6
Benefits
What Makes a Benefits Package Competitive?

THE PATIENT PROTECTION AND AFFORDABLE CARE ACT (PPACA), signed into law on March 23, 2010, created a seismic shift in the employee benefits landscape. Deciding on an employee benefits package had already been an intimidating process for any employer. The mind-boggling array of choices—HMO, PPO, LTD, EAP—identified by an array of confusing acronyms combined with mounting costs and the demands of offering a competitive program have been taken up another notch with the addition of federal legislation and the fact that the law is still in flux.

Without minimizing the difficulty of wading through the options and requirements, we can tell you that it is possible to make intelligent and informed decisions that will help you to attract, retain, and improve the effectiveness of employees. This chapter covers the elements of an effective benefits process and explains ways to develop a comprehensive program that works for your organization.

“What are employee benefits?”

Employee benefits are all benefits and services, other than wages, provided to employees by the employer. These include legally required social insurance programs, health and life insurance coverage, retirement plans, payment for time not worked, subsidized assistance, and any other program an organization may offer to help its workers.

“Where do I begin?”

Begin by articulating your organization’s benefits philosophy, similarly to how you developed a compensation philosophy as discussed in Chapter 5. Using your benefits philosophy as a guidepost will enable you to make decisions that will fit your company’s culture and overall business plan. Start by answering these questions:

• What level of benefits can you afford?

• What will you expect employees to contribute toward the costs?

• How do you want your benefits to stack up against those offered by companies that compete for your employees?

• Will your benefits reward longevity and encourage retention or focus on short-term expectations?

• How will your benefits match the demographics of your workforce?

• Is it important for your organization to have benefits that encourage professional and/or personal growth?

• Are there specific or special benefits that you must offer because of senior management needs or the nature of your workforce?

• How do your plans, now and in the future, meet potential PPACA requirements?

“What do employees look for in benefits?”

It depends on the age and family status of the employee. While a worker with health problems or with a family might place health insurance at the top of the list, a young or single employee may be more interested in the amount of vacation available. If you do not already know what your employees value, ask them!

LEGALLY REQUIRED INSURANCE PROGRAMS

“Are there minimum benefits I have to provide?”

Yes, you are required by federal law to provide Social Security contributions, unemployment insurance, and workers compensation coverage. Employers in California, Hawaii, New Jersey, New York, Puerto Rico, and Rhode Island must provide short-term disability (STD) coverage that replaces an identified minimum income in the event of a non-work-related injury or illness. In Hawaii, most employers are also required to provide a specified level of health care coverage to employees.

“Doesn’t PPACA mandate employer-provided health benefits?”

PPACA does not require employers to offer health coverage, but beginning January 1, 2014, employers will be subject to “pay or play” and affordability penalties designed to encourage expansion of coverage. The smallest companies will not be affected by this “employer responsibility,” which covers only those with an average of fifty or more full-time employees.

The potential penalty calculations are quite complicated and include consequences for both employers that do not offer health benefits and those who offer benefits considered unaffordable. The legislation assumes that by January 1, 2012, there will be Health Benefit Exchanges and Small Business Health Options Programs in place to make affordable coverage available to individuals and small businesses. The core components of the new law are presently under legal challenges that could result in further changes to PPACA.

An introduction to PPACA health plan regulations is included in the health insurance section of this chapter. In addition to these plan details, PPACA includes some programs to assist employers in providing coverage and adhering to other rules, such as:

• Small-business tax credits available through 2014

• Break time to be offered to nursing mothers

• An independent appeals process for participants of plan decisions

• Grants for small employer (up to one hundred employees) wellness programs

• Simplified cafeteria plans to allow tax advantages to small employers.

• Excise tax on high-cost plans

Many of the components of PPACA include definitions and regulations yet to be issued or clarified by the Department of Health and Human Services, Internal Revenue Service, and/or Department of Labor. Even as of this writing, some definitions have been issued while other effective dates have been delayed as the legal challenges continue.

Social Security Benefits

All nongovernment employers must contribute a designated percentage of each employee’s pay toward Social Security, up to a maximum amount determined periodically by the federal government. You are obligated to make Social Security payments whether a worker is full- or part-time, temporary or newly hired—although there are some very limited exemptions, such as foreign students working temporarily in the United States. While employees pay a percentage of their wages for Social Security, many do not realize this is also an employer-paid benefit. Let your employees know that you are making this contribution as part of their total benefits package. The Social Security Administration can provide a wealth of additional information to both employers and employees.

Unemployment Insurance

Unemployment insurance was established by the federal government to provide individuals who are out of work through no fault of their own with temporary cash assistance to help tide them over while they actively look for work. Each state administers its own program under the federal guidelines. Employers are required to contribute a percentage of their payroll toward federal taxes under the Federal Unemployment Tax Act (FUTA) and toward state unemployment taxes. Your contribution rate will vary based on your claims experience—that is, the historical record of unemployment benefits charged.

Your state will determine both the size of the employer contribution and the duration and amount of the benefit paid to the employee. Employee benefits are generally based on a percentage of the employee’s previous earnings, up to a state maximum. States will set payments for new employers at the industry average, an assigned rate, or the state average. Each state has its own timetables for reviewing unemployment claims experience and adjusting rates.

Employees who are terminated or laid off for a reason other than misconduct are typically entitled to unemployment benefits if they have worked for a minimum period designated by the state. Workers subjected to temporary layoffs or reductions in hours may also be eligible for payouts. While employees who voluntarily resign usually cannot collect benefits, some states make exceptions for people who leave their jobs under extenuating circumstances, such as to relocate to care for a sick family member. When you receive any requests for information from your local unemployment office, it is important that you respond in a timely manner, because you can incur considerable fines for missed deadlines.

You can reduce your unemployment tax rate by contesting appropriate claims and monitoring terminations. There are service providers, often affiliated with payroll service companies, that work with employers at reasonable cost to respond to unemployment claims and reduce or stabilize contribution rates. When selecting a provider, the size of the organization is less important than its unemployment claims processing knowledge and experience with the systems and procedures of your local unemployment offices.

Workers Compensation

“Why do I have to worry about workers compensation since no one gets hurt in an office?”

Workers compensation is a state-governed benefits scheme that requires employers to pay medical bills and partial lost wages that result from work-related injuries and illnesses. It is also a no-fault system that quantifies the extent of any permanent partial disability resulting from an injury or illness and provides monetary payments to the employee proportionate to the disability. Some employers purchase private workers compensation insurance, while others self-fund—meaning they pay their own claims. Self-insurance arrangements are typically administered by insurance companies or other third parties. Twenty states have their own workers compensation funds, to which some states mandate employer contributions. The cost of workers compensation insurance is based on the risk level of the industry and the claims history of the employer.

Too many employers accept high workers compensation premiums as a necessary evil, rather than working actively to monitor claims and rein in costs. You can dramatically reduce the risk of employee exposure to injury or illness through an active safety program. Work-related injuries are not confined to traditional manufacturing environments. Workers compensation costs have skyrocketed in all industries because of increased medical costs and rising claims connected with stress-related illnesses, repetitive motion injuries, and back problems. Work with your workers compensation carrier or state fund to identify potential hazards in your workplace, then take action and provide training to reduce these risks. Also, work with your carrier to reduce costs by actively reviewing claims. Ask your carrier to explain the way it processes claims and charges reserves and expenses. Find out if your state laws permit you to request second opinions for medical care or to designate a provider or network of doctors for covered injuries and illnesses. These methods will allow you to obtain more information about the course of treatment and avoid or contest spurious claims.

Keep in touch with your employees when they are out of work because of work-related injuries or illnesses. Regular contact will maintain their connection with the workplace, show that you care, and speed their return to work. Many employers make efforts to get employees back to work as soon as possible, even if they cannot yet return to their regular jobs. Providing employees with “light duty,” “restricted duty,” or “transitional duty” assignments can be very cost-effective. You will save on lost wage payments and aid workers in a rapid transition back to their regular jobs.

“Do I need a broker?”

Most employers purchase insurance benefits coverage and retirement plan services through a broker. Brokers can offer a good perspective on the range of plans available and help you choose appropriate options for your company. If you do not have your own internal benefits staff, a broker can provide much-needed assistance as a liaison with your carriers and keep you up to date on legislative requirements. You probably already use a broker for other types of business insurance; this person or company may or may not be appropriate for your benefits needs. Benefits brokers earn commissions from the benefit carriers and may charge additional fees for some services. A good broker will design programs to meet client needs regardless of commission structure.

Take the time to interview a number of brokers, asking them specifically about their experience in the applicable benefits area. Obtain competitive proposals to learn more about available options and select the best broker for your needs.

BENEFITS THAT PROVIDE ECONOMIC SECURITY

Economic security benefits provide payments to employees and/or their families in the event that the employee dies or otherwise becomes unable to work.

Group Life Insurance

Life insurance is relatively inexpensive, but it offers employees and their loved ones a great deal of security. If an employee dies, the group policy pays a flat dollar amount to a designated beneficiary. The amount of the payment can be tied to the employee’s position, annual salary, or a multiple of the annual salary, with a cap or maximum payout. Your premiums will be calculated based on the total dollar amount of coverage, the ages of your individual participants, or a rate determined from a census of the entire group. Unlike individual life insurance policies, most group plans require minimal or no prescreening to identify high-risk medical conditions. If your plan has prescreening requirements or limitations on benefits payouts, communicate these factors to your workforce.

“Do I have to worry about taxes and discrimination when I provide group term life insurance?”

If you pay for more than a specified amount of life insurance for employees, the IRS considers the value of the extra coverage to be a taxable benefit. Your accountant or payroll provider can perform this calculation. Ask also about rules to ensure that employers do not limit life insurance benefits to older, more highly compensated employees.

“What about the employee who wants more life insurance?”

Supplemental or optional life insurance is a popular voluntary benefit, providing employees a convenient way to purchase additional coverage at their own expense. Coverage is usually available in multiples of the employee’s salary, up to a maximum amount. Employees may also be able to purchase limited life insurance coverage for a spouse or child. Individuals wishing to purchase supplemental benefits may be required to submit medical evidence of insurability, especially for higher levels of coverage. Your administrative responsibilities regarding supplemental policies will be the same as those for your regular group plan.

AD&D Coverage

Group life insurance is often coupled with accidental death and dismemberment (AD&D) coverage that pays an additional benefit after an accidental death or the loss of a limb or eyesight. AD&D benefits are less expensive than life insurance, but they are not a substitute for basic life insurance benefits.

When problems arise under life or AD&D policies, more often than not they involve disputes as to the proper beneficiary. To avoid potential headaches, maintain up-to-date, signed records of employee beneficiary designations. It is good practice to ask employees to complete new beneficiary forms on a regular basis, perhaps annually or during open enrollment, and to replace the old forms with the new ones in your files. If you have employees who are out on disability leave, your insurer will probably waive life or AD&D premiums during the disability period, but will only continue coverage if you provide notice of the employees’ extended absence. Consult with your insurance carrier to determine whether state laws require you to offer terminated employees the opportunity to convert their group coverage into individual policies.

Disability Insurance

“Should I consider a disability plan?”

Employees up to age sixty-five are statistically more likely to lose income because of extended absences. Short-term disability (STD) and long-term disability (LTD) insurance pay covered employees a percentage of their earnings when they are unable to work because of an illness or injury.

STD plans pay a percentage of the employee’s weekly earnings for a fixed period of up to twelve months. The average policy limits coverage to six months. Employees are usually required to satisfy a brief waiting period before payments begin. Average payments range from 50 percent to 67 percent of earnings; more generous benefits could create an incentive for the employee to stay out of work. Your STD policy should clearly define the word disability, meet applicable state requirements, and cover disabilities arising from pregnancy in the same way as other disabilities.

LTD coverage replaces a percentage of income in more extreme situations, when the employee is unable to work for extended periods. When you offer STD coverage, LTD will kick in after STD insurance runs out. Where there is no prior STD coverage, waiting periods for LTD can range from three to twelve months, or longer in situations involving preexisting conditions. Benefits are usually set at about 60 percent of the employee’s base salary, with a plan maximum, either for a specified number of months or until the employee turns age sixty-five or seventy. The definition of a disability under LTD plans is generally more stringent than under STD plans. An LTD policy may limit benefits to people unable to perform any type of work at all.

Rates for both STD and LTD policies are based on your claims experience, but some companies choose to fund their own STD plans. Many organizations share the plan cost by requiring an employee contribution. You can help to control costs by requiring employees to use accrued sick and vacation time before receiving disability benefits and by reducing disability payments by amounts that the employee receives from Social Security or other sources. You can also contain expenses through an active return-to-work program, similar to the “light duty” plans described previously in the workers compensation section.

Alternatively, consider offering voluntary LTD plans, through which employees have the opportunity to purchase individual policies at attractive group rates through payroll deductions. Voluntary plans provide easy access to LTD for employees and portability if they leave the company. On the downside, these programs usually require a minimum percentage of employee participation, which can be difficult to reach and maintain. If you offer voluntary LTD benefits, you will have to continually communicate the benefits to employees if you expect them to participate.

“Who’s going to pay for the nursing home?”

With the aging of the employee population and the availability of life-extending treatments and new options for care, long-term care (LTC) insurance has received increased publicity. LTC insurance is designed to cover the costs of care in nursing homes, assisted-living facilities, adult day care, or someone’s own home. LTC is typically offered as a voluntary benefit, with employees paying all premiums. It is relatively expensive and complex and therefore requires very good communication in order to be successful and reach typical participation rates of 6 percent to 15 percent. While LTC options are more prevalent at large employers, increased awareness and the availability of a variety of policies make it a benefit worth exploring for employers of all sizes. PPACA includes the Community Living Assistance Services and Support Act (CLASS), which establishes a federally administered voluntary long-term care plan that can be paid for through payroll deduction.

BENEFIT DAYS: HOLIDAYS, VACATION, AND SICK DAYS

“I know Scrooge gave Bob Cratchit Christmas off, but do I have to?”

Ebenezer Scrooge did not have to give Christmas Day off in London in the 1800s, and if you are a private employer, you are not legally required to recognize holidays, personal days, or vacation time. But you will likely find yourself with an unfortunate recruitment and retention problem if you do not offer some type of time-off arrangement. Return to your benefits philosophy and once again use it as a guidepost when devising a policy on benefit days that works for your organization.

Holidays

While public employers are required to give workers certain holidays off, private employers can devise their own holiday schedules. Your schedule will likely be influenced by your business cycle, industry standards, and practices in your geographic area. Start by deciding how many annual holidays you want to offer employees. Some employers set a fixed list of days on which their facilities will close, or they issue a new holiday schedule each year. Or you may opt for a shorter fixed list and set aside a given number of days as “floating” holidays that workers may use as desired. Floating holidays are an easy way to accommodate diverse religious and cultural observances. Some of the other questions to consider are:

• Will I pay a premium to employees who work on designated holidays?

• What alternative day will I give when the holiday falls on a non-working day?

• Are new employees eligible for paid holidays immediately, or will there be a waiting period?

• Will I offer part-time employees full or prorated holiday benefits?

Vacation Days

Employers typically encourage, or even require, employees to take vacation. Studies show that employees return from vacations rested, recharged, and ready to work. The two most important factors in a vacation policy are how much paid vacation time you will give employees and how the days are earned. You may elect to give all employees the same amount of vacation, to provide different benefits to exempt and nonexempt workers, or to offer more time to officers and executives. Most organizations provide increased vacation benefits as an employee’s seniority grows.

You set the standard by which employees earn, or accrue, vacation time. If your policy allows twelve paid vacation days per year, you might decide that workers will earn one day per month. You may also set a waiting period, or a certain amount of time that employees must work for your company before they can earn or take vacation. You are permitted to place restrictions on employee use of vacation time. You can require advance notice for vacation scheduling or “blackout” dates during which employees cannot take vacation because of high business demand. You can set rules as to whether vacation can be taken in single days as well as multiple-day blocks. You may limit the number of unused vacation days an employee can carry over to the next year.

Most problems with vacation policies arise when an employee leaves the company and there is a dispute over the amount of accrued, unused vacation time that the employer must pay. Some states require payouts of unused days while others allow an employer to determine a policy. To avoid misunderstandings, prepare and communicate a written vacation policy that clearly explains the rules, especially concerning eligibility, accrual, and carryover limitations, and utilize an accurate tracking system.

Sick Days

With the exception of time off for work-related injuries or illnesses and STD as described above, there is no federal requirement to provide paid sick days to employees. But a handful of municipalities and at least one state have passed laws that mandate some form of paid sick days, and a growing number of legislative initiatives have the potential to gain passage in other locations. Where not required, the concepts and considerations for establishing sick days are similar to those for paid vacation: You determine eligibility, accrual rate, and whether you will allow carryover. Some employers allow workers to take sick time in partial-day increments to cover doctor’s appointments and medical tests. Many employers are reluctant to give employees sick days because they believe they will take the time off whether or not they are sick. You can minimize the potential for misuse by paying workers for unused days at the end of a calendar quarter or year. Some companies retain unused sick days in a bank of “hospital days,” to provide paid days for hospital stays or other disability situations.

“Is it better just to switch to a paid time-off policy?”

Many employers have moved away from separating sick, vacation, personal, and floating holiday time and are instead substituting a single bank of days called “paid time off” (PTO). Under the PTO concept, a business gives employees a specified number of paid days or hours to use however they wish, as long as they provide sufficient notice for planned absences. With PTO, employers no longer have to wonder if that employee who called in sick is really going to a weekday theater matinee. The reasons for absences do not matter.

PTO can discourage absenteeism. Instead of employees feeling that they have to use sick days or lose them, they can accumulate days to use for vacation or other pursuits. The system creates equity between those employees who traditionally use all their sick time and those who rarely use it. PTO also simplifies administrative record keeping, eliminating the need to track reasons for absences.

When creating a PTO policy, consider what types of absences you will include in your PTO bank, how many days off you will make available, whether you will differentiate between levels of employees or between full- and part-time workers, how time will accrue, what notice expectations are for scheduled leave requests, and whether you will allow carryover or will pay out unused days at the end of the year. You will also need to determine how PTO will interact with other paid and unpaid leave, such as disability and leave without pay under the Family and Medical Leave Act (FMLA). Since PTO does not distinguish between vacation time and other types of leave, depending on your state termination laws, you may be required to pay employees for earned, unused PTO at the time of termination. If you are shifting from a traditional days off program to PTO, develop a transition plan regarding unused days under the old system. It may take some initial effort to explain and sell the change to your employees, but most employees ultimately prefer the added flexibility of PTO.

HEALTH INSURANCE

Health care will undoubtedly be your largest employee benefit expenditure, and costs continue to rise at a staggering pace. Aging baby boomers, soaring prescription drug use, sophisticated and costly medical procedures, and fraud are key contributors to a cost structure that seems out of control. According to a 2010 study conducted by the Kaiser Family Foundation and Health Research & Educational Trust, between 2000 and 2010 the average annual health insurance premiums in employer-sponsored plans for family coverage rose from $6,438 to $13,770. During this same period the average employee contribution toward this premium has grown dramatically, but employers pay more than 70 percent of the total cost. While it is easy to fixate on health insurance costs, it is critical to remember that health benefits are a key tool for recruitment and retention. You will want to take the time to find a plan that both fits within your budget and meets employee needs. There are numerous types of plans available from a variety of sources. The key to finding a program that will work for your organization is understanding your real needs and shopping smartly.

“Are there legal requirements for offering health benefits?”

Once you provide benefits, your plan will be subject to state insurance regulations. Many states have specific laws ranging from maximum copays for prescription drugs to parity for mental health coverage to minimum hospital stays after childbirth. If you have operations in several states, you can vary your coverage by state. In addition, all group health plans are covered by the federal Women’s Health and Cancer Rights Act of 1998, which provides mandatory coverage for women who choose to have breast reconstruction connected with a mastectomy.

PPACA requires a series of changes that are to be phased in over a number of years beginning in 2010:

• Extension of coverage eligibility to dependent children up to age twenty-six

• Elimination of lifetime coverage limits and regulation of annual limits

• Prohibitions on rescission of coverage

• Ban on preexisting condition exclusions for children and later for adults

• Coverage of preventive services

• Parity in emergency room copayments for in-network and out-of-network service

• Primary care designation available for ob-gyn and pediatricians

• Auto enrollment into health plans for large employers

• W-2 reporting of the value of health coverage

• Requirement that employers provide uniform, clearly written summaries of health coverage

• Limitations on waiting periods for coverage to ninety days or less

• Coverage for routine costs for clinical trials

• Enhancement of rewards that can be offered for participation in wellness programs

Your best approach to become and remain knowledgeable and compliant regarding PPACA is to keep up to date on changes and implementation, with the realization that a great deal can change or will be undefined for some time. Your broker or carrier and employer associations will be good sources of information.

“Where do I begin looking for a health care plan?”

You may want to start with a broker. A broker will be able to present you with a range of options, provide clout when dealing with a larger insurance carrier, and give you leverage with claims issues once you sign on with a provider. Or you may want to contact carriers directly. Some insurance providers, particularly local managed care programs, prefer to avoid paying brokers’ commissions and work with the employer. Alternatively, many small employers purchase coverage at attractive prices through trade associations, chambers of commerce, or state-supported plans, and they may have the option of the exchanges when they are made available. Your state department of health can help you identify state resources.

“What factors will influence the cost of the plan?”

Your coverage costs will generally depend on the number of covered employees, whether they elect single or family coverage, and the level of benefits selected. Insurance companies will set their rates based on community ratings (i.e., the claims experience of a specific group or geographic area), or the organization’s individual claims experience, or a blended rate. A community rating that spreads the risk will usually provide savings for small employers. If your employee population is young and healthy and does not incur large claims, an experience rating could work in your favor. You do not have a choice on how a particular plan is rated, but the rating could be one factor in your decision among providers. The higher the level of benefit, the more your plan will cost. Including a prescription plan, coverage for in vitro fertilization, and vision care will all add cost. If you join a group plan through your chamber of commerce or industry association, you will have a smaller range of benefit-level choices than if you establish your own company plan.

You can fully insure or self-insure your plan. Under a fully insured plan, you pay premiums to the insurance company that covers all expenses incurred by the group. Your carrier adjusts your premiums annually, depending on the claims experience of the group. Under a self-insured plan, you pay all the costs of health care and an administration fee, and purchase stop-loss insurance to cover very large claims. Self-funding your plan may save you money and, depending on the laws of your state, may exempt your plan from certain insurance requirements, but the approach also involves more risk. Larger companies are more likely to self-insure, and cover the potential of the largest claims with stop-loss insurance, because they are better able to absorb the risk. Other funding options may be available. Make sure you understand the specifics of your costs and potential risks.

“What type of health plan do I choose?”

Before making a decision, understand the different types of plans available.

Indemnity Plans. Thirty years ago, most employees with employer-sponsored health benefits went to the doctor, paid the bill, and then brought the receipt with a claim form to someone at work, who checked to make sure that all of the boxes were filled. The employer then sent the paperwork to an insurance company, which sent a check to the employee a few weeks later covering a percentage of the cost, typically 80 percent. There were low—or no—deductibles, and employees did not contribute toward the cost of this coverage. Employees visited any doctor they wanted and made their own decisions about when to visit a specialist.

This traditional indemnity plan sounds like science fiction today. Over the years, both insurance carriers and employers have made major changes to control costs. Some changes were administrative; employees now send claims directly to insurance companies for processing. Others affected the delivery of care, such as requiring precertification before all nonemergency surgery and medical management for chronic illness. Employees assumed increased deductibles and copayments, with caps on maximum insurance payouts. Insurers began to limit reimbursements to a percentage of “usual and customary rates” to discourage the use of high-fee providers. Yet all these changes failed to reduce the annual double-digit percentage increases in employer costs. Indemnity plans are in limited use today; most employers choose alternative arrangements.

Health Maintenance Organizations (HMOs). The HMO model is designed to cover a wide range of care and minimize out-of-pocket expenses by requiring that participants use specified providers for all medical services. An HMO may operate in a clinic-like setting, where all the providers are HMO employees, or it may provide participants with a list of providers in multiple locations that have contracted with the HMO to provide care at set rates. Under most HMO systems, a patient needs a referral from the primary care physician before seeing a specialist, hospital stays must be preapproved and are limited to in-network hospitals, and prescriptions are filled at designated pharmacies for preferred medications. The payout cap is usually high, with low employee copayment levels. These tight restrictions help to control and predict health care costs, but they severely limit options, especially for higher-paid employees who traditionally prefer to choose their own doctors.

Preferred Provider Organizations (PPOs). The PPO combines the HMO model with the features of an indemnity system to provide more options for employers and employees alike. Under a PPO, participants can either seek care from doctors in the PPO network or choose their own out-of-network care providers. To encourage use of in-network services, PPOs will typically require employees to pay a large deductible and make significantly higher copayments for out-of-network services. PPO plans cost more than HMOs, but they can be attractive for a diverse workforce, offering a range of benefit levels and provider options and allowing employees to set their priorities. Another variant of a PPO is a point of service plan (POS), which provides in-network discounts only if all services are directed in-network. For example, if a participant chooses an out-of-network provider, even if that provider directs him to an in-network hospital, he will not be eligible for in-network discounts.

High-Deductible Health Plans. High-deductible health plans (HDHP), the newest options designed to control ever-rising costs, have significantly expanded the alphabet soup of insurance approaches. Also termed consumer-directed or consumer-driven health plans (CDHP), these options combine higher annual deductibles with tax-advantaged savings, called health savings accounts (HSAs), that employees can use to pay for covered expenses and save for future medical expenditures. HDHPs create an incentive for better-informed decisions and cost consciousness when participants pay expenses from an account they control with the potential for rollover of unspent money into funds that can accumulate for future use.

There are three key features of HDHPs paired with HSAs:

1. The health benefit plan must have a minimum annual deductible at or above the annual rate set by the IRS; $1,200 for an individual and $2,400 for a family in 2011.

2. Each eligible participating employee has an HSA account set up with a trustee, typically a bank or insurance company, into which an annual maximum amount can be contributed as designated annually by the IRS. For 2011 HSA account maximums are $3,050 for an individual and $6,150 for family coverage. These can be interest-bearing accounts.

3. The IRS sets an annual limit, indexed each year, on out-of-pocket expenses that employees are responsible for, after which plans generally pay 100 percent of expenses. For 2011 the maximum annual combination of deductible and other out-of-pocket expenses for HDHPs is $5,950 for self-only coverage and $11,900 for family coverage.

Contributions into an HSA can be made by the employee, employers, or both, using a variety of formulas. Participants can use the accounts to pay for covered expenses or pay with out-of-pocket dollars and choose to allow the HSA to grow. Employees cannot make contributions into an HSA if they are enrolled in any other health coverage, including Medicare, that is not an HDHP. When spouses are enrolled in separate HDHPs with an HSA, the deposits in both accounts combined cannot exceed the annual family limit. HSAs create tax advantages for employers and employees. Much like 401(k) accounts, HSA balances roll over into subsequent years and are portable when an employee changes jobs or retires.

High-deductible health plans may also be paired with health reimbursement accounts (HRAs).These tax-sheltered accounts are funded only by an employer. Employers have significant flexibility in plan design and funding with an HRA. HRAs can allow rollovers and use in retirement but are not required to do so since they are employer-owned accounts.

HDHPs require extra attention to education and communications that must be tailored to the employee population. Additional time spent will translate into better benefits plan usage and employee satisfaction.

“Should I offer dental and vision care benefits?”

More employers than ever are offering dental benefits. Dental costs have remained relatively stable and insurance is widely available through indemnity coverage, PPOs, dental maintenance organizations, and national plans. Make sure that any network plan you are considering offers a good selection of dentists in your area. Dental plans are typically weighted toward preventive care and limit annual per-person reimbursements to about $1,000 or $1,500.While coverage for orthodontics is popular, you can limit eligibility to employees or children, or mandate the use of in-network providers to control costs. You can position your dental plan as a benefit separate from the medical plan, allowing employees to choose whether they want to elect coverage under medical, dental, or both.

Vision care is another popular health benefit offered through many HMOs, some PPOs, and a few national companies that maintain extensive networks of providers for eye exams, glasses, and contact lenses at either fixed or discounted rates. While these plans are easy to administer and do not cost much, many companies offer vision care as an optional benefit, with employees paying all or part of the cost. Those that choose the benefit are more likely to take advantage of the coverage. National retail eye care chains also promote employer discount plans, so you can offer discounts to your employees without providing a vision benefit plan.

“Our city government provides insurance coverage for domestic partners. Do I have to?”

No. Private employers that offer domestic partner coverage do so not for legal reasons, but for philosophical or competitive ones. Domestic partner provisions can cover same-sex and heterosexual partners and can require some form of recognized registration or proof of an ongoing relationship. Numerous studies have shown that the inclusion of domestic partner benefits has not caused cost increases.

“How do I make my final decision?”

Your decision will be based on a number of factors. There are your employee needs based on age, family, and income demographics. There are competitive needs, driven by the types of packages your industry and local competitors offer. Too many small companies design their plans around the needs of an owner or senior manager, which results in a higher-cost plan with fewer employee options. If the boss wants a plan that covers 100 percent of his Freudian analysis, look into purchasing an executive benefit plan. Executive plans can save money over providing costly benefits to an entire group, but some may create future violations of PPACA. Check the most recent regulations before instituting or modifying such a plan.

In addition to looking at the cost and benefit levels of specific plans, ask what services are included. Are there online solutions for billing and enrollment questions? Do customer service representatives speak languages other than English? Who will handle company questions and concerns? Can employees make benefit or enrollment changes on the telephone or online? One important measure of service is whether the carrier has a claims committee to objectively review denied claims. Finally, check the carrier’s financial stability through a private, state, or local rating service.

You do not have to offer only one health plan option for employees. Offering differing plans, perhaps an HMO alongside a PPO, can meet different needs and potentially save costs over the long term.

“My insurance company is raising my rates. Should I change carriers?”

Not necessarily. Annual changes in health benefits carriers, levels of coverage, or employee contributions are quite common, but do not make this decision casually. When you change HMOs or other network plans, your employees may have to change most or all of their doctors. While you should not hesitate to change your plan if you and your employees are getting bad service, if your motivation is cost, first look at what you can do within your current plan to control your costs.

If your current copayment level for office visits is low, consider raising it. Higher copays reduce costs, give employees a greater understanding of the cost of care, and provide an incentive to limit doctor visits. You can also increase employee copayments for prescription medicine or offer preferential reimbursements for generic drugs. Many plans now include a list of generic prescriptions that are provided without any copayment at all. You may need to raise the rate of employee contribution. Employers generally require employees to pay from 20 percent to 40 percent of employer premium plan costs through payroll deductions. Many small employers pay for individual coverage but require an employee to pay the entire additional cost for family coverage. Contribution rates can be calculated as a percentage of total cost, a flat dollar amount, or as a percentage of earnings. Some companies steer employees to lower-cost plans by dramatically increasing the employee contribution rates required for the more expensive plans. Also consider reducing or removing certain benefits or increasing the eligibility waiting period for new employees.

Employees are likely to gripe when you ask them to make any extra payments or contributions, so it is important that you explain to them the big picture. They will be less likely to complain about paying $25 for an office visit if they are reminded that your plan will cover many thousands of dollars in expenses should they require major surgery and hospitalization. Single employees who feel that the $80 a month you deduct for coverage is outrageous probably have no idea that you are paying 80 percent of the cost. Preparing and distributing a breakdown of total cost and respective employer and employee contributions will help illustrate the magnitude of the figures involved.

“Is it true that I am obligated to offer insurance to employees after they leave the company?”

Yes, if you have twenty or more employees, you are covered under the terms of the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA). COBRA requirements are discussed in detail in Chapter 9 on termination. COBRA mandates extensive employer notice and record-keeping responsibilities, but you can ease your administrative burden and minimize the risk of costly violations at a reasonable cost by hiring an outside COBRA administrator. The administrator keeps track of sending notification letters, billing former employees, and communicating with benefits carriers. Companies offering COBRA administration services include insurance carriers, payroll companies, and independent service providers. Choose an administrator that meets your communication and record-keeping needs; do not compromise your requirements to fit in with a third party’s system.

“How do medical privacy laws affect our company?”

In 2003, the Department of Health and Human Services finalized new regulations under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), giving patients broad protections over the privacy of their medical records. HIPAA rules are designed to control the use and disclosure of certain defined, protected health information. HIPAA laws are very complex, but in general, since it is the health plan and not the employer that is covered under the HIPAA rules, if you are not in a health care-related business, your most important consideration will be continuing to protect the privacy of employee medical records in your possession. Examine the flow of employee medical information in your organization (i.e., how the company obtains information, how much and what kind of data is normally received, and where the data goes once it’s received). Ask yourself whether the company has a legitimate need for the level of information received and whether there are safeguards in place for preventing improper access to the information. Keep employee medical benefit records confidential and separate from other employment records, and limit access to this data to those employees with a need to know.

“What is a cafeteria plan?”

Cafeteria plans, adopted under Section 125 of the Internal Revenue Code, are also known as Section 125 plans. Without a cafeteria plan, employees make payments toward their benefit plans on an after-tax basis. With a Section 125 plan, employees sign an acknowledgment and their contributions can be made as pretax dollars. A cafeteria plan provides tax benefits for employers as well. Check with an accountant to see whether this is a viable alternative for your company.

“Is a cafeteria plan the same as a flexible spending account?”

No, but a flexible spending account (FSA) is another way to offer employees a potentially valuable tax-exempt arrangement. Under an FSA, employees can set aside pretax dollars, up to a designated maximum, in an account to cover health or dependent care costs. As employees incur eligible costs, they submit proof of payment to the administrator and receive reimbursements from the account. Medical savings accounts reimburse expenses such as insurance deductibles, coinsurance payments, and other health-related payments, identified by the IRS, that are not covered under the regular medical insurance plan. Dependent care accounts reimburse expenses for child and dependent care (including parents) for licensed day care, legal home care, preschools, some camps, and before- and after-school programs. You can establish FSA arrangements internally or through an administrator, with the employer paying the administrative fee for worker accounts.

Employees must elect to fund their FSAs at the beginning of the plan year, and at the end of the year they forfeit any money they do not spend. Therefore, workers should take a conservative approach in estimating their expenses. This is a great benefit for employees who understand how medical and dependent care expenses can add up and are interested in reducing their taxable income.

EMPLOYEE ASSISTANCE PROGRAMS

“What can I expect from an employee assistance program?”

An employee assistance program (EAP) helps employees handle non-work-related problems that can interfere with their performance on the job. The first EAPs targeted alcohol and substance abuse problems, but the plans have subsequently evolved into “broad brush” programs that respond to a wide range of issues, from domestic violence to aging parents. Under an EAP system, employees can confidentially contact a third party for assistance. The EAP will either provide short-term telephone or in-person counseling or refer the employee elsewhere for help.

An EAP can offer employees referrals that the employer would otherwise lack the expertise to provide. A good EAP will also advise an employer and its managers how to identify and properly handle employees who show signs of problems such as domestic violence or alcohol or substance abuse. EAP providers can be large or small, local or national. Select one that matches your style and philosophy, that provides service your employees will find accessible, and that will train your managers to refer appropriate employees to the program.

RETIREMENT BENEFITS

“What is the difference between a pension plan and a 401(k) plan?”

Employer-sponsored retirement plans can be divided into two types: defined benefit and defined contribution plans. Defined benefit plans are the traditional pension plans. Employers make 100 percent of the contributions toward these plans and, upon retirement, employees receive a specific monthly benefit. The benefit can be a flat amount or it may be based on a formula including age, earnings, and years of service. The plan is funded through employer contributions and investment of plan assets. Defined benefit plans are common in the public sector and in large companies, especially those with long-standing union contracts.

Defined contribution plans provide an individual account for each participant, and the value of each account is usually based largely on the dollar amount contributed by the individual, although there will also be investment gains or losses.

Because defined benefit plans are increasingly costly and burdensome to administer and have been the subject of much litigation in recent years, most employers are offering defined contribution plans. There is even a trend among employers who have long offered pension plans to employees to either freeze or terminate those plans in favor of defined contribution plans. The 401(k) plan is the most popular of these vehicles.

401(k) Plans

“What is a 401(k) plan and how do I set one up?”

A 401(k) plan is an employer-sponsored plan that helps workers save money for their retirement. Employees can put an elective amount, usually up to 15 percent of their annual earnings, into a retirement savings account on a pretax basis, up to a maximum set by the IRS each year. Employees age fifty or older may contribute at a higher level. Not all plans require employers to contribute, but most provide that employers either match or contribute a percentage of the employee contribution. All contributions are given to a third-party administrator or plan provider, who invests the funds as the employee directs. If employees withdraw their money before they reach age fifty-nine and a half, they have to pay tax on it, plus a 10 percent fine to the IRS. However, if allowed under the plan, individuals can take loans against their accounts and can always take a hardship withdrawal under specific situations defined by the IRS.

Because they offer many advantages, 401(k) plans are hugely popular. These plans allow employees to manage and check their own accounts, and employees like to be able to make decisions about and watch their investments. They appreciate the convenience of payroll savings, the opportunity to save pretax dollars at much higher levels than IRAs, and, when offered, the “free money” benefit of employer contributions. When employees switch jobs, they can roll over their funds to their new employer’s 401(k) or other qualified retirement plan. A qualified plan is one that meets all the requirements of the IRS for favorable tax status. Employers save money, too, because they can fund contributions with pretax dollars.

Your provider may be an insurance carrier, an investment company, or a third-party administrator. When setting up a new 401(k) plan, do not assume that all plan providers are the same. Administrative services, fees, and investment options vary. In all cases, you will want to investigate and ask the following questions:

• What fees are assessed, and are they charged to the employer or deducted from plan earnings?

• What services does the plan offer, and is there an additional charge for services? For example, you have an obligation to your employees to educate them about your 401(k) offering.

• Will the provider help you educate employees or do you need to offer independent education?

• What material will the provider use to communicate plan details?

• What types of investment options does the provider offer? You have a fiduciary responsibility to provide a variety of investment options, not just your company stock and one or two others. Investments should cover the gamut, from conservative to higher-risk investment choices, and optimally the funds should have offerings spanning a variety of investment management firms. Employers who do not offer a range of investment alternatives risk litigation from employees who are unhappy with the range of options.

• What are the customer service offerings? Can employees contact the provider directly, by phone or over the Internet, to change investment options or ask questions?

• How often can employees change their investments?

• How easy will it be for the employer to change investment options in the event of underperforming funds or new market trends, and what assistance will the provider offer in making recommendations regarding appropriate fund options?

If you are changing 401(k) providers or making fund changes, find out if there will be a blackout period during which participants cannot access their accounts. Also, identify how money will be moved from funds that are no longer offered into new options. Ask for changes that are most favorable to your employees and communicate these details.

When setting up your 401(k) plan, decide which employees are eligible to participate in the plan and whether you will require a waiting period for new employees before they are eligible to contribute. All 401(k) plans are governed by strict ERISA rules (see page 150) designed to ensure that the plan is fair to all employees and that it is not “top-heavy”—that is, it does not favor highly compensated individuals. You must run an annual nondiscrimination test to ensure that lower-level employees as well as key employees are taking advantage of the plan. If the plan does not pass the discrimination test, you must take steps to correct the problem that may include returning plan funds to the highly compensated employees, who will then have to pay income tax on these amounts. Repeated test failures can cause tax implications for all participants. Your plan provider or an accountant can usually perform these tests and will be helpful in suggesting solutions should you run afoul of the top-heavy provisions.

It is advisable to designate an “investment oversight” or “fiduciary” committee within the company to regularly review the performance of the plan, ensure that the plan complies with any new laws and regulations, meet with advisers to determine whether the current plan options are still appropriate, and resolve administrative questions that may come up from time to time. This committee is typically made up of senior finance, HR, and legal executives, and sometimes other members of the management team. Take minutes of all meetings that document important decisions regarding the plan. Demonstrating that the company has acted responsibly in protecting employee contributions will help to limit your liability in the event of a lawsuit.

“What happens to the 401(k) accounts when employees leave?”

The answer depends on the provisions of your plan and the employee’s reason for leaving. There will be options for retirement, rollover, cash distributions, or remaining in a plan as an “inactive participant.” Any money that an employee contributes into any plan is always 100 percent vested. An amount is considered vested if it belongs to the employee today. Subject to legal guidelines, employers may adopt a schedule that allows only a specific percentage of employer contributions to vest each year, so that the employee must work for the company for a determined number of years to be fully vested in the employer portion of the account. In these situations, an employee who leaves the company will be entitled to take away the full employee contribution and the vested percentage of the employer contribution.

Other Retirement Plans

“What are the other types of defined contribution plans?”

SIMPLE Plans. If you are a business with one hundred or fewer employees who each earned at least $5,000 in the previous year, you are eligible to adopt a Savings Incentive Match Plan for Employees of Small Businesses (SIMPLE).Your SIMPLE plan will allow both you and your employees to make pretax contributions under rules that are much less complicated than those for traditional 401(k) plans, with fewer administrative responsibilities and lower plan costs. An accountant, financial adviser, or independent plan administrator can provide you with the most up-to-date rules for SIMPLE plans and help you make decisions about setup and administration.

Profit Sharing. Many companies include some sort of profit sharing as part of their compensation structures, but you can also structure a profit-sharing plan as a defined contribution retirement plan. Employers can contribute a flexible amount based on individual salaries and company earnings. Employees do not make contributions to the plan and they do not receive payouts until they retire or leave the company. Profit-sharing plans can be strong incentives in companies where business fluctuates and participants can see and understand the results of their hard work. These plans are good options for smaller businesses because they allow employers to contribute in profitable years but not in tough times.

Money Purchase Plans. This is the simplest form of defined contribution plan. The employer makes a predetermined annual contribution to the account of each eligible employee, whether or not the company is profitable.

“What about nonqualified plans?”

A nonqualified plan is a retirement or deferred compensation plan that does not meet ERISA and IRS requirements for favorable tax status, but does provide a long-term investment vehicle for senior executives or owners. Nonqualified plans allow highly compensated employees to defer and invest more money than they can under a 401(k), especially those plans that have been determined to be top-heavy. There are numerous forms of nonqualified plans, all of which involve potential risk for both the employee and the employer. Retain a reputable investment adviser to design your plans. Understand and inform participants about how contributions will be invested and the consequences and availability of early withdrawals.

“Do I have any other reporting requirements?”

The Employee Retirement Income Security Act (ERISA) sets out detailed reporting and compliance rules to ensure that employee benefit plans are properly administered, well-funded, and do not favor owners and the highest earners in a company. You are required to complete a Form 5500 for each of your benefits plans at the end of each plan year. If you are offering health plans to employees through a chamber of commerce or trade association, you do not have to submit a Form 5500 for those plans. Form 5500 requests basic information about the number of employees covered and types of coverage. Your benefits carrier, plan administrator, or broker will often complete the forms for you or can send you the forms and filing instructions.

“Haven’t we covered everything?”

While we have described the most common benefits, there are numerous others you may want to offer or consider. Tuition assistance can be a qualified plan or be limited to simple reimbursement for adult education. Employees of retailers and consumer products companies frequently enjoy employee and family discounts. Subsidized or paid meals may be a big benefit for your workforce. Child care referrals, subsidies, or nearby day care providers may enhance your retention. We could continue on and on with the possibilities, but these will be for you to decide, based on your company philosophy. For each benefit, identify who will gain and your goal in implementation. Communicate that the benefit exists and how to use it. You can then measure use and satisfaction and continually develop and maintain a high-quality benefits package that your employees will appreciate and value.