Module 3 Flashcards
Describe the functional approach to benefits plan design
The functional approach to benefits plan design is a systematic method for analyzing a plan sponsor’s overall benefits plan. It analyzes the plan as a coordinated whole in terms of its ability to meet plan members’ (and others’) needs and to manage loss exposures within the plan sponsor organization’s overall compensation philosophy/objectives and cost parameters.
Outline the advantages of using a functional approach in plan design and evaluation (5)
(a) The functional approach assists in effectively meeting plan members’ needs, which is important because benefits are a significant element of total compensation.
(b) It assists in effective benefits planning, which helps to avoid waste in providing benefits and is an important cost-control measure.
(c) It assists in reviewing current benefit plans or proposed changes in plans for overlapping benefits and potential cost savings as well as for gaps requiring new or revised benefits.
(d) It assists in keeping the benefits plan current, cost-effective, competitive and in compliance with regulatory requirements.
(e) It assists in properly integrating different benefit plans (e.g., pension plan coverages with group insurance coverages).
Identify factors that impact a plan sponsor’s total compensation philosophy/objectives
Setting the total compensation philosophy/objectives is a strategic decision. For single employer plans, this statement embodies the plan sponsor’s beliefs and values in the area of compensation practices, links those values to the strategy and direction of the business, and brings together all elements of total compensation.
Many factors—including type of industry, business strategy and basis of competitive advantage, organizational characteristics, geographic location, supply and demand of relevant talent and prevailing compensation practices—influence an employer’s total compensation philosophy/objectives (including the design of its group benefits plan).
Explain why a plan sponsor using the functional approach to benefit plan design and evaluation might not include a specific benefit in its plan or entirely cover a certain plan member need related to that benefit.
The functional approach to planning and designing a group benefits plan must be applied in a way that is consistent with the plan sponsor’s total compensation philosophy/objectives (including those for its benefits). Therefore, a plan sponsor using the functional approach may not include a specific benefit in its benefits plan or entirely cover a certain employee need or want related to that benefit, not because the need or want is not recognized but because the employer’s total compensation philosophy/objectives calls for a relatively low level of benefits or, perhaps, benefits are oriented in a different direction.
Compare a compensation/service-oriented benefits approach and a benefits/ needs-oriented approach to plan design
When designing their group benefit plans, plan sponsors using a compensation/service-oriented approach tend to relate benefits primarily to compensation, service or both (remaining consistent with any nondiscrimination rules). The level of benefits tends to be tied in with compensation level, and eligibility for benefits may be conditional directly or indirectly on salary level.
Under the benefits/needs-oriented approach, plan design decisions related to eligibility, participation requirements and benefit levels tend to be based primarily on the basic security needs of plan members and their dependents rather than on compensation and service.
In practice, the design of group benefit plans tends to be a compromise between these two approaches. Certain kinds of benefits such as health care tend to be primarily benefits/needs oriented. Other benefits, such as group life insurance and pension, customarily are compensation oriented, at least for nonunion plan members.
Outline the main steps of the functional approach to benefits plan design or revision (13)
(1) Classify plan member and dependent needs and loss exposures into logical functional categories.
(2) Categorize individuals to be covered for what benefits, for what time and under what conditions.
(3) Analyze the current benefits plan in terms of functional categories of needs and loss exposures and categories of individuals to be covered.
(4) Determine gaps and/or overlaps in current benefits after considering all sources of benefits.
(5) Identify recommendations for changes to fill gaps and/or eliminate overlaps in the current benefits plan.
(6) Evaluate alternative funding sources and funding arrangements.
(7) Consider cost-saving or cost-containment techniques.
(8) Estimate costs (or savings) for each recommended change.
(9) Finalize appropriate benefits, funding sources and funding arrangements as a result of the preceding analysis.
(10) Evaluate alternative benefit administration approaches and finalize an approach.
(11) Implement changes.
(12) Communicate changes to plan members.
(13) Reevaluate the benefits plan periodically.
Describe how plan member and dependent needs and exposures to loss are categorized under the functional approach (11)
Plan member and dependent needs are classified into logical functional categories. The commonly accepted categories of needs and exposures to loss that may be covered in a group benefits plan are:
(a) Health care expenses incurred by active plan members, dependents, retired (or certain otherwise terminated, suspended or temporarily not in service) plan members, or former plan members and their dependents
(b) Income losses due to plan members’ disability (short-term and long-term)
(c) Income losses resulting from active plan members’ deaths, dependents’ deaths, retired (or certain otherwise terminated, suspended or temporarily not in service) plan members’ deaths, or former plan members’ deaths
(d) Needs for dependent-care assistance (child-care or elder-care services)
(e) Retirement needs of plan members and dependents
(f) Capital accumulation needs or goals (short-term and long-term)
(g) Needs arising from unemployment or from temporary termination or suspension of employment
(h) Needs for financial, retirement and other counselling services
(i) Losses resulting from property and liability exposures
(j) Needs for educational assistance for plan members and/or dependents
(k) Other benefits needs or goals (such as participating in corporate stock plans or other longer term incentive plans).
Outline the categories of individuals a plan sponsor might consider protecting
A plan sponsor might consider covering the following categories of individuals under its group benefits plan:
(a) Active permanent employees (can include full-time and part-time employees)
(b) Dependents of active permanent employees
(c) Retired former employees
(d) Dependents of retired former employees
(e) Disabled plan members and their dependents
(f) Surviving dependents of deceased employees
(g) Terminated employees and their dependents
(h) Employees (and dependents) temporarily separated from the plan sponsor’s service, such as during layoffs, leaves of absence, military duty, strikes, etc.
(i) Individuals other than permanent active employees (e.g., temporary part-time, directors, etc.).
Explain why the process of categorizing the individuals the plan sponsor wants to protect is an important plan design decision.
Categorizing the individuals to protect is the foundation of the functional approach—The needs and loss exposures of plan members imply consideration of not only the individuals to be protected but also the kinds of benefits to be provided, for what period of time and under what conditions. It is an important plan design consideration because as the scope of benefits coverage increases, so does the cost. The extent to which plan sponsors may want to extend coverage of their group benefit plans to one or more of these categories of individuals varies with the plan sponsor’s total compensation philosophy/objectives, cost constraints, funding and accounting considerations, collective agreements, and group benefits practices in the particular industry and geographic area involved. Such extensions also vary considerably among the different kinds of benefits. Regulatory requirements must also be followed.
Outline issues that should be considered when determining eligibility for benefits.
(a) Which dependents of active plan members should (or must) be covered for health care benefits or life insurance benefits?
(b) Should retirees (and their spouses and other dependents) continue to be covered? If so, for what benefits?
(c) Should survivors of deceased active plan members continue to be covered? If so, for what benefits and for how long?
(d) Should survivors of retired former employees continue to be covered? If so, for what benefits?
(e) Should disabled plan members or disabled former plan members (and perhaps their dependents) continue to be covered? If so, for what benefits, for how long and under what conditions?
(f) Should (or must) coverage be extended to plan members during layoffs, leaves of absence, strikes and other temporary interruptions of employment? If so, for what benefits, for how long and under what conditions?
(g) Should coverage be limited to permanent full-time employees, or should coverage also be extended to part-time employees or temporary part-time employees?
(h) Should (or must) coverage be continued or made available to individuals (or for the dependents of such individuals) after termination of employment and on what basis?
Justify the inclusion of optional benefits in an evaluation of the levels of benefits and benefits adequacy.
An evaluation of levels of benefits and benefit adequacy should recognize that plan members’ needs may exceed the basic level of benefits provided by the plan sponsor. Optional benefits involve the opportunity for plan members to purchase coverage or additional levels of coverage in excess of the basic level of benefits. Through such optional benefits, the plan sponsor is giving plan members the opportunity at a given cost to make their total benefits more adequate in certain specific areas (e.g., additional life insurance).
Explain why benefit waiting periods are considered.
Waiting periods, by their nature, create gaps in coverage for newly hired or newly eligible employees and their dependents. The functional approach analyzes the benefits plan to determine if any resulting gaps in coverage caused by a waiting period are appropriate and consistent with the plan sponsor’s total compensation philosophy/objectives and plan members’ needs.
Discuss why certain benefits are more suited to longer waiting periods than others.
Group benefits can be divided into two groups: protection-oriented benefits (e.g., health care benefits, life insurance benefits, weekly indemnity/short-term disability (WI/STD) and long-term disability (LTD), etc.) and accumulation-oriented benefits (e.g., pension plans, profit-sharing plans, stock bonus plans, etc.).
A plan sponsor may want to use waiting periods with accumulation-oriented benefits but not with protection-oriented benefits. Protection-oriented benefits protect against serious loss exposures that, if immediate coverage were not available, could create financial consequences for plan members, their dependents or both. The rationale is that the need for immediate coverage would override the traditional reasons for using waiting periods or longer waiting periods.
Accumulation-oriented benefits could involve long waiting periods and could be subject to legal requirements. The plan sponsor rationale might be that these kinds of benefits should reward long service. Also, a plan member who stayed with the plan sponsor would have a relatively long time in which to accumulate such benefits and, thus, longer waiting periods would not necessarily place such longer service plan members at any serious disadvantage or risk.
Describe the benefit of using the functional approach to analyze gaps or overlapping benefits in the current benefits plan
Steps one through four of the functional approach provide the basis for more effectively identifying gaps and/or overlapping benefits in the current plan against defined parameters. Gaps and/or overlapping benefits can be determined by analyzing benefits available from all sources to meet various categories of plan members’ needs and goals, the projected levels of benefits for those needs, coverage of the various categories of individuals the plan sponsor may want to protect and, finally, actual participation in the various components of the group benefits plan.
Discuss the impact of requiring plan member contributions on how well a group benefits plan meets the needs of the group as a whole.
If employees are required to contribute to the cost of a particular benefit, it impacts participation rates if the plan is voluntary and, consequently, the degree to which the group benefits plan meets the group’s needs as a whole. This represents a trade-off between the funding (sources of funds and amount of funds) and other advantages of a contributory plan and the loss of participation in the plan due to requiring plan member contributions. One approach to balancing these concerns is to rank group benefits in terms of the relative degree to which the plan sponsor believes all plan members and their dependents should be protected. Ranking allows the plan sponsor to identify benefits to be targeted for 100% participation as well as benefits for which such a high level of participation is not deemed essential.
