Lesson 11

Question 1

1.1 Outline factors that have influenced the development of group flexible benefits plans in Canada (5 +1)

Answer 1

1) Escalating benefit costs due to government cost shifting through reductions in coverage in provincial/territorial health plans
2) An expanding range of innovative and high cost services
3) Health care cost increases in excess of general inflation levels
4) an aging population
5) Increasing diversity in the workforce

In addition employees have become more educated and involved consumers and value choice in their benefits plans

Question 2

1.2 Identify reasons plan sponsors implement flex benefit plans (7)

Answer 2

1) Meeting diverse plan member needs
2) Containing or reducing benefit costs
3) Improving attraction and retention
4) Increasing plan member understanding of the cost of benefits
5) Meeting competitive pressures
6) Delivering benefits more tax effectively
7) Harmonizing benefit arrangements

Question 3

1.3 Explain how a traditional plan with no add ons differs from a traditional plan with no add ons

Answer 3

No add ons:

The plan sponsor provides a fixed offering of benefits and plan members have on choices

With add ons:

The plan sponsor provides a fixed offering of benefits to which members can choose to add supplemental coverage. This is not considered a flex plan since it only offers a small degree of choice

Question 4

1.4 Explain a modular approach to flexible benefits

Answer 4

Members have choice between at least two predefined benefits packages.

Members electing the higher level package usually have to contribute via payroll deduction

Question 5

1.4 Explain a full flex approach (5 points)

Answer 5

plan member choose from a wide variety of benefits that are typically added to a core plan.

Usually the core plan includes life and LTD at minimum levels.

Plan members also usually get credits that they can use to choose from a menu of options.

If flex credits are for more than what the member has elected the remaining amount may go into a HCSA taxable spending account, group RRSP or be a taxable cash benefit depending on the employer’s plan.

If flex credits are insufficient the member may pay the difference via payroll deduction

Question 6

1.5 Describe the total rewards approach to flexible benefits

Answer 6

Provides plan members with the most choice

Depending on parameters members can have choices in pay, benefits, pension, retirement contributions, vacation. But tax implications should be considered

For example additional vacation days purchased with flex credits should be used in year of purchase otherwise there are tax implications.

Plan members must keep the minimum number of vacation days and the number that can be sold must be limited

Question 7

1.6 Explain how a HCSA can be used to enhance member choice

Answer 7

Can be used to pay for what a plan member really needs.

Can be used to cover dental and health expenses not covered ( such as coinsurance and deductibles)

Question 8

1.7 Describe a taxable spending account

Answer 8

A personal spending account, or flexible spending account or wellness/fitness account.

Allows employers to reimburse employees for things that are wellness related but not eligible medical expenses.

Question 9

1.7 Describe how a taxable spending account can be used to enhance plan member choice

Answer 9

Can broaden the uses for flex credits and the benefits employers could offer through this are not limited.

Plan members decide how many flex credits are deposited into the taxable spending account.

Question 10

1.7 Describe the tax treatment of items claimed under a taxable spending account

Answer 10

any benefit received is taxable to the member and the plan sponsor cannot deduct its contributions

Question 11

2.1 Describe how price tags and flex credits are used in flexible benefit plans

Answer 11

Price tags are associated with each option in the flex plan and flex credits represent the employer’s contribution.

Flex credits are allocated to members and used to purchase benefits coverage

Question 12

2.2 Outline the key pricing objectives used by plan sponsors to guide decisions on flex credits and price tags (5)

Answer 12

1) Realistic - reflects actual value
2) Equity - each member receives the same level of subsidy
3) No-losers - no cost change to members from previous plan if they select the same benefits they had
4) No additional cost to plan sponsor
5) A combination of objectives. It isn’t feasible to accomplish all four of the above at once so compromises must be made

Question 13

2.3 Explain how the total plan sponsor cost of a flexible benefits plan is determined

Answer 13

Plan sponsor cost = expected claims + expenses and taxes + flex credits (ER contribution) - price tags (mbr contribution)

Question 14

2.4 Identify steps generally involved in setting price tags in a flexible benefits plan (8)

Answer 14

1) Data collection and analysis
2) Preliminary option pricing
3) Preliminary subgroup pricing
4) Anticipation of changes
5) Calculation of taxes and administration fees
6) Adjustment to realistic price tags
7) Determination of no coverage or opt out pricing
8) Pricing by business unit or location

Question 15

Describe the step of data collection and analysis in setting price tags in a flexible benefits plan and how many years of data is typically collected

Answer 15

Collection of claims data, admin fees, participation figures and premium costs.

Generally 1-2 years for health and dental. 5 years for life and LTD

Question 16

Describe the step of Preliminary option pricing in a flexible benefits plan and how many years of data is typically collected

Answer 16

Preliminary prices are set based on claims experience in the current plan.

Typically the relative values are set at 100% and the values for other plans are set relative to the old one.

Question 17

Describe the step of Preliminary subgroup pricing in a flexible benefits plan and how many years of data is typically collected

Answer 17

To help minimize adverse selection the pricing structure is usually divided into smaller groups with similar characteristics.

Can be based on single vs multiple lives/dependents

Question 18

Describe the step of Anticipation of changes in a flexible benefits plan and how many years of data is typically collected

Answer 18

Adjustments are made for inflation or cost trends, adverse selection and any other relevant factors

Question 19

Describe the step of Calculation of taxes and administration fees in a flexible benefits plan and how many years of data is typically collected

Answer 19

The total cost of the plan including taxes, administration costs are calculated and it is decided whether or not to include those costs in price tags.

Usually taxes and admin costs are included while costs for setting up the flex plan are not

Question 20

Describe the step of

Adjustment to realistic price tags in a flexible benefits plan and how many years of data is typically collected

Answer 20

Price tags can be adjusted here to drive plan member choice. The plan sponsor may subsidize using a flat percentage of all realistic prices, flat dollar subsidies or carve out pricing (where the price for core options is set to $0)

Question 21

Describe the step of Determination of no coverage or opt out pricing in a flexible benefits plan and how many years of data is typically collected

Answer 21

Plan members may be allowed to waive or decline coverage for certain benefits

Question 22

Describe the step of Pricing by business unit or location in a flexible benefits plan and how many years of data is typically collected

Answer 22

Plan sponsors may choose different price tags for different locations or business units die to market or competitive pressures

Question 23

2.5 Describe the disadvantages of using subsidized pricing in a flexible benefits plan

Answer 23

Can encourage members to select an option but it can make determining the plan sponsor’s cost more difficult and the prices may be difficult to explain or to reprice in the future if they are set artificially low

Question 24

2.6 Explain what influences a plan sponsor’s decision to include limitations on a plan member’s ability to opt our of coverage in a flexible benefits plan

Answer 24

It is rare to allow opting our of all benefits (without showing enrollment in another plan) since this can create adverse selection.

If a plan sponsor allows for opting out the flex credit is set at a lower value than the expected cost of the benefit.

For insured benefits the insurer has an impact on the decision to allow plan members to waive or decline coverage since it may be unwilling to underwrite benefits if participation is too low

Question 25

2.7 Explain billed rates as they relate to flexible benefit plans

Answer 25

Billed or premium rates may not match the price tags communicated to members.

If the plan is self insured with and ASO the plan administrator may recommend billed rates for budgeting purposes, however the plan sponsors have the latitude to set deposit levels as they see fit.

Consulting firms may be used to help set deposit rates.

Question 26

2.8 Identify possible sources of funding for flex credits. (6)

Answer 26

1) From the current plan
2) By restructuring the benefits provided under the flex plan
3) From additional plan sponsor contributions allocated to all plan members
4) By restructuring the benefits provided outside the flex plan (pension, salary)
5) From additional plan sponsor contributions via wellness credits earned by members through participation in health related initiatives
6) From payroll deductions

Question 27

2.10 Describe methods a plan sponsor can use for allocating flex credits to meet the equity in benefit value objective (4)

Answer 27

1) Single coverage cost - equal credits to all members based on the average cost of single plan members
2) family coverage cost - equal credits to all members based on the average cost of plan members with dependents
3) average cost - equal credits to all members based on the average cost of all plan members
4) Percentage of pay - flex credits to all members based on the a percentage of their pay

Question 28

2.11 Identify methods a plan sponsor can use to test the overall feasibility of the flex benefits plan (2)

Answer 28

1) Plan sponsor cost analysis - compares costs to sponsor before and after flex implementation
2) Winner and loser analysis - compares a member’s position before and after implementation as well as plan member contributions

Question 29

3.1 List 6 strategies that can be applied to a flex benefit plan to minimize risk of adverse selection other than a price tag adjustment

Answer 29

1) Step up or step down limitations
2) Lock in provisions
3) Packaged options
4) Structuring benefit options strategically
5) Using HCSAs for predictable expenses
6) Including opt out disincentives

Question 30

3.1 Describe the following strategy applied to flex benefits to reduce adverse selection: Step up or step down limitations

Answer 30

This prevents the member from moving from highest to lowest coverage one year to the next.

Exceptions can be made in relation to certain life events

Question 31

3.1 Describe the following strategy applied to flex benefits to reduce adverse selection: Lock in provisions

Answer 31

Once a plan member has chosen a provision they cannot change for a specified period of time (2-3 years usually)

Ensures that members can’t choose a high level benefit for a specific treatment and then drop off coverage once received

Question 32

3.1 Describe the following strategy applied to flex benefits to reduce adverse selection: Packaged options

Answer 32

Preset combinations of coverage that may combine more predictable expenses like dental care with potentially catastrophic expenses like health care

Question 33

3.1 Describe the following strategy applied to flex benefits to reduce adverse selection: Structuring benefit options strategically

Answer 33

This involves looking at the available choices from a plan member perspective to limit adverse selection.

Options can be designed to attract a wider range of plan members.

eg highest dental option would include orthodontics as well as a higher coinsurance level for basic services

Question 34

3.1 Describe the following strategy applied to flex benefits to reduce adverse selection: Using HCSAs for predictable expenses

Answer 34

This can eliminate the need for coverage for predictable expenses (vision and dental) from the options offered

Question 35

3.1 Describe the following strategy applied to flex benefits to reduce adverse selection: Including opt out disincentives

Answer 35

Members who waive benefits or opt out for a certain period are provided with less than full value of the flex credits

Question 36

4.1 Explain how flex benefits are taxed

Answer 36

Generally flex benefits are taxable when used to purchase benefits in accordance with the benefit purchased.

They are viewed as plan sponsor premium contributions.

Note that this treatment isn’t extended to Life, AD&D and CI benefits where flex credits are taxable to plan members.

Question 37

4.2 Explain the tax implications of selling vacation days

Answer 37

Some plans allow members to trade vacation days for extra flex credits.

The value is included in the member’s income when the sale is made. This is taxable

Question 38

4.2 Explain the tax implications of converting a negotiated salary increase into flex credits for a plan year

Answer 38

If the salary is reduced and the reduction converted into flex credits then this is taxable according to the usual rules.

If it is an increase in salary that is converted to flex credits then they are taxable and considered employee contributions.

However, if the employee
renegotiates an employment contract during its term to decrease salary or wages and increase flex credits, the additional flex credits are included in the employee’s income at that time and are considered to have been provided through employee
contributions.

Question 39

4.3 Define plan year under IT-529 Flexible employee benefit programs

Answer 39

A 12 month period

The first year can be greater or less than 12 months so that the plan year end will coincide with the year end designated in the plan documentation

The year end doesn’t need to be the same for all plan members (can go by month of birth for example)

Question 40

4.4 Explain the tax implications of plan year as defined by IT-529 Flexible employee benefits programs

Answer 40

The concept of the plan year as defined under IT-529, Flexible Employee Benefit Programs, is significant if the plan offers members the choice of both taxable and nontaxable benefits.

As a general rule, where one part of a flexible benefits plan could be regarded as a health and welfare trust or similar arrangement and another part could be regarded as:

• a salary deferral arrangement (SDA),
• a retirement compensation arrangement (RCA),
• an employee benefit plan or an employee trust,

the statutory rules applicable to SDAs, RCAs, employee benefit plans or employee trusts, as the case may be, apply to the entire flexible benefits plan.

However, if plan members covered by the flexible benefits plan are required to choose which benefits will be provided under the flexible benefits plan and how the benefits will be funded prior to the beginning of the plan year and the selection is irrevocable,

then the flexible benefits plan can be segregated into multiple parts, and the taxation of the benefits offered under the flexible benefits plan is not altered by the fact it is provided under the umbrella of a flexible benefits plan.