Module 10 - Managing Flexible Benefit Plans

Question 1

Outline factors that have influenced the development of group flexible benefit plans in Canada.

Answer 1

Flexible benefit plans respond to several trends that are driving rising benefits costs and changing workplace demographics:

(a) Escalating benefits costs due to government cost shifting through reductions in coverage under provincial/territorial health plans

(b) An expanding range of innovative and high-cost health care services

(c) Health care cost increases in excess of general inflation levels

(d) An aging population

(e) An increasingly diverse workforce (e.g., gender, race, ethnicity, age, sexuality, language, education, culture and religion) with increasingly diverse heath care needs.

In addition to these factors, many employees have become more educated and involved consumers thanks to greater access to information and the growing focus on prevention and wellness. As a result, many employees increasingly value choice in their group benefit plans.

Question 2

Identify reasons plan sponsors implement flexible benefit plans.

Answer 2

Plan sponsors typically cite these reasons for implementing flexible benefit plans:

(a) Meeting diverse plan member needs

(b) Improving attraction and retention of employees

(c) Increasing plan member understanding of the cost of benefits

(d) Containing or reducing benefits costs

(e) Meeting competitive pressures

(f) Delivering benefits in a more tax-effective manner

(g) Harmonizing benefit arrangements following mergers and acquisitions.

Question 3

Explain how a traditional plan with no choice differs from a traditional plan with add-ons.

Answer 3

In a traditional plan with no choice, the plan sponsor provides a fixed offering of benefits, and plan members have no choice in benefit types or levels of coverage, aside from electing single or family coverage (or opting out if they have spousal coverage). In a traditional plan with add-ons, plan members are allowed to add on to the traditional benefit plan by supplementing coverage in certain benefit areas (typically by adding optional life, optional accidental death and dismemberment (AD&D), or optional critical illness (CI) insurance). A traditional plan with add-ons is not considered to be a flex plan because it offers only a small degree of choice, for which the plan member typically pays.

Question 4

Explain how a modular approach to flexible benefits differs from the full flex approach.

Answer 4

The modular approach provides plan members with a choice of at least two predefined benefits modules or packages (e.g., a package for basic, medium or high coverage). Plan members who select a module that offers a high level of coverage must usually contribute to the cost of benefits through payroll deduction.

Under the full flex approach, plans offer a wide range of different options to plan members. There is typically a core plan, which includes a minimum level of coverage for life and long-term disability (LTD) that is mandatory for all plan members. Plan sponsors usually choose to offer some form of catastrophic health coverage in the core plan, which could include drug coverage after satisfaction of a high deductible and emergency out-of-country coverage. Usually, plan members receive flex credits (or flex dollars) from the plan sponsor. Plan members use the flex credits to purchase benefits from a menu of options with predetermined price tags. If the flex credits are more than the price of the selected benefits, plan members may choose among several options to use the remaining amount, depending on what the plan sponsor offers (e.g., health care spending account (HCSA), taxable spending account, group registered retirement savings plan (RRSP), tax-free savings account (TFSA) or taxable cash). If the flex credits are not sufficient to cover the price of the selected benefits, plan members pay the difference through payroll deduction.

Question 5

Describe the total rewards approach to flexible benefits.

Answer 5

Total rewards flex plans take a total compensation approach that provides plan members with the most extensive choice. Depending on the parameters of the flexible benefit plan, plan members could have choice in benefits, pay, pension/retirement contributions and vacation; however, it is important to carefully consider the tax implications.

For example, some plans allow plan members to purchase vacation with flex credits, so they receive more vacation in place of benefits. Plan members must use additional vacation days they purchase with flex credits in the year of purchase; otherwise, there may be tax implications. These plans may also allow plan members to sell vacation and receive less time off in exchange for more flex credits to purchase additional coverage. Most employers limit the number of vacation days that plan members can sell to between one and five days. Plan members must retain the minimum number of vacation days mandated by employment standards legislation in their province or territory of employment. Flex credits obtained from selling vacation days are taxable to plan members.

Question 6

Describe price tags and flex credits and explain how they are used in flexible benefit plans.

Answer 6

Flexible benefit plans typically use price tags and flex credits, which are communicated to plan members in the benefits selection process. Price tags are the prices or rates (cost of purchasing) for each benefits coverage option the plan sponsor offers.

Flex credits represent the plan sponsor’s contribution to the plan costs. The plan sponsor allocates flex credits to plan members, and plan members use them to purchase benefits coverage. The number of flex credits plan members receive relates to the setting of price tags, as these components work together to influence plan member choice. Factors that play a role in determining the number of flex credits plan sponsors make available to plan members are funding sources and the pricing objectives of the flex plan.

Depending on the price tags of the options plan members select and the flex credits they receive, plan members may have to contribute additional dollars through payroll deduction to purchase the coverage they want.

Question 7

Outline pricing objectives used by plan sponsors to guide decisions on flex credits and price tags and provide examples that align with each of the objectives: List

Answer 7

Realistic pricing

Equity pricing

No-losers pricing

No additional plan sponsor cost pricing

Question 8

Outline pricing objectives used by plan sponsors to guide decisions on flex credits and price tags and provide examples that align with each of the objectives: Realistic Pricing

Answer 8

This approach sets price tags that reflect the cost of the coverage. The plan sponsor can then allocate flex credits to plan members based on realistic prices. With realistic pricing, plan members can develop a better understanding of the value of the program since the price tags for each option reflect the expected claims cost.

Question 9

Outline pricing objectives used by plan sponsors to guide decisions on flex credits and price tags and provide examples that align with each of the objectives: Equity Pricing

Answer 9

Each plan member receives an equal dollar amount or percentage of pay in flex dollars, regardless of their dependent coverage status (i.e., members with and without dependents receive the same allocation). The plan sponsor provides equal flex credits to all plan members based on the average cost of coverage for single plan members only, average cost of coverage for plan members with dependents (more costly than single), average cost of coverage for all plan members or as a percentage of pay.

Question 10

Outline pricing objectives used by plan sponsors to guide decisions on flex credits and price tags and provide examples that align with each of the objectives: No-losers pricing

Answer 10

This approach structures flex credits and price tags to allow plan members to obtain the same (or most comparable) level of coverage that they would have had under a previous, traditional plan without any cost increase. To meet this objective, plan sponsors use component credit allocation, allocating flex credits to plan members for each type of benefit previously offered. Typically, plan sponsors base credits for benefits not related to pay, such as extended health care, on flat-dollar components, while they base credits for pay-related benefits, such as LTD, on percentage-of-pay components.

Question 11

Outline pricing objectives used by plan sponsors to guide decisions on flex credits and price tags and provide examples that align with each of the objectives: No additional plan sponsor cost pricing

Answer 11

The plan sponsor contributes the same level of overall dollars toward the flexible benefit plan as it would have contributed to the previous benefit plan. For example, if the average plan sponsor cost for the traditional plan was $2,500 per plan member and the estimated cost for the new flexible benefit plan is $3,000 per plan member, the flex credit allocated would be $2,500 per plan member, with the plan members funding the additional $500.

Question 12

Explain how the total plan sponsor cost of a flexible benefit plan is determined.

Answer 12

The total plan sponsor cost of a flexible benefit plan can be estimated by projecting the expected claims cost (claims adjusted for inflation plus expenses and taxes), adding the total flex credits (plan sponsor contribution) and subtracting the total price tags (plan member contribution):

Total plan sponsor cost = expected claims + expected expenses and taxes + flex credits – price tags.

Question 13

Identify steps generally involved in setting price tags under a flexible benefit plan.

Answer 13

Data collection and analysis

Preliminary option pricing

Preliminary subgroup pricing

Consideration of adverse selection and other changes that will impact benefit costs

Calculation of taxes and administration fees.

Adjustment to realistic price tags

Determination of no-coverage or opt-out pricing (if applicable)

Pricing by business unit or location

Question 14

Describe the disadvantages of using subsidized pricing in a flexible benefit plan.

Answer 14

While subsidized pricing may encourage plan members to select a particular option, it also adds a layer of complexity to the pricing process and can have some disadvantages. Subsidized pricing may cause the plan sponsor to move away from the objective of realistic pricing. It also makes it more difficult for plan members to understand the program cost, since subsidized price tags may significantly understate the actual cost of providing benefits.

Question 15

Explain what influences a plan sponsor’s decision to include limitations on a plan member’s ability to opt out of coverage in a flexible benefit plan.

Answer 15

Plan members may be allowed to waive or decline coverage for certain benefits. The plan sponsor decides whether plan members will be allowed to opt out and for which benefits. It is rare for plan sponsors to allow plan members to opt out of all benefits due to the potential for adverse selection, which can drive up the cost for the remaining plan members. In addition, many plan sponsors have a benefits philosophy to provide plan members with a certain minimum level of benefits coverage.

Some plan sponsors may allow plan members to opt out of extended health care and dental benefits entirely; however, plan sponsors generally require plan members to have coverage under another plan, such as a spouse’s group benefits plan, before permitting plan members to waive coverage. Other benefits (e.g., life and LTD) usually have a minimum core level that plan members cannot waive.

If benefits are insured, this impacts the decision about whether or not to allow plan members to decline coverage. As discussed previously, the insurer may be unwilling to underwrite certain benefits if participation is too low.

Question 16

Differentiate between premium or deposit billed rates and price tags as they relate to flexible benefit plans.

Answer 16

In insured plans, the insurer sets premium rates. These premium rates may or may not match the price tags communicated to plan members in the benefits selection process. For example, if the plan sponsor is subsidizing the price tags for the core level of insured extended health care benefits, the premium rate billed by the insurer for the health benefit could be $50 per month/member, but the price tag charged to a plan member could be $40 per month.

This may also happen if the plan is self-insured with an administrative services only (ASO) arrangement. If the plan sponsor is using a billed-in-advance payment option, the monthly deposit levels or deposit rates set by the insurer or TPA may or may not match the price tags the plan sponsor communicates to plan members in the benefits selection process.

Question 17

Identify possible sources of funding for flex credits.

Answer 17

Plan sponsor contributions to current plan

Reallocation of funds from restructuring benefits provided within the flexible benefit plan

Restructuring benefits provided outside the flexible benefit plan

Additional plan sponsor contributions allocated to all plan members

Additional plan sponsor contributions through wellness credits

Payroll deductions

Question 18

Identify methods a plan sponsor can use to test the overall feasibility of the flexible benefits pricing structure.

Answer 18

Plan sponsor cost analysis: This compares the total plan sponsor cost before the flexible benefit plan to the expected cost of the flexible benefit plan.

Winner and loser analysis: This compares a plan member’s situation before and after implementation of the flexible benefit plan. It reviews plan member contributions for each plan to determine the impact of the introduction of the flexible benefit plan. There will always be winners and losers under a new flexible benefit plan (i.e., there is no perfect scenario where every plan member “wins”).

Question 19

Describe adverse selection and outline strategies, other than price tag adjustments, that can be applied to a flexible benefit plan to minimize the risk of adverse selection yet still offer some plan member choice

Answer 19

Adverse selection occurs when plan members are aware that they will use a particular benefit and select the benefit option that provides the highest level of coverage at the lowest cost (based on their best estimate of the out-of-pocket expenses they would otherwise incur). For example, plan members who know they need expensive bridgework will tend to select a dental care option that is priced lower than the cost they otherwise would have had to pay to obtain the bridgework.

Strategies that can be applied to a flexible benefit plan to minimize adverse selection yet still provide some plan member choice include:

Implementing step-up or step-down limitations (i.e., staircase rule)

Implementing lock-in provisions

Implementing packaged options

Structuring benefit options strategically

Using HCSAs for predictable expenses

Using opting-out disincentives

Question 20

Staircase rule

Answer 20

The staircase rule applies a maximum increase or decrease in coverage from one plan year to the next. This prevents plan members from moving from the lowest level of coverage to the highest after learning they might require medical or dental treatment for a particular condition, and vice versa when the need no longer exists. There may be exceptions to allow for changes in options related to certain life events.

Question 21

Lock-in provisions

Answer 21

When plan members choose certain options (such as the highest level of benefits coverage), they cannot change their selections for a specified period of time, referred to as the “lock-in” period (usually two or three years). This protects the plan from plan members staying in an option only for the period they expect to receive treatment or care and then dropping down to a less expensive option as soon as they have incurred these expenses. Lock-in provisions also ensure that premiums for high-level options are paid for at least a minimum period.

Question 22

Packaged options

Answer 22

Packaged options reflect pre-set combinations of benefits coverage that combine coverage for what might be predictable and budgetable expenses (e.g., dental care) with benefits coverage for catastrophic and nonpredictable expenses (e.g., emergency out of Canada health care).

Question 23

Opt-out disincentives

Answer 23

Plan members who waive or opt out of coverage for a certain benefit are provided with less than the full value of that benefit in terms of flex credits.

Question 24

Explain how benefits provided under a flexible benefit plan are taxed.

Answer 24

In general, benefits under a flex plan are taxed in the same way as those under a traditional plan as long as the plan meets the set criteria (i.e., plan members must choose their benefits and how to fund them before the beginning of the plan year and, subject to certain exceptions, these selections must be irrevocable). Exceptions to irrevocable selection are life events (e.g., birth or death of a dependent, change in marital status or loss of insurance coverage under a spouse’s plan) or changes in employment status (e.g., full-time to part-time employment). Changes are only effective from the date of the life event or employment status change and do not apply retroactively.

The mere allocation of flex credits by a plan sponsor does not create a taxable benefit in the hands of the plan member if certain conditions are met and flex credits are notional. Flex credits are considered to be notional amounts if they have no redemptive value, and the plan member forfeits nothing of value to acquire them.

Canada Revenue Agency (CRA) views flex credits as plan sponsor benefit premiums, not plan member earnings. Flex credits are generally not taxable until the plan member uses them to purchase benefit selections. The tax treatment of flex credits depends on the type of benefits the plan member purchases. For example, when a plan member chooses, before the beginning of the plan year, to have a portion of their flex credits deposited into a TFSA or an RRSP, the amount received or deposited is included in the plan member’s income as salary or wages when it is received or deposited.

Except in Quebec, plan sponsor premium contributions to a PHSP, such as a group benefits plan, are not considered income to the plan member. Note that this tax treatment is not extended to life, AD&D or CI benefits; flex credits used to purchase these types of coverage are considered taxable to plan members. In Quebec, flex credits used to purchase health and dental coverage are subject to provincial income tax.

Question 25

Explain the tax implications of selling vacation days or converting a negotiated salary increase into flex credits for a plan year.

Answer 25

When plan sponsors allow plan members to sell vacation days in exchange for additional flex credits, the value is included in the plan member’s income at the time the plan member receives the additional flex credits. In this case, the plan member’s trading of vacation entitlement triggers a taxable event, not their use of the additional flex credits.

When a new employment contract is negotiated with a lower salary amount and higher flex credits after the expiry of any prior employment contract, the reduction in salary is not considered a conversion of salary to flex credits. However, if the employment contract is renegotiated 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 the benefits the employee acquires using the additional credits are considered to have come from employee contributions.

Question 26

Outline basic issues typically addressed in the preassessment stage of introducing a flexible benefit plan.

Answer 26

The preassessment stage involves either validating the plan sponsor’s current benefits plan philosophy or establishing one. The benefits plan philosophy and/or objectives typically address these basic issues:

(a) Extent of coverage (e.g., to provide plan members with protection against catastrophic events like death and disability; to provide plan members with financial assistance for budgetable expenses like vision and dental care)

(b) Specific competitive objectives (e.g., to provide a median plan among competitor groups or a plan in the 75th percentile relative to competitor groups)

(c) Benefits provisions for different plan member groups (e.g., hourly, salaried, union, nonunion, managers, senior executives, full- or part-time, active, retiree), in terms of level of expenditure, coverage and eligibility

(d) Targets such as cost control or cost reductions (e.g., to maintain the same percentage of payroll cost)

(e) Integration of the plan with government-sponsored benefits

(f) Plan member contribution levels

(g) Degree of choice given to plan members.

Question 27

Explain the role of the benefits philosophy/objectives.

Answer 27

The benefits philosophy/objectives statement guides the development of and revisions to all components of the benefits plan. It performs the following functions:

(a) Serves as a guide for new plan design and evaluating benefits changes in an existing plan

(b) Provides the basic framework to implement plan changes effectively

(c) Defines the link between human resources goals, such as attracting and retaining qualified individuals, fostering a healthy workplace culture and driving health behaviours, and the role of the benefits plan in supporting those goals.

Question 28

Describe the steps involved in developing the preliminary design of a flexible benefit plan.

Answer 28

Developing the preliminary design involves evaluating alternative design approaches; analyzing pros and cons of each; and identifying associated cost, legal and tax implications. Steps in this stage of the process are as follows.

Collect data on the current benefit plan and the plan member group.

Define flex plan objectives.

Develop plan design.

Pretest proposed plan with plan members.

Clarify legal and tax issues.

Determine preliminary pricing structure, including pricing objectives, preliminary price tags and flex credits.

Question 29

Explain what is involved in determining the implementation requirements of a flexible benefit plan as part of the planning stage.

Answer 29

Determining the implementation requirements of a flexible benefit plan involves:

(a) Developing a detailed implementation schedule addressing the time needed to prepare administrative systems and procedures, develop a communication strategy (including writing, editing, translating, approving and production of communication materials for print or online delivery), prepare legal documentation, set up the insurer/third-party administrator (TPA) claims and administration systems, and enroll plan members in the plan

(b) Developing an implementation budget including the cost of required resources, including the production of communication materials and all other costs associated with implementation

(c) Determining the administrative approach. In making the administrative approach decision, plan sponsors generally assess their current environment to understand the relationship between the departments involved in the administration of the plan (e.g., human resources, benefits administration, payroll and finance) as well as information technology capabilities by:

• Assessing current capabilities by auditing current administration systems and procedures
• Identifying new procedures and requirements for the flexible benefit plan (e.g., calculation of flex credits and the special record-keeping required for HCSAs)
• Completing a gap analysis by comparing systems/procedures requirements for the new flexible benefit plan against those already in place
• Evaluating options available to handle the administration functions (e.g., develop/expand in-house capacity or outsource some or all functions to TPAs or insurers).

Question 30

Outline steps in the implementation stage of introducing a flexible benefit plan.

Answer 30

There are eight steps in the implementation stage:

(1) Finalize plan design and pricing structure

(2) Finalize communication plan

(3) Confirm administration capabilities

(4) Execute legal documents

(5) Complete enrollment process

(6) Modify payroll system to interface with enrollment system

(7) Communicate new plan design to the insurer/TPA to allow for updating of their systems

(8) Conduct a postimplementation review.

Question 31

Identify communication objectives when introducing a flexible benefit plan.

Answer 31

Communication processes should support the overall objectives for the flex plan. The plan’s communication plan should achieve the following:

(a) Identify and address information needs of all plan member groups affected by the introduction of flexible benefits

(b) Link the plan sponsor’s goals for the flex plan to other organizational initiatives by communicating how the flexible benefit plan reinforces them

(c) Emphasize key messages that focus on the defining characteristics of the plan (e.g., providing information to assist with plan member decision making, reiterating that benefits are a shared responsibility or other information as appropriate)

(d) Identify the roles and responsibilities of managers and supervisors during plan implementation and provide them with the support they need

(e) Assess the work environment (e.g., plan members’ current knowledge of benefits-related issues, plan member demographics, the existing communication infrastructure, organizational barriers) and target information to the needs and interests of plan members

(f) Identify communication vehicles appropriate to the particular workplace (e.g., booklets, newsletters, audiovisual, email or social media, etc.) and phase of implementation

(g) Establish methods to solicit, track and respond to plan member feedback and questions

(h) Identify potential areas of plan member concern with the flexible benefit plan design and implementation and communicate the plan sponsor’s rationale

(i) Address decision-making issues related to the broad element of choice inherent in flexible benefit plans and provide communication tools to address the concepts of difficult choices and inappropriate choices.

Question 32

Describe procedures involved in the enrollment process in a flexible benefit plan.

Answer 32

Procedures involved in the enrollment process in a flexible benefit plan include the following.

(a) Collecting and verifying plan member data. This is particularly important with flexible benefit plans, since individual data, such as classification or age, may determine eligibility for coverage, benefits options and/or option prices. Once data is verified, eligible plan members receive enrollment packages, which often include a statement of the plan member’s current selections.

(b) Updating premium rate tables/option prices and computing the flex credit allocation for each plan member. Enrollment packages commonly include calculations that show updated prices (i.e., the total amount required should plan members keep the same selections).

(c) Checking plan member selections to ensure information is correct (e.g., validating whether options selected by a plan member are available to the plan member and checking calculations used in allocating flex credits to benefit options).

(d) Producing personalized confirmation statements. To help reduce errors, plan sponsors may require plan members to review and confirm their statements for accuracy before their choices take effect.

(e) Monitoring the status of plan members with missing enrollments, following up with plan members who made invalid selections that require corrections and keeping these plan members informed of their status.

(f) Communicating completed enrollment information to the appropriate parties (e.g., payroll deductions to the payroll department and benefit selections to insurers).

Question 33

Describe events that can trigger changes to plan member coverage in a flexible benefit plan.

Answer 33

Life events—including becoming a parent, changing marital status or gaining/losing coverage under another plan (e.g., spouse’s group benefit plan)—can trigger a change in coverage. The plan sponsor may require proof of the life event and that the plan member request changes within a specified period of time after the change occurs, normally 31 days.

Changes to coverage also occur when plan members terminate, retire or change classifications or when they become eligible for full benefits after satisfying the waiting period.

Question 34

Explain how a financial review of a flexible benefit plan differs from the financial review of a traditional plan.

Answer 34

The financial review of a benefits plan involves periodic analysis of the claims to determine whether the experience is running above or below expected levels, whether there are any emerging claims trends and the types of services being claimed (under extended health care and dental benefits). Typically, the financial review of a flexible benefit plan is more complex compared with that of a traditional plan because it must also consider enrollment and experience by option.

The review of a flexible benefit plan is typically performed when the flexible benefit plan has sufficient experience, and it may occur at several intervals throughout the year to keep the plan sponsor apprised of the emerging experience. For most flexible benefit plans, due to adverse selection, the lower priced options tend to have more favourable claims experience, while the higher priced options tend to have less favourable claims experience.

If the plan sponsor remits premiums or deposits to the insurer, the financial review also includes an analysis of whether the premium or deposit level is sufficient given the claims experience. The plan sponsor can use this information to develop an estimated renewal projection and/or estimated financial statement for budgeting and accounting purposes.

The annual renewal may require repricing of options if the financial review determines this is appropriate. The price tags may increase or decrease by a flat percentage, or the percentage adjustment could differ by option, depending on the level of subsidization the plan sponsor wants to achieve. In addition to price tags, the plan sponsor could also adjust the number of flex credits provided to plan members. At the annual renewal, the plan sponsor must also consider the fees the insurer and/or TPA charges to administer the flexible benefit plan.

Question 35

Explain how ongoing communication for a flexible benefit plan differs from a traditional plan.

Answer 35

A flexible benefit plan requires greater ongoing communication effort than a traditional plan. Since a flexible benefit plan empowers plan members to select their benefit, plan members must have sufficient information at reenrollment to make informed decisions. It is essential to clearly communicate any changes to price tags, flex credits or plan design. At reenrollment, the vast majority of plan members maintain their current options; therefore, plan sponsors need reenrollment communication that engages plan members and encourages them to reevaluate their needs.

Question 36

Explain how the plan sponsor can encourage flexible benefit plan members to evaluate their needs at reenrollment.

Answer 36

The plan sponsor can encourage flexible benefit plan members to evaluate their needs at reenrollment by making the reenrollment process mandatory, or “active.” This means that unless plan members actively reenroll, their coverage reverts to a default set of options, which may not meet their needs. However, this approach increases administrative resource requirements and may result in negative feedback from plan members if they are unaware that they need to make an active selection, despite communication efforts.

Question 37

Outline steps involved in determining the magnitude of a flexible benefit plan redesign.

Answer 37

Revisiting plan objectives

Reviewing plan member feedback

Conducting a gap analysis

Question 38

Describe the advantages of implementing a flexible benefit plan.

Answer 38

(a) Flexible benefit plans provide plan members with the opportunity to participate actively in benefits selection. Plan members can choose options to best meet their needs, depending on the structure of their family (e.g., single-parent family, dual-income family, extended family, common-law partners and foster family) as well as their age, health profile and occupation.

(b) Flexible benefit plans use a defined contribution (DC) approach to funding, which means that a plan sponsor can control costs by fixing the amount it contributes toward the cost of the plan, with plan members paying the remainder. This allows plan sponsors to budget and project annual benefits expenditures more precisely than with a defined benefit (DB) approach where plan sponsors have limited ability to transfer unexpected plan costs to plan members.

(c) By matching benefits options with plan members’ needs, the plan sponsor can reduce unnecessary duplication of coverage, for example, when a plan member’s spouse is eligible for benefits through another organization’s group benefit plan.

(d) Through plan design and pricing, plan sponsors can encourage plan members to select more cost-effective options that have lower premiums.

(e) In some cases, new benefits can be added at little additional cost and without redesigning the current benefits package; plan members can pay for new benefits themselves, in a tax-effective way, by trading benefits they do not want for the new benefits or by using flex credits.

(f) Plan member morale may improve when plan members become more knowledgeable consumers and participate in the selection of benefits that match their needs. Flexible benefit plans can improve plan member perception of the plan sponsor because the plan sponsor is viewed as a progressive organization that values plan member input.

Question 39

Outline the disadvantages of implementing a flexible benefit plan.

Answer 39

a) Given freedom of choice, plan members tend to make choices in their own best interest (i.e., adverse selection), which can be detrimental to the plan sponsor’s financial interests. In other words, based on their personal needs and health conditions, plan members select benefits options that are more financially beneficial for them, rather than for the plan sponsor. Plan members who know they will make greater-than-average use of a particular benefit may select that benefit, knowing they need pay only the price an average user would pay.

b) When a plan sponsor introduces a flexible benefit plan, there will be some winners and losers (i.e., some plan members will be better off, and some plan members will be worse off relative to the traditional plan).

c) Because flexible benefit plans are complex, they require more resources for plan member communication, and plan sponsors should allocate sufficient resources to effectively communicate the plan’s details to plan members. It is important to clearly communicate the menu of options, flex credit structure, price tags and tax implications to plan members well in advance of the enrollment period and effective date of the flexible benefit plan.

d) There is risk of inappropriate plan member decisions. Plan members who do not make prudent selections run the risk of having insufficient coverage. Plan sponsors can mitigate but not eliminate this risk through proper plan member communications.

e) Administrative costs may be higher. Flexible benefit plans may require a larger initial investment for planning and implementation than traditional benefit plans and have higher ongoing plan management costs. The relatively high cost of implementing and maintaining full flex plans may prove prohibitive for smaller organizations, which generally have significantly higher per capita administrative costs and may lack necessary resources in the areas of finance, human resources and administration. Without these resources, they may not have the expertise to manage the tax and legal complexities inherent in flexible benefit plans.