Learning Objective 3 - Employee Benefits

Question 1

Private exchanges are not bound by the rules that apply to ACA exchanges and can

Answer 1

~be customized to a single large employer

~have special coverages for different classes of employees.

Question 2

% of employee compensation represented by employee beneftis

Answer 2

more than 35%

Question 3

Tax benefits of employee benefits

Answer 3

1. deductibility of the employer’s expenses of managing the plan
2. deductibility of employer contributions to the plan (within limits)
3. tax-free accumulation of assets in certain types of plans (such as retirement plans)

Question 4

Definition of employee benefits

Answer 4

Includes virtually any form of compensation other than direct wages, including:
1. The employer’s share of legally-required payments (such as social security)
2. Payments for time not worked (such as paid sick leave, paid vacations, and holidays)
3. The employer’s share of medical and medically-related payments
4. The employer’s share of retirement and savings plan payments
5. Miscellaneous benefits (such as employee discounts, severance pay, and educational expenditures)
More limited definition - excluded legally-mandated benefits

Question 5

Reasons for growth of employee benefit plans

Answer 5

1. Business reasons - good benefit plans helps the employer attract and retain capable employees, and can improve employee morale and productivity
2. Collective bargaining - the Taft-Hartley Act requires good-faith collective bargaining over conditions of employment (including benefit plans)
3. Favorable tax legislation - many plans are designed to maximize available tax benefits
4. Efficiency of the employee benefits approach - marketing of benefits through the employer is a cost-effective and administratively efficient distribution channel
5. Wage increase limits - wage increase limits during World War II and the Korean Was lead to an expansion of employee benefits as a way in which employers could increase the employees’ total compensation
6. Legislative actions - the government has encouraged employee benefit plans through various legislative actions

Question 6

Characteristics of the group technique of providing employee benefits

Answer 6

1. Only certain groups are eligible - groups formed solely for the purpose of obtaining insurance should not be offered coverage.
2. Steady flow of lives through the group - to maintain a fairly healthy group
3. Minimum number of persons in a group - to prevent less-healthy lives from being a major part of the group
4. A minimum portion of the group must participate - such as 75% of employees must be covered in plans where the employee must pay a portion of the premium
5. Eligibility requirements and waiting periods are imposed
6. Maximum limits for any one person - to prevent the possibility of excessive amounts of coverage for any particular unhealthy individual
7. Automatic determination of benefits - some benefits may be determined based on a formula (such as a multiple of salary) to prevent unhealthy lives from obtaining large benefit amounts
8. A central and efficient administrative agency - to minimize expenses and handle the mechanics of the benefit plan

Question 7

Questions to ask in evaluating employee benefit plans

Answer 7

1. What are the objectives of the employer and employee?
2. What benefits should be provided?
3. Who should be covered under the benefit plan? - retirees, dependents?
4. Should employees have benefit options?
5. How should the benefit plan be financed?
6. How should the benefit plan be administered? - by employer, insurer, or a TPA?
7. How should the plan be communicated?

Question 8

Reasons for using the functional approach for designing and evaluating employee benefits

Answer 8

1. benefits must be organized to be as effective as possible in meeting employee needs
2. avoiding waste in benefits can be an important cost-control measure for employers
3. it is important to analyze where current benefits may overlap and costs may be saved
4. A systematic approach is needed to keep benefits current, cost effective, and in compliance with regulations.
5. A systematic approach is needed to ensure that the various benefits can be integrated with each other

Question 9

Steps in applying the functional approach for employee benefit plan design and evaluation

Answer 9

1. Classify employee and dependent needs or objective into logical functional categories
2. Classify the categories of persons the employer may want or need to protect
3. Analyze current benefits with respect to employee needs and the categories of covered persons
4. Determine any gaps in benefits or overlapping benefits in the current plan
5. Consider recommendations for plan changes to meet any gaps in benefits and to correct any overlapping benefits.
6. Estimate the cost or saving from each of the recommendations made
7. Evaluate alternative methods of financing or securing the benefits
8. Consider other cost-saving or cost-containment techniques for both current and recommended benefits
9. Decide upon the appropriate benefits, methods of financing, and sources of benefits, by using the preceding analysis.
10. Implement the change
11. Communicate benefit changes to employees
12. Periodically reevaluate the employee benefit plan

Question 10

Common loss exposures covered by employee benefit plans

Answer 10

1. Medical expenses for employees (active and retired) and their dependents
2. Losses due to employees’ disability (LTD & STD)
3. Losses due to the death of active employees, their dependents, and retired employees
4. Retirement needs of employees and their dependents
5. Capital accumulation needs or goals
6. Needs arising from unemployment or from temporary termination or suspension of employment
7. Needs for financial counseling, retirement counseling, and other counseling service
8. Losses resulting from property and liability exposures
9. Needs for dependent care assistance (day care or elderly care)
10. Needs for educational assistance for employees and their dependents.
11. Needs for LTC for employees (active and retired) and their dependents
12. Other employee benefit needs or goals (such as incentive programs)

Question 11

Categories of persons the employer may want to or be required to provide benefits for

Answer 11

1. Active full-time employees
2. Dependents of active full-time employees
3. Retired former employees
4. Dependents of retired former employees
5. Disabled employees and their dependents
6. Surviving dependents of deceased employees
7. Terminated employees and their dependents
8. Employees (and dependents) on temporary leaves of absence (such as for military duty)
9. Active employees who are not full-time (such as part-time employees and directors)

Question 12

Considerations for analyzing current benefits in the employee benefit plan

Answer 12

1. Types of benefits - a common approach is to prepare an outline or table showing how the different types of benefits meet the various employee needs
2. Levels of benefits - the analysis should also show the amount of those benefits that is currently provided under various scenarios
3. Probationary periods - analyze any periods during which newly-hired employees are not yet eligible to receive benefits to determine whether they are appropriate.
4. Eligibility requirements - various requirements should be analyzed. For example, should survivors of deceased employees continue to be covered, for what benefits, and for how long?
5. Employee contribution requirements - determine how much employees will be required to contribute to the cost, and whether the plans will be mandatory or voluntary.
6. Flexibility available to employees - determine the choices that will be given to employees in selecting their benefits
7. Actual employee participation in benefit plans - determine what percentage of employees enroll in each benefit, which may indicate whether the benefit meets employee needs

Question 13

the premise of CDHPs

Answer 13

individuals will become better health care consumers if given the proper information tools and financial incentives

Question 14

Typical elements of CDHPs

Answer 14

1. A high-deductible health plan (HDHP)
2. an individual account to pay for expenses not covered by the HDHP
3. Information and tools to provide health education and help find the highest-quality providers at the lowest cost
4. A communications program to encourage consumerism and healthy behaviors
5. A health coach or consultant to help individuals use available information and provide guidance on use of health care providers
6. For serious chronic conditions, a proactive medical professional to coordinate care for the patient

Question 15

Basic plan structures of CDHPs

Answer 15

1. 1st dollar coverage provided through a health care account
2. Employee is responsible for the difference between the account amount and the deductible
3. After the deductible, the plan coinsurance and copayments apply
4. Deductibles, coinsurance, and copayments differ for single versus family coverage and IN v OON

Question 16

Types of health care accounts

Answer 16

1. HSA
   a. Must accompany a HDHP with a min deductible ($1,200 Ind, $2,400 fam) and max OOP limit ($5,950 Ind, $11,900 fam)
   * 2011 amounts, indexed for inflation
   b. can be used to pay for qualified medical expenses, health insurance premiums in limited circumstances, LTC premiums, and LTC services
   c. Owned by the employee, who gets to keep the unused balance upon terminating employment
2. HRA - can be used for qualified medical expenses, health insurance premiums, and LTC-premiums
3. FSA
   a. can be used to pay for qualified medical expenses
   b. the contribution amount must be specified at the beginning of the period, and the employee can use the full amount at any time in the coverage period.
   c. Funds not used by the end of the period are forfeited.

Question 17

Comparison of key features or health care accounts

Answer 17

1. Who can set up the account?
   HSA - individuals and employees covered by HDHP and no other health insurace
   HRA & FSA - only employers
2. Who can contribute?
   HSA & FSA - employers and employees
   HRA - only employers
3. Contribution limits
   HSA - $3,050 for Ind; $6,150 for fam (2011, indexed)
   HRA - no federal limit; employers usually set limits
   FSA - through 2012, no limit. 2013: $2,500 (indexed)
4. Carryover of unused balance?
   HSA - yes
   HRA - Yes, subject to employer limits
   FSA - no
5. Portability
   HSA - yes
   HRA & FSA - no

Question 18

Tax treatment of health care accounts

Answer 18

1. Employer Contributions
   All - contributions excluded from gross income and not subject to FICA; funding limits for HSA & FSA
2. Individual Contributions
   HSA -funding limits; contributions are deductible
   HRA - employees cannot contribute
   FSA - generally pretax and not subject to FICA
3. Earning on accounts
   HSA - generally not taxable
   HRA & FSA - accounts are generally notitional, so there are no earnings
4. Distributions
   HSA - permissible reimbursements are not taxed; otherwise 20% penalty (some exceptions)
   HRA & FSA - distributions are only allowed for qualified medical expenses

Question 19

Plan design considerations for CDHPs

Answer 19

1. Establishing the parameters of the HDHP
2. Selecting a type of health care account
3. Level of preventive care coverage
   a. Most offer an initial health screening or physical at no, or very low, cost
   b. Also included are immunizations, routine annual physicals, and well-mother and well-baby visits
4. Whether the CDHP will be a full replacement plan or one of multiple options. A full replacement plan will minimize adverse selection and maximize cost savings, but may face employee resistance
5. Employer contribution strategy
   a. Must decide how much to contribute to the employees’ accounts
   b. CDHP contributions are often set to compare favorably with other options
6. For HRA plans, whether to permit carryovers of unused balances.

Question 20

Advantages of voluntary benefits

Answer 20

For Employee:

1. employer group’s discount
2. sometimes can use pre-tax dollars (not usually, though)
3. convenience of obtaining benefits through the workplace and during work time
4. benefits are portable (in most cases), so employees can keep them upon changing jobs.

For Employer:

1. More benefits can be offered without significant added cost.
2. can supplement or replace employer-sponsored benefits that have been reduced or eliminated
3. can act as a recruitment or retention tool
4. may offer these benefits to employees that meet performance targets

Question 21

Types of voluntary benefits

Answer 21

1. Group term life
2. Dependent life insurance
3. Supplemental life insurance
4. LTD or STD income insurance
5. Dental
6. LTC
7. Adoption Assistance
8. Accidental Death & Dismemberment (AD&D)
9. Automobile Insurance
10. Homeowners
11. Benefits under a legal service plan
12. Vison
13. Critical care ins
14. Cancer ins
15. Group homeowners & auto ins
16. Hospital indemnity ins
17. Travel accident ins
18. Student medical ins

Question 22

Common functions of administering employee benefits

Answer 22

1. Benefit Plan Design - create a benefit program that address the needs of the organization and can be effectively administered and communicated
2. Benefits plan delivery - involves serving plan participants through various activities. Must meet legal standards for quality service (e.g., complying with ERISA and COBRA standards)
3. Benefits policy formulation - management must make decisions on questions and issues that arise. these decisions must be codified into policies
4. Communications - must effectively communicate benefit programs and plan provisions, which is challenging due to workforce diversity, regulatory requirements, and plan complexity. Legal Standards require certain communications (e.g., summary plan description, benefit statements, and statement of COBRA rights.)
5. Applying technology - involves setting up a database containing information on all the employer’s different benefit plans. This information should be secure and easily accessible to the employer and its employees.
6. Cost management and resource controls - benefit directs must evaluate proposals from insurers and develop the firm’s risk-management approach.
7. Management reporting - information systems are needed in order to:
   a. Compare the competition
   b. measure achievement of human resources objectives (through industry surveys, employee surveys, and focus groups)
   c. assess and manage program risks
8. Legal and regulatory compliance - must comply with fiduciary, funding, and other requirements as prescribed by law. Many standards were codified as part of ERISA
9. Monitoring the external environment - involves monitoring various factors that impact benefit management activities.

Question 23

Activities required for serving plan participants

Answer 23

1. New employee benefits orientation
2. Policy clarification on benefits eligibility, coverage, and applicability of plan provisions
3. Dealing with exceptional circumstances and unusual cases
4. Collection and processing of enrollment data, claims information, and requests for plan distributions
5. Benefits counseling and response to employee inquiries for active employees
6. Benefits counseling for employees who are terminating, retiring, disabled, or on leave

Question 24

Technological tools used by benefits directors to support customer-driven processes

Answer 24

1. Executive information systems - provide management information in summary format. Helps identify utilization patterns and cost factors.
2. Imaging and optical storage - eliminates paper records and allows sharing of documents over a network
3. Access to information over the internet - facilitates paper-less communications from the plan sponsor to insurance carriers, investment custodians, and 3rd party administrators
4. Client-server technology - integrates networked applications with desktop and mobile tools, allowing decentralized management and supporting self-sufficient plan participants
5. Employee self-service - allows customer-driven benefits modeling, retirement planning, and updating of personal data.

Question 25

Methods for comparing benefit programs to the competition

Answer 25

1. Compare the benefits payable to representative employees under different circumstances
2. Compare actual costs to the employer for different benefit plans
3. calculate relative values of the different benefits based on uniform actuarial methods and assumptions
4. Compare benefit plans feature by feature to isolate specific provisions that may be appealing to certain employee groups

Question 26

External factors that impact benefit management activities

Answer 26

1. General business and competitive conditions - benefit programs are increasingly important for attracting and retaining employees. There is a trend toward benefits outsourcing
2. Governmental policy - requires monitoring laws and subsequent regulations, as well as proposed legislation
3. Workforce demographic shifts - greater diversity has led to flexible benefit plan offerings. The aging of the workforce has created greater interest in retirement programs.
4. New product development - must develop a means to evaluate new products and services, and to integrate them into existing plan offerings.
5. New organization structures - must redesign plans to fit the new structures and remain compliant
6. Technological enhancement and innovation - must keep abreast of technological changes and proactively plan the introduction of new technologies.

Question 27

Reasons plans are outsourcing benefits admin

Answer 27

1. complexity of administering benefits
2. efficiencies of specialized service providers
3. ability of specialized providers to obtain favorable pricing because of their business volume
4. ability of service providers to more readily implement technology and monitor regulations and market trends.

Question 28

Cafeteria plan advantages and disadvantages to the employee

Answer 28

Advantages:

1. employees can pay for benefit expenses on a tax-favored basis
2. employees can have more control over their health spending

Disadvantages

1. Benefit elections must be made prior to the beginning of the year, and the election is irrevocable (with limited exceptions)
2. For FSAs, the use-it-or-lose-it rule means benefit dollars unused at the end of the year are forfeited
3. Since there is no FICA tax, participants may see a slight reduction in social security benefits.

Question 29

Cafeteria plan advantages and disadvantages to the employer

Answer 29

Advantages:

1. The employer does not have to pay FICA or FUTA (Federal Unemployment Tax Act) taxes on contributions
2. Deferred amounts do not count when determining worker’ compensation premiums
3. Creates increased awareness of the overall cost and value of employee benefits
4. Helps to contain health care costs and prevent wasting benefit dollars on duplicate or unneeded benefits

Disadvantages:

1. The large cost of administration and operation of a cafeteria plan
2. If a medical reimbursement account is included in the plan, the total amount of the employee’s account must be available at any time in the year
3. Adverse selection can result in increased costs.
4. Plans are subject to complex coverage and nondiscrimination testing

Question 30

Types of cafeteria plans in the US

Answer 30

1. Premium conversion plans - there are no employer contributions. The plan is offered so that employees can pay for their employee-paid insurance costs on a tax-favored basis
2. FSAs- these accounts are permitted for medical reimbursements, dependent care, and adoption
3. Full flex plans - participants can select fro a wide range of benefits. The employer selects an amount to give for benefits, which is put towards the cafeteria plan or into an account

Question 31

Benefits that can be offered in a cafeteria plan

Answer 31

Qualified Benefits (can be offered on a pre-tax basis)

1. Employer-provided accident or health coverage - this includes medical, dental, vision, disability, AD&D, business travel and accident plans, hospital indemnity, cancer policies, Medicare supplements, and reimbursements for FSAs
2. Individually-owned accident or health policies
3. Employer-provided group term life insurance coverage (only the first $50K is non-taxable)
4. Employer-provided dependent care assistance
5. Employer-provided adoption assistance
6. Contributions to a 401(k) plan
7. Contributions to an HSA

Permissible benefits (these can be offered, but are taxable)

1. Cash
2. paid vacation days
3. Group term life insurance in excess of $50K

Question 32

Benefits that cannot be offered in a cafeteria plan

Answer 32

1. Contributions to medical savings account
2. Qualified scholarships and education assistance programs
3. certain fringe benefits
4. Qualified LTC insurance (although an HSA fund can be used to pay for LTC)
5. Athletic facilities
6. De minimis benefits
7. Dependent life insurance
8. Employee discounts
9. lodging on the business premises
10. Meals
11. moving expense reimbursements
12. No-additional-cost service
13. Parking and mass transit reimbursement
14. Contributions to a college savings account
15. Legal or financial assistance
16. 403(b) plans

Question 33

Challenges for small companies offering group medical plans

Answer 33

1. Bc small companies are most often fully insured, they are subject to state-mandated benefits
2. Bc employees are usually in a relatively small geographic area, plans must be designed using options available in that area
3. Small companies may have to provide additional documentation so that insurers can verify the existence of the company
4. Most states do not allow companies to join forces to form larger purchasing pools in order to get group discounts

Question 34

Reasons a small company should require employee contributions for medical insurance

Answer 34

1. Most employees today are accustomed to paying some level of contribution
2. Requiring a contribution motivates employees who have other coverage options to use those options.
3. It sis easier to require contributions beginning at the plan’s inception than it is to start requiring contributions at a later date.
4. Requiring a contribution can help avoid legal problems since the contribution makes it clear who is covered by the plan vs who opted out

Question 35

Eligibility and amounts for the ACA small employer tax credit

Answer 35

1. To be eligible, employers must:
   a. have no more than 25 FTE
   b. have avg annual wages of $50K or less
   c. pay at least 50% of the premium for employees
2. The credit is a % of the employer-paid premium. It is on a sliding scale, with the max available to employers with fewer than 10 FTEs and avg annual wages of less than $35K. The maximum credit is:
   a. 35% from 2010-2013
   b. 50% beginning in 2014, and can only be take for up to 2 consecutive years and if employees are covered under a state-based exchange.

Question 36

Types of flexible accounts in Canada

Answer 36

1. Health spending account (non taxable if requirements are met) - may cover any health care expense that would be tax deductible under the Income Tax Act, as long as they are not covered by the provincial plan or other private insurance.
2. Personal account (taxable) - may cover a wide range of benefits, at the employer’s discretions, such as child care, financial counseling, or even sports equipment or gym memberships
3. Executive perquisite account (taxation depends on the taxability of the covered expense) - normally administered separately from the flexible plan

Question 37

Advantages to the employer of offering flexible accounts (Canada)

Answer 37

1. Expand the types of benefits offered with little or no additional employer cost
2. Add a new benefit without subsidizing an expensive coverage area
3. Offer a benefit that might appeal to only a small segment of the employee population
4. Contains costs (by setting a defined contribution) while providing employees with flexibility over how funds are spent.
5. Test the appeal of flexible benefits without committing a full-choice program

Question 38

Additional advantages of health spending accounts (Canada)

Answer 38

In addition to advantages of all flexible accounts in Canada:

1. deliver compensation tax effectively
2. Encourage employees to self-insure predictable and budgetable expenses (such as vision and dental)
3. Soften the impact of higher employee cost sharing
4. Replace existing coverage, allowing the employer to gain control of future cost increases
5. Obtain the maximum value from health benefits under the Quebec tax system

Question 39

Requirements for Canadian health spending account reimbursements to be tax-free

Answer 39

1. An employee’s election to allocate funds to the account must be made in advance of the plan year and must be irrevocable. An exception is allowed for family status changes.
2. The plan must require forfeiture of any unused account balances, using one of the following methods:
   a. one year rollover of unused balances - funds allocated to the account can be used to reimburse current year expenses or rolled over to next year’s account. Unused amounts are forfeited at the end of the 2nd year.
   b. One year rollover of unpaid claims - roll over unpaid claims from the prior year to be paid by this year’s account balance. Funds remaining at the end of the year are forfeited

Question 40

sources of funds for health spending accounts (Canada)

Answer 40

1. New contributions by the employer
2. Employer savings from reducing medical plan costs
3. Employees directing employer-provided flexible credits to the account
4. Employees allocating a part of annual bonuses or company savings plan matches to account

Question 41

Considerations for designing flexible accounts

Answer 41

1. Types of approach - decide whether to introduce a flexible account and which types of accounts to offer
2. How will the presence of the account impact other benefit choices?
3. Funding considerations - for example, decide if contributions to the accounts will be monthly or annually
4. Should there be limits on how much the employee can allocate to flexible account?
5. How will mid-year changed be handled? - this will vary by account type and the reason for the change (family status change, termination, retirement, or death)
6. Disposition of funds at year end - funds are forfeited, rolled over, or (for personal or perquisite accounts) paid in cash

Question 42

Advantages and Disadvantages of health spending account replacing health and dental plans

Answer 42

Advantages for the employer

1. Fixed contribution (give employer control over benefit cost increase)
2. Contributions to the account are tax deductible
3. The accounts are easy to administer and communicate

Advantages for the employee:

1. The accounts provide flexibility as to how the money is spent
2. Benefits are non-taxable to the employee
3. Can be used to buy insurance
4. The employee can decide what expenses are covered.

Disadvantages

1. Benefits are inadequate since there is no insurance
2. Inequities
   a. A flat contribution per employee mean families receive relatively less protection than singles
   b. A % of pay contribution means lower-paid employees receive less protection than higher-paid employees
3. Inflation is borne by the employees

Question 43

Plan design approaches for controlling adverse selection

Answer 43

PD CONTROL

1. Parallel design should be maintained - e.g., include vision and ortho at the same coverage in all plans
2. Delay full payment - have lower benefits during a waiting period of 6 to 12 months
3. Certain coverages can be grouped together - predictable expenses (such as dental or vision) could be grouped with less predictable expenses (such as supplemental medical)
4. Offer a health spending account instead of insurance - useful for vision & dental
5. Not allow a large spread between options - could be done by requiring a core coverage level
6. Test the program with employees - to bring to light potential design weakness
7. Require proof of insurability for increases in coverage
8. Only allow mid-cycle changes if a life-changing event occurs.
9. Limit the frequency of choice - allow benefit changes only every 2-3 years, instead of annually
10. Limit the degree of change - restrict changes to 1 level of coverage per year (staircase rule)

Question 44

Pricing strategies for controlling adverse selection

Answer 44

1. Risk-based pricing - price options in a way that reflects the expected cost of the benefit (e.g., vary rates by age, gender, & smoker status)
2. Employer subsidization - subsidize prices to encourage broad participation, which will cause a better spread of risk

Question 45

Options for spreading cost of adverse selection

Answer 45

1. Load the prices of the lesser-valued options - reduces the reward for opting down
2. Load the prices of the highest-valued option - this may cause more employees tot opt down
3. Spread the cost of the adverse selection over the price of all the options

Question 46

Differences from private and public exchanges

Answer 46

1. Who sponsors?
   Private: Employer
   Public: Government
2. Who can enroll?
   Private: employees and retirees of sponsor
   Public: individuals and SGs
3. Types of coverage available?
   Private: Medical, Rx, dental, vision, & other voluntary benefits
   Public: Medical & Rx
4. Plan designs available
   Private: exchange operator or employer defines plan designs
   Public: Plans with AV of 90%, 80%, 70%, and 60%
5. Who pays for coverage
   Private: Employers provide a subsidy and members pay the rest
   Public: Individuals and small employer groups. Individual subsidies and small business tax credits exist

Question 47

Considerations when setting employee contribution levels for an employer health plan

Answer 47

1. Total compensation philosophy - this includes how compensation is divided between salary and benefits. Some employers allocate a larger portion of total compensation toward benefits
2. Benefits Budget - many employer budgets are not keeping pace with increases in the cost of health care, so a grater portion of costs must be paid by employees
3. Benefit competitiveness - employers must consider the total benefit structure compared to other employers with whom they compete for talent.
4. Collective Bargaining - this leads to union groups often having better health coverage and subsidization that non-union groups at the same company.
5. Legislative and regulatory issues - new laws may cause employers to change benefits or employee contribution levels. For example, the CCA affordability threshold (contributions begin no more than 9.5% of household income) resulted in some employers reducing required contributions.

Question 48

Approaches for setting employee contribution levels for an employer health plan

Answer 48

Two basic approaches:

1. Defined Benefit - such as setting the employee’s contribution equal to a specified % of premium.
2. Defined Contribution - the employer provides a defined dollar subsidy regardless of plan choice

Other levers (or strategies) the employer may use:

1. Income-based contributions - require high contributions from higher-paid employees
2. Dependent subsidy or spousal surcharge - require a greater level of contribution to cover dependents
3. Health incentives - implement wellness incentive programs where employees receive a premium reduction for health behaviors, such as completing a health risk assessment or receiving preventive services.

Question 49

Types of group purchasing arrangements

Answer 49

1. Association Health Plans (AHPs) - health coverage is sold to employer members of an association, such as professional or trade association.
2. Multiple employer welfare arrangements (MEWA) - established by two or more employers or self-employed individuals in order to offer health coverage
3. Professional employer organizations - these provide various employer functions, in some cases taking on the administrative role acquiring and obtaining health insurance for a group of employers
4. Group captives - multiple employers form an insurance company to underwrite their own insurance, rather than buy insurance from a separate insurer.

Question 50

Alternative coverage options for low-risk small employer groups to remain outside of the fully-insured market

Answer 50

These allow healthy groups to reduce costs by avoiding being part of the ACA single risk pool for SG.

1. Continue in plans that are exempt from many ACA reforms:
   a. Grandfathered plans - plans that existed before the ACA and are allowed to continue indefinitely as long as their benefits and cost-sharing structure do not change significantly.
   b. Grandmothered or transitional plans - plan that renewed in 2013 before the ACA’s primary benefit and rating reforms went into effect, and which most states allow to continue through 2017.
2. Set up a self-funding arrangement - these often include stop-loss insurance with very low attachment points. So they mimic traditional insurance, but are exempt from most of the ACA’s market reforms.
3. Obtain coverage through group purchasing arrangements - these lower costs by self insuring and pooling admin functions. They may also claim large employer status to avoid SG reforms
4. Drop coverage entirely - the employer mandate does not apply to employers with less than 50 employees, and the ACA guarantees coverage to the employees who are dropped

Question 51

Reasons why more SG employers have not dropped health coverage

Answer 51

1. SG premiums generally remained stable
2. The rollout of the individual marketplaces was rocky, and there is uncertainty about the individual market
3. Offering employer-sponsored insurance continues to be an expectation as part of the business culture or necessary to compete for talent.

Question 52

Common elements of private exchanges

Answer 52

1. Employee Choice - private exchanges often offer more plan design options than traditional employer-sponsored plans
2. Employer subsidies - the employer typically makes a defined contribution
3. Ancillary product offerings - products such as dental and vision are often offered alongside medical and pharmacy benefits
4. Online enrollment and decision-making tools - theses tools allow members to evaluate their health care needs, understand their employer’s subsidy, and elect benefits that meet their needs.
5. Benefits administration - most private exchanges offer end-to-end benefits administration, including enrollment, eligibility, customer service, and billing.

Question 53

Advantages & Disadvantages of private exchanges

Answer 53

Advantages:

1. Increased employee choice
2. Cost-savings from increased competition across carries and best-in-class carrier pricing
3. Increased consumerism from members buying-down benefits as a result of transparent defined-contribution approach
4. Robust online decision-support tools and customer service
5. Benefits administration simplification
6. Shift of financial and regulatory risks (for fully-insured models)
7. Cost predictability (for fully-insured models)
8. Improved cost transparency

Disadvantages:

1. Additional expenses for exchange operator financing
2. Less control over plan design, clinical management, and member outreach
3. the need for the employer to increase the defined-contribution amount over time
4. Other member concerns, such as loss of plan-sponsor support and less generous benefits.

Question 54

Considerations for determining the employer’s optimal defined-contribution amount for a private exchange

Answer 54

1. Current funding approach - what is the employer’s current philosophy around subsidies and how does it compare to a defined-contribution approach?
2. Variations by coverage tier - does the employer want to subsidize dependents at a different level than the employee?
3. Member impact - how does this impact the member payroll contributions and what sort of dissatisfaction could arise?
4. Financial goals - does this change meet the employer’s financial goals?
5. Competitive pressures - how does the subsidy compare to the benefits provided by other organization that compete for similar talent?