Module 4

Question 1

What are the main decisions in designing a plan? (6)

Answer 1

Plan design involves the analysis and decision-making process that plan sponsors apply when implementing a new plan or reviewing/changing an established plan. Plan design activities generally focus on addressing:

(a) Benefits plan philosophy/objectives

(b) Categories of individuals eligible for benefits coverage

(c) Type and level of benefits provided and under what terms and conditions

(d) Who pays for coverage

(e) Whether plan members can choose some of their benefits

(f) How to manage plan costs.

Question 2

Explain why setting the benefits philosophy/objectives for a benefits plan is a strategic decision.

Answer 2

Setting the benefits philosophy/objectives statement is a strategic decision for the plan sponsor because this statement can provide insight into why the plan sponsor has introduced the plan (it provides context for plan design, identifying organizational values, and providing high-level direction and guidance to the plan sponsor).

This statement embodies the single employer plan sponsor’s beliefs and values around compensation practices, links those values to the strategy and direction of the business, and brings together all elements of total compensation, such as base salary, short- and long-term incentives, and benefits. For multi-employer plans (MEPs), this statement relates to the trustees’ role of providing strategic direction for the management of the trust and plan as a whole to achieve the trust’s purpose over the long term.

Question 3

What can a benefits philosophy do (3)

Answer 3

(a) Serve as a guide for evaluating benefit changes and specific cost-savings initiatives moving forward

(b) Provide the basic framework to implement plan changes consistently and effectively within the overall context of the plan and helps to prevent impulsive reactions to external factors, like cutbacks in government health plans that may influence the organization’s benefits plan

(c) Explicitly define how the mix of benefits in the benefits plan will support human resource goals, such as attracting and retaining the kind of people essential to the plan sponsor organization’s business strategy, fostering a healthy workplace culture and driving health behaviours.

Question 4

Outline factors influencing plan design decisions regarding categories of individuals eligible for coverage. (5)

Answer 4

Benefits eligibility may vary based on:

(a) Form of compensation (e.g., salaried, hourly or contract)

(b) Presence of collective bargaining agreements (e.g., union or nonunion)

(c) Individual’s position within a company (e.g., executive, professional, technical, administrative/clerical)

(d) Geographic region in which employees are located (e.g., province/territory or city)

(e) Number of years of service.

Question 5

Describe how the plan sponsor’s level of risk tolerance and cash flow can impact its decisions regarding the type and level of benefits to offer and whether to insure or self-insure.

Answer 5

Cost to the plan sponsor must be balanced against plan member needs. Few plan sponsors can directly absorb the costs of all claims under a group benefits plan, since these include many predictable costs, as well as future obligations arising from plan member sickness/injury, which cannot be predicted. Depending on its level of risk tolerance and cash flow available to cover unforeseen expenses, the plan sponsor may assume some financial risk for claims costs and expenses incurred (self-insure), or it may choose to transfer some (or all) financial risk to an insurer. In a fully insured plan, the plan sponsor’s financial liability is limited to the premiums payable to the insurer, regardless of whether these are sufficient to cover actual claims and plan expenses.

Question 6

Contrast the cost of a disability claim with the cost of a routine dental care claim.

Answer 6

The cost of insurance is related to the predictability of the event that will trigger a claim and the significance of the cost of the claim when the event occurs. The incidence of disability (how often it will happen) is hard to predict, disabilities have an unpredictable duration, and the cost of disability claims can be significant. In comparison, the incidence of dental exams plus routine dental care is more predictable and the claims have far less significant costs.

Question 7

Identify sources of information that can provide plan sponsors with insight into plan member needs regarding type and level of benefits to include in a benefits plan.

Answer 7

Sources of information that provide insight include:

(a) Plan sponsor’s perception of member needs

(b) Industry standards/benchmarking of competitor benefits plans in the same industry or in different industries

(c) Benefits obligations set out in collective bargaining agreements

(d) Plan members’ perceptions of their needs.

Question 8

Outline the benefits and risks to a plan sponsor of soliciting plan member input in the benefits plan design process.

Answer 8

One objective of the plan design process is that plan members perceive the value of their benefits plan. The mix of benefits and features of each benefit should relate to specific needs of the group so that individuals can easily identify which aspects of the benefits plan are valuable to them. This can be accomplished by soliciting member input. Plan sponsors can use this input to flag for review any benefits or features without an explicit link to identified plan member needs or to determine where to allocate funds in terms of new or enhanced benefits or where to make plan reductions if implementing cost-saving measures. Plan member input can also be helpful to determine which provisions plan members prefer for a certain type of benefit.

The risk of soliciting this type of input is that it can have a negative impact on employee morale if the plan sponsor does not clearly manage plan member expectations as to how the input will be used. It is important to put plan member input in context by communicating other important considerations such as achieving a balance between plan sponsor costs and plan member needs.

Question 9

Compare the role of weekly indemnity/short-term disability (WI/STD) benefits with long-term disability (LTD) benefits provided in many group benefit plans.

Answer 9

Income replacement plans protect against loss of income in the event of illness or injury resulting in disability. Many group benefits plans incorporate coverage of short-term disabilities for all full-time employees. The most commonly offered plans are sick leave, salary continuance and/or WI/STD. WI/STD plans may apply to both salaried and hourly employees. They typically pay benefits on the first day if the disability is due to an accident or hospitalization; if the disability is due to an illness, the plans typically have an elimination period for benefits of three to seven days. The maximum benefit durations usually range from 15 to 26 weeks. However, some hourly plans may have maximum benefit durations of 52 weeks or more.

An LTD plan is the most common way of providing extended coverage to disabled plan members who are unable to work due to prolonged illness or injury. Benefits are payable only after an elimination period during which plan members usually receive income through short-term income replacement plans, such as sick leave, salary continuance or WI/STD plans, or through a government-sponsored program, such as Workers’ Compensation (WC), Employment Insurance (EI) or, less frequently, the Canada Pension Plan/Quebec Pension Plan (CPP/QPP). The benefit period usually ends at the earliest of a plan member’s recovery, retirement or attainment of age 65.

Question 10

Justify why dental coverage, for the most part, is not insurance in the classic sense.

Answer 10

Recall from Module 1 the characteristics of an insurable risk. Dental coverage, for the most part, is not insurance in the classic sense, because expenses are not random and unforeseen; most dental expenses are for scheduled services. Unlike group extended health care plans that provide protection against the financial impact of an unexpected or ongoing medical condition, group dental plans cover services that are often predictable, short-term and not financially catastrophic. Accidental dental benefits generally fall under the extended health care provisions of a group insurance contract.

Question 11

Compare the roles of core benefits, optional benefits and ancillary benefits in an overall benefits plan.

Answer 11

Benefits commonly offered in group benefit plans can be categorized in terms of their role in the overall benefits plan—core, optional and ancillary. Core benefits typically include mandatory benefits that address the primary needs of most plan members such as basic life insurance, disability, extended health care (EHC) and dental benefits. Core benefits also commonly include dependent life insurance and basic accidental death and dismemberment (AD&D) insurance. They may be 100% plan sponsor-paid or may have an element of cost sharing with the plan member.

Optional benefits, also referred to as voluntary benefits, typically include additional amounts of life and AD&D insurance (referred to as optional life and optional AD&D). Optional benefits are generally 100% plan member-paid.

Ancillary benefits reflect needs (other than basic health care and income protection needs) that influence an individual’s well-being and work productivity. The scope of ancillary benefits can be quite wide and varied and can include employee assistance plans (EAPs), wellness programs, critical illness insurance plans, health care spending accounts (HCSAs) and taxable spending accounts.

Question 12

Identify the primary difference between a traditional group benefits plan for salaried employees and hourly employees.

Answer 12

A traditional group benefits plan for both salaried and hourly employees includes core, optional and ancillary benefits. The primary difference is the short-term disability component provided under the core benefits. Salaried employees are more likely to receive sick leave or salary continuance benefits, while hourly employees are more likely to receive WI/STD benefits. Further, a broader range of ancillary benefits is typically provided to salaried employees

Question 13

Explain why integration of WC and CPP/QPP death benefits is not a consideration in the design of group life insurance plans.

Answer 13

Group benefit plans top up benefits that government-sponsored plans provide. Typically group benefits plans integrate or coordinate with government benefits provided for similar coverage to avoid duplication. Because government-sponsored death benefits are relatively modest, the availability of these death benefits does not affect the design or amounts of group life insurance benefits. Note also that WC applies only to occupational deaths when WC coverage is mandatory (some industries are exempt). Therefore, the death benefits that group benefits plans provide are very important to meet plan members’ financial security needs.

Question 14

Describe practices insurers use to integrate government-sponsored disability benefits with benefits payable under group LTD plans.

Answer 14

EI is second payer and, therefore, plan sponsors do not integrate EI benefits. Other sources of income, such as CPP/QPP and WC, are offsets that reduce the disability benefits payable under group STD and LTD plans. Generally:

(a) Direct offsets mean that the group benefits plan deducts from LTD benefit amounts any amounts that government benefits pay to plan members, including primary (plan member only) CPP/QPP disability pensions and WC benefits.

(b) Indirect offsets limit income from all named sources to a specified percentage of predisability earnings. This is called the all-source maximum. The purpose of indirect offsets is to limit the overall benefit a plan member receives to that specified percentage of predisability earnings. These offsets reduce the LTD benefit amount only if total income from the LTD benefit and all named sources exceeds the all-source maximum. These offsets typically include direct offsets plus:

Benefits payable under an association or other group disability program
Earnings or payments from any employer, including severance or vacation pay
Any retirement benefits related to any employment (e.g., all employer- sponsored registered pension plans including group (but not individual) Registered Retirement Savings Plans (RRSPs)).

Question 15

Outline the five categories of provisions in the master contract that detail the benefits provided and their associated terms and conditions.

Answer 15

The following five categories of provisions in the master contract describe the types and levels of benefits provided and their associated terms and conditions:

(1) Insuring provisions (e.g., definitions, eligibility requirements, incontestability provision, commencement and termination of insurance)

(2) Benefits provisions (e.g., waiver of premium, definition of disability, qualifying period, benefits schedule, benefits period, offsets, eligible expenses, exclusions and limitations)

(3) Claims provisions

(4) Premium provisions (e.g., grace period)

(5) General provisions (e.g., conformity to legislation and disclosure provisions).

Question 16

Explain the rationale behind an insurer’s “be permanent and actively at work” eligibility requirement in a group benefits plan.

Answer 16

The assumption is that an individual who is working on a permanent basis for a certain minimum numbers of hours per week must be reasonably healthy and therefore represents a relatively low risk to the insurer, requiring no evidence of health.

Question 17

Explain the rationale for applying an eligibility waiting period for new employees in single employer plans.

Answer 17

A waiting period is often applied to new employees because it minimizes unnecessary recordkeeping and administrative expenses, as well as claims, for individuals who are only employed for short periods. There is no defined legal requirement with respect to a minimum or maximum duration of the waiting period. If a plan requires a waiting period, it is generally from one to three months. For hourly paid employees, plans commonly tie the specified time to the employment probationary period. For salaried employees, waiting periods are frequently shorter, e.g., plans provide coverage from date of hire or after one month. Waiting periods can vary from one benefit to the next and from one plan sponsor to another.

Question 18

Describe eligibility requirements for members of MEPs.

Answer 18

While most group plans require plan members to be permanent employees and actively at work, members of MEPs do not have to be actively at work for a minimum numbers of hours per week to be eligible for coverage. Multi-employer plans are common in industries that experience varied work patterns (i.e., periods of high employment activity with overtime, followed by short work weeks or temporary unemployment and seasonal layoffs). If being actively at work were a condition of eligibility, many plan members would likely lose their rights to benefits for extended periods.

Participating employers make plan contributions to notional accounts on behalf of each union member they employ. Employer contribution requirements may be based on hours worked, a percentage of earnings, a flat dollar rate or a piecework rate. To maintain eligibility for benefits, plan members must work a minimum number of hours or employers must contribute a minimum number of dollars for them in the period specified.

Question 19

Explain how the hour or dollar bank system is used to maintain eligibility in MEPs.

Answer 19

To maintain eligibility, a plan member must work a minimum number of hours or employers must contribute a minimum number of dollars for them in a specified period. For example, if eligibility is based on hours worked, a plan member may be required to work at least 120 hours per month (the “hours charge”) to be eligible for benefits. If eligibility is dollar-based, a plan member may have to receive employer contributions on their behalf of at least $500 per month in the period specified. Generally, plan eligibility is based on hours worked when employer contributions are the same per hour worked for all plan members and based on dollars when various employer contribution rates apply.

Question 20

In the context of dependent coverage, outline the most common definition of eligible dependent in group benefits contracts.

Answer 20

Most group contracts define an eligible dependent as:

(a) The plan member’s married or common-law spouse; the latter means an individual of the same or opposite sex who has cohabited with the plan member for a minimum period, typically 12 consecutive months.

(b) Unmarried children under a specified age, typically age 21, or up to a higher age if they are full-time students, typically age 25, and who are dependent solely on the plan member for support

(c) Unmarried incapacitated children past the limiting ages, provided they became physically or mentally incapacitated prior to attaining these ages and while covered under the group benefits plan and continue to depend solely on the plan member for support.

Question 21

Identify circumstances under which a plan member is required to provide satisfactory evidence of insurability for benefits eligibility.

Answer 21

Most group benefit plans do not require group members to provide satisfactory evidence of insurability to qualify for benefits a plan enrollment, except when an individual:

(a) Chooses optional life insurance coverage

(b) Applies for life insurance and LTD benefits that exceed predefined maximums

(c) Is considered a late applicant (applies for coverage more than 31 days after original eligibility)

(d) Withdraws from the group benefits plan while still employed and wishes to rejoin and have coverage reinstated

(e) Applies for coverage that they previously refused

(f) Applies for reinstatement of an overall lifetime maximum amount under a group extended health care plan

(g) Enrolls in a group benefits plan comprised of a small number of eligible group members (parameters defining a small group vary by insurer).

Question 22

Compare the benefits schedules for group life insurance coverage with extended health care coverage.

Answer 22

With group life insurance, plan members belong to various classes under the group insurance contract (e.g., executives, salaried plan members), and the benefits schedule for a given class determines the amount of life insurance provided to the members of that class. A benefits schedule for life insurance can be based on earnings or a flat amount.

The benefits schedule for extended health care differs significantly from the benefit schedules for life insurance. An extended health care plan comprises a multitude of benefits (e.g., hospital, prescription drug, paramedical), each with its own provisions. The schedule may include deductibles, coinsurance and benefit maximums per covered person. Claims are settled in accordance with the benefits schedule, and eligible claims expenses are limited to reasonable and customary charges.

Question 23

Outline events that can trigger the termination of a plan member’s coverage under a group benefits plan.

Answer 23

All group benefits plan contracts contain termination-of-coverage provisions that clearly define when coverage of plan members (and their dependents) terminates. Unless the group contract specifies otherwise, coverage generally terminates for a covered plan member, effective the earliest date on which one the following events occur:

(a) Plan member retires (except when the plan offers retiree benefits)

(b) Plan member’s employment with plan sponsor terminates

(c) Plan member ceases active work (except for temporary interruption such as illness, injury, maternity or parental leave, layoff or leave of absence)

(d) Plan member ceases to be a member of an eligible class

(e) Plan member reaches the termination age for a particular benefit

(f) Premium payments cease.

Question 24

Describe an insurer’s incontestability provision and provide examples of how it is applied

Answer 24

In general, an incontestability provision defines a period (usually two years) after which all information provided by an applicant who had to provide evidence of insurability (e.g., a late applicant) is deemed to be true (unless purposefully presented fraudulently). During the contestability period (i.e., during those two years), the insurer can contest the information the applicant provided. While group insurance generally does not require evidence of insurability, if a person who must provide it misrepresents or fails to disclose information during the contestability period, the insurance in respect to that person is voidable. However, once the insurance has been in effect continuously for the full contestability period, the insurance is not voidable because of those misrepresentations or failures to disclose (except in cases of fraud).

Misstating age or gender usually does not void a policy but may adjust death benefits or premiums due. An insurer can completely void a policy for a person required to provide evidence of insurance who fraudulently misrepresented information (e.g., omitting a health diagnosis or prognosis or misrepresenting smoking status).

Question 25

Outline some common group dental plan policy provisions

Answer 25

Coverage can include preventive, basic, major restorative and orthodontic services. An annual maximum usually applies to preventive, basic and major restorative services for each insured member (plan member and each dependent), and a lifetime maximum applies to orthodontic services.

Question 26

Explain how tax incentives provided under the Income Tax Act (ITA) for specific types of insured benefit plans can impact the tax consequences for the plan members.

Answer 26

Basic life, optional life, dependent life, basic and optional AD&D, EHC and dental benefit payments are not taxable to the plan member/beneficiary, regardless of whether the plan member or plan sponsor pays the premium.

WI/STD and LTD are taxable to the plan member if the plan sponsor pays the premium. These benefits are nontaxable to the plan member if the plan member pays 100% of the premium.

Question 27

Compare the modular flex, full flex and total rewards flex approaches to providing benefits to the traditional with add-ons approach.

Answer 27

Under the traditional with add-ons approach, plan sponsors provide the same benefits to all plan members, and any additional benefits are optional (or “voluntary”) and paid for by plan members (e.g., life, AD&D, critical illness).

As the plan design moves further along the continuum of choice, the opportunity for plan members to make decisions (within parameters) regarding types of benefits, levels of coverage and form of compensation (i.e., benefits vs. pay) increases. Under modular flex, plan members choose benefits grouped together in modules (or packages)—usually basic, medium and high. Under full flex, plan members choose from a wide variety of options in various lines of benefits. Total rewards flex is similar to full flex but with a total compensation component through which plan members may have additional choice relating to pay, pension/retirement contributions and vacation.

Question 28

Explain why plan sponsors might prefer using coinsurance over deductibles in plan design

Answer 28

Deductibles tend to remain at original amounts for long periods, and their effect erodes as inflation and utilization increase over time, increasing the plan sponsor’s proportionate share of the cost and reducing plan members’ proportionate share of the cost (called deductible erosion). While a plan sponsor can increase deductibles, it is an evident cost increase to plan members who may see this as reducing the value of the plan.

Unlike deductibles, coinsurance builds in changes in inflation and utilization factors. For example, for a benefit reimbursed at 80%, the plan member must pay the remaining 20% regardless of how much costs of the service or product have increased. The plan sponsor passes on part of the increased costs to the plan members without the plan sponsor having to communicate an increase.

Question 29

Explain how prior authorization can help plan sponsors manage their drug costs

Answer 29

Prior authorization involves more proactive claims management by requiring a plan member to obtain approval from the insurer before a drug is covered. Typically, the plan member (and their physician) must fill out a prior authorization form and provide any additional supporting medical information. Prior authorization can help manage step therapy, ensuring that a plan member has attempted less expensive first-line therapies before progressing to more expensive therapies. It can also help to ensure that drugs are described for their intended purpose according to Health Canada guidelines. The list of drugs that fall under this category varies among insurers but typically includes high-cost specialty drugs such as biologics.

Question 30

Outline the advantages of group benefits plans for plan sponsors.

Answer 30

Group benefits plans offer many advantages to plan sponsors, including:

(a) Expenditures for group benefits are tax-deductible as a business expense.

(b) Benefits can attract and retain qualified employees.

(c) Benefits foster a healthy workforce and consequently improve employee engagement and productivity.

(d) Benefits can be provided in place of additional monetary compensation.

Question 31

Outline the advantages of group benefits plans for plan members

Answer 31

Group benefits plans offer many advantages to plan members, including:

(a) Plan members may not need to use after-tax money to purchase various types of individual insurance policies.

(b) Plan members do not usually have to provide medical evidence of insurability.

(c) Plan members may be able to access benefits coverage unavailable to them in the individual market.

(d) Insurance is usually less expensive through a group benefits plan than in the individual insurance market for individuals with health issues.