Flexible Benefits Plans
• Group #10
Cecilia Martinez
Melissa Martin
Ravi Arman
Jas Sangha
Why offer Benefits plans?
• Many employers have implemented
flexible benefit plans to respond to their
workers’ deferring needs
• Competitive advantage
• Retain existing staff
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 sponsor’s expenditures for all
employee benefits it is important to
incorporate work and family issues.
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.
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.
Overall Purpose of Flex Benefit
Programs
• Improve compensation effectiveness.
• Increase perceived value.
• Contain costs.
• Manage compensation more effectively.
Flexible Benefits Effects on
Employees
• Participation
• Employee Ownership
• Employee Appreciation
• Budgets
Participation
• All participants must be employees.
• Spouses and beneficiaries may receive
benefits due to employees’ participation.
Employee Ownership
• Basic prerequisite for success.
• Important for employees to feel sense of
ownership.
• Acceptance, understanding, and usage will
be enhanced.
Employee Appreciation
• Plan sponsors feel employees will be more
appreciative if given a choice.
• Employees’ reactions are favorable to flex
benefits programs.
Budgets
• Flex benefits help solve budget problems.
• The plan sponsor can set specific dollar
amounts as the plan credits for a given
year.
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.
The Changing Workforce
• The major reason plan sponsors implement flex
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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.
Present Demographic of Family
Composition in the U.S. Is
• Married-both
US Age Composition of Adult
Population
30
Percent of Adult
Population
spouses work,
45%.
• Single-head of
household-no
dependent,
25%.
• Marriedhusband
works, wife
does not, 20%.
• Single-head of
household-with
dependents,
10%.
25
16-24
25-34
35-44
45-54
55-64
65 & Over
20
15
10
5
0
1950 1970 1990 2000
Year
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
Types of Flexible Benefit Plans
Include:
• Flexible Spending Accounts
• Job Sharing
• Section 125
• Cafeteria Accounts
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.
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.
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 FSA’s may be subject to
federal requirements such as COBRA.
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 FSA’s and DCAP’s fall under
different section of the IRS tax code.
How FSA’s 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 don’t rollover to next year
• Account can ONLY be made within 31 days
of divorce, or the birth of the child
Which Expenses Are Reimbursed
Under FSA?
• Fee’s paid to doctors, dentists, surgeons, chiropractors,
•
•
•
•
•
•
•
•
etc…
Fee’s for hospital services
Acupuncture treatments
Inpatient treatment
Dentures, hearing aids, crutches, wheelchairs
Deductibles
Braces
Prescription drugs
NON-elective cosmetic surgery
What is the Advantage of Before-Tax Dollars?
• Let’s assume you are the sole wage earner
in your family and will earn $25,000 next
year. You expect to spend $2000 for your
child’s orthodontic work. The following
illustrates how a health FSA actually
increases your spendable income. The
table assumes a married filer with 3
dependants.
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
Flex Pricing
• Now let’s look at an actual example of
pricing multiple health plans. We will start
by using three distinct integrated steps in
pricing flexible benefit programs.
• 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Step 3. Continued
• Cost projections and
price tags can be
finalized based on
enrollment results or
feed back from focus
groups and survey’s
show in figure 12.
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.
Three Main Types of Job Share:
• Shared Responsibility
• Divided Responsibility
• Unrelated Responsibility
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
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
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.
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
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.
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
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
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.
Any Questions?