Learning Objectives 3 - Employee Benefit Strategy

Question 1

Rosenbloom chapter 1
The Environment of Employee Benefit Plans

120. Definition of employee benefits ( 4)

Answer 1

Broad definition - 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 - excludes legally-mandated benefits

Question 2

Rosenbloom chapter 1
The Environment of Employee Benefit Plans

121. Reasons for the growth of employee benefit plans ( 5)

Answer 2

1. Business reasons - good benefit plans help 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 War led 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 3

Rosenbloom chapter 1
The Environment of Employee Benefit Plans

122. Characteristics of the group technique of providing employee benefits (8) (all but the last one are meant to minimize adverse selection)

Answer 3

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 4

Rosenbloom chapter 1
The Environment of Employee Benefit Plans

123. Questions to ask in evaluating employee benefit plans (10)

Answer 4

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 the employer, an insurer, or a TPA?
7. How should the benefit plan be communicated?

Question 5

Rosenbloom chapter 2
Functional Approach to Designing and Evaluating Employee Benefits

124. Reasons for using the functional approach for designing and evaluating employee benefits (14)

Answer 5

1. Benefits must be organized to be as effective as possible in meeting employee needs
2. A voiding 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 6

Rosenbloom chapter 2
Functional Approach to Designing and Evaluating Employee Benefits

125. Steps in applying the functional approach for employee benefit plan design and evaluation (19)

Answer 6

1. Classify employee and dependent needs or objectives into logical functional categories (see separate list of common loss exposures)
2. Classify the categories of persons the employer may want or need to protect (see separate list)
3. Analyze current benefits with respect to employee needs and the categories of covered persons (see separate list).
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 costs or savings 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 changes
11. Communicate benefit changes to employees
12. Periodically reevaluate the employee benefit plan

Question 7

Rosenbloom chapter 2
Functional Approach to Designing and Evaluating Employee Benefits

126. Common loss exposures covered by employee benefit plans (20)

Answer 7

1. Medical expenses for employees (active and retired) and their dependents
2. Losses due to employees’ disability (short-term and long-term)
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 services
8. Losses resulting from property and liability exposures
9. Needs for dependent care assistance (e.g., child-care or elder-care services)
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 8

Rosenbloom chapter 2
Functional Approach to Designing and Evaluating Employee Benefits

127. Categories of persons the employer may want to or be required to provide benefits for (25)

Answer 8

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 9

Rosenbloom chapter 2
Functional Approach to Designing and Evaluating Employee Benefits

128. Considerations for analyzing current benefits in the employee benefit plan (27)

Answer 9

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 10

Rosenbloom chapter 7
Consumer-Driven Health Plans

129. Typical elements of CDHPs (176)

Answer 10

1. A high-deductible health plan (HDHP)
2. An individual health 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 11

Rosenbloom chapter 7
Consumer-Driven Health Plans

130. Basic plan structures of CDHPs (177)

Answer 11

1. First-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-network versus out-of-network services

Question 12

Rosenbloom chapter 7
Consumer-Driven Health Plans

131. Types of health care accounts (178) (see separate lists for comparisons of these accounts)

Answer 12

Types of health care accounts (178) (see separate lists for comparisons of these accounts)

1. HSA
   a) Must accompany a high-deductible health plan with a minimum deductible ($1,200 individual, $2,400 family) and maximum out-of-pocket limit ($5,950 individual, $11,900 family) (year 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 to pay 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 13

132 Comparison of key features of health care accounts

Look at slide 132

Answer 13

Comparison of key features of health care accounts

Look at slide 132

Question 14

133. Types of health care accounts (178) (see separate lists for comparisons of these accounts)

Look at slide 133

Answer 14

Types of health care accounts (178) (see separate lists for comparisons of these accounts)

Look at slide 133

Question 15

Rosenbloom chapter 7
Consumer-Driven Health Plans

134. Plan design considerations for CDHPs (185)

Answer 15

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 16

Rosenbloom chapter 18
Selected Additional Benefits

135. Advantages of voluntary benefits ( 491)

Answer 16

Voluntary benefits are offered by the employer but employees purchase them on their own

Employer advantages:

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 an employee recruitment or retention tool
4. Can offer to employees that meet performance targets

Employee advantages:

1. Can get the employer’s group discount
2. In some cases, can purchase with pretax dollars
3. Convenience of obtaining benefits through the workplace (not having to shop around) and during work time
4. They are often portable (employees can keep them upon changing jobs)

Question 17

Rosenbloom chapter 18
Selected Additional Benefits

136. Types of voluntary benefits ( 492)

Answer 17

1. Group term life
2. Dependent life insurance
3. Supplemental life insurance
4. Long-term and/or short-term disability income insurance
5. Dental insurance
6. LTC coverage
7. Adoption assistance
8. Accidental death and dismemberment insurance
9. Automobile insurance
10. Homeowners insurance
11. Benefits under a legal services plan
12. Vision benefits coverage
13. Critical care insurance
14. Cancer insurance
15. Group homeowners and automobile insurance
16. Hospital indemnity insurance
17. Travel accident insurance
18. Student medical insurance

Question 18

Rosenbloom chapter 24
Strategic Benefit Plan Management

137. Common functions for administering employee benefits (636) (all plan sponsors must perform these core activities, and the benefits director must be proficient at these)

Answer 18

1. Benefits plan design - create a benefit program that addresses the needs of the organization and can be effectively administered and communicated
2. Benefits plan delivery- involves serving plan participants through various activities (see separate list). 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 and plan complexity. Legal standards require certain communications (e.g., summary plan descriptions, 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- benefits directors must evaluate proposals from insurers and develop the firm’s risk-management approach
7. Management reporting - information systems are needed to monitor financial results, utilization, and compliance. Reports are needed in order to:
   a) Compare to the competition (see separate list of comparison methods)
   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 (see separate list)

Question 19

Rosenbloom chapter 24
Strategic Benefit Plan Management

138. Activities required for serving plan participants (639)

Answer 19

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 20

Rosenbloom chapter 24
Strategic Benefit Plan Management

139. Technological tools used by benefits directors to support customer-driven processes (650)

Answer 20

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 communication from the plan sponsor to insurance carriers, investment custodians, and third-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 21

Rosenbloom chapter 24
Strategic Benefit Plan Management

140. Methods for comparing benefit programs to the competition (655)

Answer 21

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 22

Rosenbloom chapter 24
Strategic Benefit Plan Management

141. External factors that impact benefit management activities (659)

Answer 22

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 organizational 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 23

Rosenbloom chapter 24
Strategic Benefit Plan Management

142. Reasons plans are outsourcing benefits administration (667)

Answer 23

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

Question 24

Rosenbloom chapter 25
Cafeteria Plan Design and Administration

143. Cafeteria plan advantages and disadvantages to the employee (673)

Answer 24

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 25

Rosenbloom chapter 25
Cafeteria Plan Design and Administration

144. Cafeteria plan advantages and disadvantages to the employer (674)

Answer 25

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 workers’ 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 26

Rosenbloom chapter 25
Cafeteria Plan Design and Administration

145. Types of cafeteria plans in the US (676)

Answer 26

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 from 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 27

Rosenbloom chapter 25
Cafeteria Plan Design and Administration

146. Benefits that can be offered in a cafeteria plan (688)

Answer 27

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 $50,000 is nontaxable)
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 $50,000

Question 28

Rosenbloom chapter 25
Cafeteria Plan Design and Administration

147. Benefits that cannot be offered in a cafeteria plan (689)

Answer 28

1. Contributions to medical savings accounts
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 services
13. Parking and mass transit reimbursement
14. Contributions to a college savings account
15. Legal or financial assistance
16. 403(b) plans

Question 29

Rosenbloom chapter 27
Employee Benefits Communications

148. Objectives of employee benefits communications (741, 755)

Answer 29

1. Adhere to statutory reporting and disclosure requirements
2. Support employee benefits cost-containment strategies (e.g., controlling medical costs by promoting preventive care and emphasizing healthy lifestyles)
3. Support human resources recruitment and retention objectives
4. Educate plan participants on the programs’ provisions
5. Demonstrate the value of benefits to the employee’s total compensation package

Question 30

Rosenbloom chapter 27
Employee Benefits Communications

149. Benefits communications that group health plans must provide to plan participants (743)

Answer 30

1. Statement of ERISA rights
2. Summary plan description within 90 days after the person becomes a participant, describing the rights, benefits, and responsibilities under the plan
3. Summary of material modifications to the plan (at least 60 days before the effective date of the change)
4. Summary annual report
5. Notification of benefit determination
6. Summary of material reduction in covered services or benefits
7. COBRA notices ·
8. HIPAA notices
9. Wellness program disclosure
10. Women’s Health and Cancer Rights Act notices
11. Medical child support order notices

Question 31

Rosenbloom chapter 27
Employee Benefits Communications

150. Categories of information included in the summary plan description (747)

Answer 31

1. Plan administration
2. Plan eligibility requirements
3. Summary of benefits, rights, and obligations -including: .
   a) A statement identifying circumstances that may result in loss or suspension of benefits
   b) Cost-sharing provisions and provisions governing the use of network providers
4. For pension plans, information on the Pension Benefit Guaranty Corporation
5. Claims and appeals processes-including the procedures for submitting claims and the remedies available for claim denials
6. ERISA rights

Question 32

Rosenbloom chapter 27
Employee Benefits Communications

151. Employee groups for benefits communications (749)

Answer 32

1. New hires - problems include benefit misunderstandings, missing applications, and vendor enrollment delays. A good communication process will anticipate and reduce some of these problems-:
2. All employees - during annual open enrollment, must communicate plan design modifications, plan cost increases, and changes in family members’ eligibility statuses. Challenges include communicating benefit cutbacks and securing employee participation.
3. Employees who experience life changes (e.g., marriage, adoption, or divorce)-the “life-events approach” extracts information whenever a life event occurs, and then communicates the options available and actions required to make benefits changes
4. Retirees - clearly state what has and has not changed, and the actions the retiree must take. Should use short sentences, avoid jargon, give examples when possible, and avoid small font sizes.
5. Employees with 401(k) plans-provide information that allows participants to exercise control over their own investment decisions. Includes financial planning seminars throughout the year and other sessions for specific groups (such as sessions on Social Security benefits and retiree medical for those nearing retirement).

Question 33

Rosenbloom chapter 32
Employee Benefit Plans for Small Companies

152. Most common employee benefits for small companies (870)

Answer 33

1. Medical - plan design options usually include HMOs, PPOs, POS plans, direct-access POS plans, and CDHPs
2. Disability income insurance - long-term, short-term, and supplemental
3. Life and AD&D - for companies with fewer than 10 employees, it may be cheaper to buy individual policies than a group policy .
4. Dental - may not be cost effective, especially for the smallest of employers. But it can be cost-effective for employees because the employer is paying some of the cost and tax savings can result if a pretax spending account is used.
5. Cafeteria plan (aka Section 125 plan or flex plan) - this can include an FSA to provide tax benefits. Types include:
   a) Premium-only plan- includes only pre-tax premium payments
   b) Full-range cafeteria plan - may offer 3-4 options in each benefit area. Small companies are generally not able to offer these due to cost and lack of availability.

Question 34

Rosenbloom chapter 32
Employee Benefit Plans for Small Companies

153. Challenges for small companies offering group medical plans (870)

Answer 34

1. Because small companies are most often fully insured, they are subject to state-mandated benefits
2. Because 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 35

Rosenbloom chapter 32
Employee Benefit Plans for Small Companies

154. Reasons a small company should require employee contributions for medical insurance (874)

Answer 35

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 is 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 versus who opted out

Question 36

Rosenbloom chapter 32
Employee Benefit Plans for Small Companies

155. Eligibility and amounts for the ACA small employer tax credit (875)

Answer 36

1. To be eligible, employers must:
   a) Have no more than 25 full-time employees (FTEs)
   b) Have average annual wages of $50,000 or less
   c) Pay at least 50% of the premium for employees
2. The credit is a percentage of the employer-paid premium. It is on a sliding scale, with the maximum available to employers with fewer than 10 FTEs and average annual wages of less than $25,000. The maximum credit is:
   a) 35% from 2010-2013
   b) 50% beginning in 2014, and can only be taken for up to two consecutive years and if employees are covered under a state-based exchange

Question 37

McKay chapter 7
Flexible Accounts - Health Spending, Personal, and Perquisite

156. Types of flexible accounts in Canada (153)

Answer 37

1. Health spending account (non taxable if requirements are met) - may cover any health care expenses 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 discretion, 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 38

McKay chapter 7
Flexible Accounts - Health Spending, Personal, and Perquisite

157. Advantages to the employer of offering flexible accounts (154)

Answer 38

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. Contain 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 to a full-choice program

Question 39

McKay chapter 7
Flexible Accounts - Health Spending, Personal, and Perquisite

158. Additional advantages of health spending accounts (154) (these are in addition to the advantages of flexible accounts from the previous list)

Answer 39

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 40

McKay chapter 7
Flexible Accounts - Health Spending, Personal, and Perquisite

159. Requirements for Canadian health spending account reimbursements to be tax-free (156)

Answer 40

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 second 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 41

McKay chapter 7
Flexible Accounts - Health Spending, Personal, and Perquisite

160. Sources of funds for health spending accounts (166)

Answer 41

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 the account

Question 42

McKay chapter 7
Flexible Accounts - Health Spending, Personal, and Perquisite

161. Considerations for designing flexible accounts (167)

Answer 42

1. Type 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 the flexible account?
5. How will mid-year changes 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 43

McKay chapter 7
Flexible Accounts - Health Spending, Personal, and Perquisite

162. Advantages and disadvantages of health spending accounts replacing health and dental plans (173)

Answer 43

Advantages for the employer

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

Advantages for the employees

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 means families receive relatively less protection than singles
   b) A percentage of pay contribution means lower-paid employees receive less protection than higher-paid employees
3. Inflation is borne by the employees

Question 44

McKay chapter 16
Adverse Selection

163. Plan design approaches for controlling adverse selection (339)

Answer 44

The first letters spell out the mnemonic PD CONTROLL

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 and 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 weaknesses
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 one level of coverage per year (staircase rule)

Question 45

McKay chapter 16
Adverse Selection

164. Pricing strategies for controlling adverse selection (341)

Answer 45

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

Question 46

McKay chapter 16
Adverse Selection

165. Options for spreading the cost of adverse selection (343)

Answer 46

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 to opt down
3. Spread the cost of the adverse selection over the price of all the options

Question 47

GHC-106-16
Health Plan Payroll Contribution Strategies and Development for Employers

166. Considerations when setting employee contribution levels for an employer health plan (1)

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 greater 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 than 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 ACA affordability threshold (contributions being no more than 9.5% of household income) resulted in some employers reducing required contributions.

Question 48

GHC-106-16
Health Plan Payroll Contribution Strategies and Development for Employers

167. Approaches for setting employee contribution levels for an employer health plan (3)

Answer 48

Two basic approaches:

1. Defined benefit - such as setting the employee’s contribution equal to a specified percentage 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 higher 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 healthy behaviors, such as completing a health risk assessment or receiving preventive services

Question 49

A Practical Guide to Private Exchanges
Health Watch, May 2015

168. Common elements of private exchanges (12)

Answer 49

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 - these 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 50

A Practical Guide to Private Exchanges
Health Watch, May 2015

169. Advantages and disadvantages of private exchanges (13)

Answer 50

Advantages:

1. Increased employee choice
2. Cost-savings potential from increased competition across carriers and best-in-class carrier pricing
3. Increased consumerism from members buying-down benefits as a result of a 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 51

A Practical Guide to Private Exchanges
Health Watch, May 2015

170. Considerations for determining the employer’s optimal defined-contribution amount for a private exchange (15)

Answer 51

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 organizations that compete for similar talent?