23
What is the Advantage of Before-Tax Dollars?

• Lets assume you are the sole wage earner in your
  family and will earn 25,000 next year. You
  expect to spend 2000 for your childs
  orthodontic work. The following illustrates how
  a health FSA actually increases your spendable
  income. The table assumes a married filer with 3
  dependants.

24
With a Health Care Account Without a Health Care Account
Base Salary 25,000 25,000
Health Care Account 2,000 0
Gross Income 23,000 25,000
Less Federal Income Tax 755 955
Less Social Security Tax 1,760 1,913
Less State Income Tax 510 570
After Tax Income 19,975 21,562
Less Heath Care Expenses Yet to be Paid 0 2,000
Spendable Income 19,975 19,562
25
Flex Pricing

• Now lets look at an actual example of pricing
  multiple health plans. We will start by using
  three distinct integrated steps in pricing
  flexible benefit programs.

26

• Step 1. Project the costs of the current benefit
  programs to the first flex pricing year.
• Step 2. Conduct an analysis of the relative
  actuarial values of the options to be offered in
  the flex program.
• Step 3. Calculate the impact selection will have
  on overall costs, the construction of the plan
  costs, and prices that reflect selection costs.

27
Step 1. Projection of Current Costs.

• The first step is the analysis of costs to the
  flex pricing year.
• By looking at the number of claims submitted per
  employee per month, an analysis can be made.

28
Step 1. Continued

• Graph 4 shows the change in utilization over
  time. The graph shows the number of claims per
  employee over the last 30 months.
• Time series analysis is applied to the 12 month
  rolling average to produce a projection of
  expected future use of the medical program.

29
Step 1. Continued

• Graph 5 shows the impact on price inflation on
  the medical program over time. It represents the
  average size claim pad in a month.
• Graph 6 shows a synthesis of these two
  projections and the overall future costs.

30
Step 2. Relative Values

• The first step is developing a model of employee
  distribution of claims by size.
• Graph 7 shows the distribution of percentage of
  employees with various sizes of claims.

31
Step 2. Continued

• Graph 8 shows the calculation of relative or
  actuarial values. The area under the curve
  represents the plans cost commitment. Until the
  deductible has been satisfied all medical cost
  are the responsibility of the employee.

32
Step 3. Cost Selection

• The final step in the flex pricing process is
  determining the impact of selection of the
  program. The original distribution of claims
  model is used again rebuilding the distribution
  for various segments of the employee population.

33
Step 3. Continued

• Figure 10 represents the distribution of claims
  for an overall population. Rebuilding this graph
  for 10 of the population will cause a shift to
  the left, since this segment of the typical
  employee population has fewer and less severe
  claims then the overall population.

34
Step 3. Continued

• Figure 10 shows the claims for 10 of the
  employee population. Compared to figure 11 which
  has shifted to the right because the least
  healthy 10 tends to have both more claims and
  more severe claims than the overall population.

35
Step 3. Continued

• To analyze the impact of selection on plan costs,
  build a distribution of claims model for the
  healthiest to leas healthy of the employee
  population.
• Then with initial enrollment assumptions you can
  make the determination of over plan costs,
  including the impact f a flexible benefits
  program.

36
Step 3. Continued

• Cost projections and price tags can be finalized
  based on enrollment results or feed back from
  focus groups and surveys show in figure 12.

37
Job Sharing

• Two people share the same position in a company,
  each working part of the week.
• They split the hours, pay, holidays and benefits
  between them according to hours they each work.

38
Three Main Types of Job Share

• Shared Responsibility
• Divided Responsibility
• Unrelated Responsibility

39
Cafeteria Plans

• Is an employee benefit plan that offers employees
  certain choices among IRC Section 125.
• Offers combination of qualify nontaxable benefits
  that include
• Health Insurance, Sickness, Accident Insurance,
  and Long Term Disability

40
Other Types of Flexible Plans

• Medical Savings Account (MSA) is a Tax-exempt
  trusts or accounts allowing individuals to pay
  certain medical expenses that are not reimbursed
  under a health plan with pr-tax contributions
• Health Reimbursement Arrangements (HRAs) is a
  strictly employer funded plan that reimburses
  employees for certain medical expenses incurred
  by the employee and the employees spouse or
  dependent

41
Funding

• Flexible benefit plans can be funded by employer
  employee contributions or both
• The salary reduction that employees agreed to pay
  before taxes is frequently used to fund health
  care and dependent care spending accounts.

42
Impact on Cost

• Flexible benefit plans help reduce their benefit
  costs and their overall expenditures for health
  coverage and other benefit programs
• Under flex plans employees have more control over
  employer contributions

43
Advantages to Flexible Benefit

• Employees can always change their benefits as
  life fluctuates.
• Employees can start to appreciate more their
  benefits and therefore increases or improves
  their morale and productivity.
• Employees can be more involved in controlling or
  balancing their benefit costs
• Flexible compensation plans can be used to
  convert workers income into Tax-Free Employee
  Benefits.

44
Disadvantages to of Flexible Benefit Plans

• Employees might not understand or have a
  difficulty in choosing their needed benefits
• Flexible plans might result in increased
  utilization and Adverse Selection
• Health care spending accounts that provide
  uniform coverage throughout the plan year could
  expose an employer to additional liability
• Greater benefit flexibility can result in a
  greater administrative complexity and costs to
  the company or firm

45
Solutions to Disadvantages

• Careful Planning
• Incorporate a program that will assure basic
  protection and also an effective communication
  program
• Plan features can be added to minimize adverse
  selection
• Define lower annual maximums or limiting midyear
  changes can minimize the exposure of the employer
  liability
• Restriction limit to the amount of flexibility
  benefits can be controlled

46
Problems Facing the Health Care System

• Few employees understand the cost their companies
  spend for health care services
• Plan sponsors and providers have not done a good
  job of educating employees about various health
  care options
• Doctors and hospitals are geared to respond to
  crises with all available resources.

47
(No Transcript)
48
Any Questions?