Objective 3: Employee Benefit Strategy

Question 1

Definition of employee benefits (5)

Answer 1

Broad definition - includes virtually any form of compensation other than direct wages, including:
1) The employer’s share of legally-required payments (such as Social Security)
2) Payments for time not worked (such as paid sick leave, paid vacations, and holidays)
3) The employer’s share of medical and medically-related problems
4) The employer’s share of retirement and savings plan payments
5) Miscellaneous benefits (such as employee discounts, severance pay, and educational expenditures)
More limited definition - excludes legally-mandated benefits

Question 2

Reasons for the growth of employee benefit plans (6)

Answer 2

1) Business reasons - good benefit plans help the employer attract and retain capable employees, and can improve employee morale and productivity
2) Collective bargaining - the Taft-Hartley Act requires good-faith collective bargaining over conditions of employment (including benefit plans)
3) Favorable tax legislation - many plans are designed to maximize available tax benefits
4) Efficiency of the employee benefits approach - marketing of benefits through the employer is a cost-effective and administratively efficient distribution channel
5) Wage increase limits - wage increase limits during World War II and the Korean War led to an expansion of employee benefits as a way in which employers could increase the employees’ total compensation
6) Legislative actions - the government has encouraged employee benefit plans through various legislative actions

Question 3

Characteristics of the group technique for providing employee benefits (8)

Answer 3

All but item #8 are meant to minimize adverse selection

1) Only certain groups are eligible - groups formed solely for the purpose of obtaining insurance should not be offered coverage
2) Steady flow of lives through the group - to maintain a fairly health group
3) Minimum number of persons in a group - to prevent less-health lives from being a major part of the group
4) A minimum portion of the group must participate - such as 75% of employees must be covered in pans where the employee must pay a portion of the premium
5) Eligibility requirements and waiting periods are imposed
6) Maximum limits for any one person - to prevent the possibility of excessive amounts of coverage for any particular unhealthy individual
7) Automatic determination of benefits - some benefits may be determined based on a formula (such as a multiple of salary) to prevent unhealthy lives from obtaining large benefit amounts
8) A central and efficient administrative agency - to minimize expenses and handle the mechanics of the benefit plan

Question 4

Questions to ask in evaluating employee benefit plans (7)

Answer 4

1) What are the objectives of the employer and employee?
2) What benefits should be provided?
3) Who should be covered under the benefit plan? - retirees, dependents?
4) Should employees have benefit options?
5) How should the benefit plan be financed?
6) How should the benefit plan be administered? - by the employer, an insurer, or a TPA?
7) How should the benefit plan be communicated?

Question 5

Reasons for using the functional approach for designing and evaluating employee benefits (5)

Answer 5

1) Benefits must be organized to be as effective as possible in meeting employee needs
2) Avoiding waste in benefits can be an important cost-control measure for employers
3) It is important to analyze where current benefits may overlap and costs may be saved
4) A systemic approach is needed to keep benefits current, cost effective, and in compliance with regulations
5) A systemic approach is needed to ensure that the various benefits can be integrated with each other

Question 6

Steps in applying the functional approach for employee benefit plan design and evaluation (12)

Answer 6

1) Classify employee and dependent needs for objectives into logical functional categories
2) Classify the categories of persons the employer may want or need to protect
3) Analyze the current benefits with respect to employee needs and the categories of covered persons
4) Determine any gaps in benefits or overlapping benefits in the current plan
5) Consider any recommendations for plan changes to meet any gaps in benefits and to correct any overlapping benefits
6) Estimate the cost or savings from each of the recommendations made
7) Evaluate alternative methods of financing or securing benefits
8) Consider other cost-saving or cost-containment techniques for both current and recommended benefits
9) Decide upon the appropriate benefits, methods of financing, and sources of benefits, by using the preceding analysis
10) Implement the changes
11) Communicate benefit changes to employees
12) Periodically reevaluate the employee benefit plan

Question 7

Common loss exposures covered by employee benefit plans (12)

Answer 7

1) Medical expenses for employees (active and retired) and their dependents
2) Losses due to employees’ disability (short-term and long-term)
3) Losses due to the death of active employees, their dependents, and retired employees
4) Retirement needs of employees and their dependents
5) Capital accumulation needs or goals
6) Needs arising from unemployment or from temporary termination or suspension of employment
7) Needs for financial counseling, retirement counseling, or other counseling services
8) Losses resulting from property and liability exposures
9) Needs for dependent care assistance (e,g,, child-care or elder-care services)
10) Needs for educational assistance for employees and their dependents
11) Needs for LTC for employees (active and retired) and their dependents
12) Other employee benefit needs or goals (such as incentive programs)

Question 8

Categories of persons the employer may want to or be required to provide benefits for (9)

Answer 8

1) Active full-time employees
2) Dependents of active full-time employees
3) Retired former employees
4) Dependents of retired former employees
5) Disabled employees and their dependents
6) Surviving dependents of deceased employees
7) Terminated employees and their dependents
8) Employees (and dependents) on temporary leaves of absence (such as for military duty)
9) Active employees who are not full time (such as part-time employees and directors)

Question 9

Considerations for analyzing current benefits in the employee benefit plan (7)

Answer 9

1) Types of benefits - a common approach is to prepare an outline or table showing how the different types of benefits meet the various employee needs
2) Levels of benefits - the analysis should also show the amount of those benefits that is currently provided under various scenarios
3) Probationary periods - analyze any periods during which newly-hired employees are not yet eligible to receive benefits, to determine whether they are appropriate
4) Eligibility requirements - various requirements should be analyzed. For example, should survivors of deceased employees continue to be covered, for what benefits, and for how long?
5) Employee contribution requirements - determine how much employees will be required to contribute to the cost, and whether the plans will be mandatory or voluntary
6) Flexibility available to employees - determine the choices that will be given to employees in selecting their benefits
7) Actual employee participation in benefit plans - determine what percentage of employees enroll in each benefit, which may indicate whether the benefit meets employee needs

Question 10

Advantages of voluntary benefits for employer (4) and employee (4)

Answer 10

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

Employer advantages:

1) More benefits can be offered without significant added cost
2) Can supplement or replace employer-sponsored benefits that have been reduced or eliminated
3) Can act as an employee recruitment or retention tool
4) Can offer to employees that meet performance targets

Employee advantages:

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

Question 11

Types of voluntary benefits (18)

Answer 11

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

Question 12

Common functions for administering employee benefits (9)

Answer 12

(all plan sponsors must perform these core activities, and the benefits director must be proficient at these)

1) Benefits plan design - create a benefit program that addresses the needs of the organization and can be effectively administered and communicated
2) Benefits plan delivery - involves serving plan participants through various activities. Must meet legal standards for quality services (e.g., complying with ERISA and COBRA standards)
3) Benefits policy formulation - management must make decisions on questions and issues that arise. These decisions must be codified into policies.
4) Communications - must effectively communicate benefit programs and plan provisions, which is challenging due to workforce diversity, regulatory requirements, and plan complexity. Legal standards require certain communications (e.g., summary plan descriptions, benefit statements and statement of COBRA rights).
5) Applying technology - involves setting up a database containing information on all the employer’s different benefit plans. This information should be secure and easily accessible to the employer and its employees.
6) Cost management and resource controls - benefits directors must evaluate proposals from insurers and develop the firm’s risk-management approach
7) Management reporting - information systems are needed to monitor financial results, utilization, and compliance. Reports are needed in order to:
a) Compare to the competition
b) Measure achievement of human resources objectives (through industry surveys, employee surveys, and focus groups)
c) Assess and manage program risks
8) Legal and regulatory compliance - must comply with fiduciary, funding, and other requirements as prescribed by law. Many standards were codified as part of ERISA.
9) Monitoring the external environment - involves monitoring various factors that impact benefit management activities

Question 13

Activities required for serving plan participants (6)

Answer 13

1) New employee benefits orientation
2) Policy clarification on benefits eligibility, coverage, and applicability of plan provisions
3) Dealing with exceptional circumstances and unusual cases
4) Collection and processing of enrollment data, claims information, and requests for plan distributions
5) Benefits counseling and response to employee inquiries for active employees
6) Benefits counseling for employees who are terminating, retiring, disabled, or on leave

Question 14

Technological tools used by benefits directors to support customer-driven processes (5)

Answer 14

1) Executive information systems - provide management information in summary format. Helps identify utilization patterns and cost factors.
2) Imaging and optical storage - eliminates paper records and allows sharing of documents over a network
3) Access to information over the internet - facilitates paper-less communication from the plan sponsor to insurance carriers, investment custodians, and third-party administrators
4) Client-server technology - integrates networked applications with desktop and mobile tools, allowing decentralized management and supporting self-sufficient plan participants
5) Employee self-service - allows customer-driven benefits modeling, retirement planning, and updating of personal data

Question 15

Methods for comparing benefit programs to the competition (4)

Answer 15

1) Compare the benefits payable to representative employees under different circumstances
2) Compare actual costs to the employer for different benefit plans
3) Calculate relative values of the different benefits based on uniform actuarial methods and assumptions
4) Compare benefit plans feature by feature to isolate specific provisions that may be appealing to certain employee groups

Question 16

External factors that impact benefit management activities (6)

Answer 16

1) General business and competitive conditions - benefit programs are increasingly important for attracting and retaining employees. There is a trend toward benefits outsourcing.
2) Governmental policy - requires monitoring laws and subsequent regulations, as well as proposed legislation
3) Workforce demographic shifts - greater diversity has led to flexible benefit plan offerings. The aging of the workforce has created greater interest in retirement programs.
4) New product development - must develop a means to evaluate new products and services, and to integrate them into existing plan offerings
5) New organization structures - must redesign plans to fit the new structures and remain compliant
6) Technological enhancement and innovation - must keep abreast of technological changes and proactively plan the introduction of new technologies

Question 17

Reasons plans are outsourcing benefits administration (4)

Answer 17

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

Question 18

Cafeteria plan advantages (2) and disadvantages (3) to the employee

Answer 18

Advantages

1) Employees can pay for benefit expenses on a tax-favored basis
2) Employees can have more control over their health spending

Disadvantages

1) Benefit elections must be made prior to the beginning of the year, and the election is irrevocable (with limited exceptions)
2) For FSAs, the use-it-or-lose-it rule means benefit dollars unused at the end of the year are forfeited
3) Since there is no FICA tax, participants may see a slight reduction in social security benefits

Question 19

Cafeteria plan advantages (4) and disadvantages (4) to the employer

Answer 19

Advantages

1) The employer does not have to pay FICA or FUTA (Federal Unemployment Tax Act) taxes on contributions
2) Deferred amounts do not count when determining workers’ compensation premiums
3) Creates increased awareness of the overall cost and value of employee benefits
4) Helps to contain health care costs and prevent wasting benefit dollars on duplicate or unneeded benefits

Disadvantages

1) The large cost of administration and operation of a cafeteria plan
2) If a medical reimbursement account is included in the plan, the total amount of the employee’s account must be available at any time in the year
3) Adverse selection can result in increased costs
4) Plans are subject to complex coverage and nondiscrimination testing

Question 20

Types of cafeteria plans in the US (3)

Answer 20

1) Premium conversion plans - there are no employer contributions. The plan is offered so that employees can pay for their employee-paid insurance costs on a tax-favored basis.
2) FSAs - these accounts are permitted for medical reimbursements, dependent care, and adoption
3) Full flex plans - participants can select from a wide range of benefits. The employer selects an amount to give for benefits, which is put towards the cafeteria plan or into an account

Question 21

Benefits that can be offered in a cafeteria plan (10)

Answer 21

Qualified benefits (can be offered on a pre-tax basis)

1) Employer-provided accident or health coverage - this includes medical, dental, vision, disability, AD&D, business travel and accident plans, hospital indemnity, cancer policies, Medicare supplements, and reimbursements for FSAs
2) Individually-owned accident or health policies
3) Employer-provided group term life insurance coverage (only the first $50,000 is nontaxable)
4) Employer-provided dependent care assistance
5) Employer-provided adoption assistance
6) Contributions to a 401(k) plan
7) Contributions to an HSA

Permissible benefits (these can be offered, but are taxable)

1) Cash
2) Paid vacation days
3) Group term life insurance in excess of $50,000

Question 22

Benefits that cannot be offered in cafeteria plans (16)

Answer 22

1) Contributions to medical savings accounts
2) Qualified scholarships and education assistance programs
3) Certain fringe benefits
4) Qualified LTC insurance (although an HSA fund can be used to pay for LTC)
5) Athletic facilities
6) De minimis benefits
7) Dependent life insurance
8) Employee discounts
9) Lodging on the business premises
10) Meals
11) Moving expense reimbursements
12) No-additional-cost services
13) Parking and mass transit reimbursement
14) Contributions to a college savings account
15) Legal or financial assistance
16) 403(b) plans

Question 23

Challenges for small companies offering group medical plans (4)

Answer 23

1) Because small companies are most often fully insured, they are subject to state-mandated benefits
2) Because employees are usually in a relatively small geographic area, plans must be designed using options available in that area
3) Small companies may have to provide additional documentation so that insurers can verify the existence of the company
4) Most states do not allow companies to join forces to form larger purchasing pools in order to get group discounts

Question 24

Reasons a small company should require employee contributions for medical insurance (4)

Answer 24

1) Most employees today are accustomed to paying some level of contribution
2) Requiring a contribution motivates employees who have other coverage options to use those options
3) It is easier to require contributions beginning at the plan’s inception than it is to start requiring contributions at a later date
4) Requiring a contribution can help avoid legal problems since the contribution makes it clear who is covered by the plan versus who opted out

Question 25

Considerations when setting employee contribution levels for an employer health plan (5)

Answer 25

1) Total compensation philosophy - this includes how compensation is divided between salary and benefits. Some employers allocate a larger portion of total compensation towards benefits.
2) Benefits budget - many employer budgets are not keeping pace with increases in the cost of health care, so a greater portion of costs must be paid by employees
3) Benefit competitiveness - employers must consider the total benefit structure compared to other employers with whom they compete for talent
4) Collective bargaining - this leads to union groups often having better health coverage and subsidization than non-union groups at the same company
5) Legislative and regulatory issues - new laws may cause employers to change benefits or employee contribution levels. For example, the ACA affordability threshold (contributions being no more than 9.5% of household income) resulted in some employers reducing required contributions.

Question 26

Approaches for setting employee contribution levels for an employer health plan (5)

Answer 26

Two basic approaches:

1) Defined benefit - such as setting the employee’s contribution equal to a specified percentage of premium
2) Defined contribution - the employer provides a defined dollar subsidy regardless of plan choice

Other levers (or strategies) the employer may use:

1) Income-based contributions - require higher contributions from higher-paid employees
2) Dependent subsidy or spousal surcharge - require a greater level of contribution to cover dependents
3) Health incentives - implement wellness incentive programs where employees receive a premium reduction for healthy behaviors, such as completing a health risk assessment or receiving preventive services

Question 27

Types of group purchasing arrangements (4)

Answer 27

1) Association health plans - health coverage is sold to employer members of an association, such as a professional or trade association
2) Multiple employer welfare arrangements - established by two or more employer or self-employed individuals in order to offer health coverage
3) Professional employer organizations - these provide various employer functions, in some cases taking on the administrative role of acquiring and obtaining health insurance for a group of employers
4) Group captives - multiple employers form an insurance company to underwrite their own insurance, rather than buy insurance from a separate insurer

Question 28

ACA reforms that address the adequacy of coverage (5)

Answer 28

1) Plans in the exchanges must cover EHBs
2) Standardized tiers of coverage based on relative cost-sharing
a) 90% for platinum plans
b) 80% for gold plans
c) 70% for silver plans
d) 60% for bronze plans
3) Insurers must provide first-dollar coverage of approved preventive services
4) Plans may not impose pre-existing condition exclusions
5) There is a cap on enrollees’ annual out-of-pocket liability

Question 29

Alternative coverage for low-risk small employer groups to remain outside the fully-insured market (4)

Answer 29

These allow healthy groups to reduce costs by avoiding being part of the ACA single risk pool for small groups

1) Continue in plans that are exempt from many ACA reforms
a) Grandfathered plans - plans that existed before the ACA and are allowed to continue indefinitely as long as their benefits and cost-sharing structure do not change significantly
b) Grandmothered or transitional plans - plans that renewed in 2013 before the ACA’s primary benefit and rating reforms went into effect, and which most states allow to continue through 2017
2) Set up a self-funding arrangement - these often include stop-loss insurance with very low attachment points. So they mimic traditional insurance, but are exempt from most of the ACA’s market reforms.
3) Obtain coverage through group purchasing arrangements - these lower costs by self insuring and pooling admin functions. They may also claim large employer status to avoid small group reforms.
4) Drop coverage entirely - the employer mandate does not apply to employees with fewer than 50 employees, and the ACA guarantees coverage to the employees who are dropped

Question 30

Reasons why more small employers have not dropped group health coverage (3)

Answer 30

1) Small group premiums generally remained stable
2) The rollout of the individual marketplaces was rocky, and there is uncertainty about the individual market
3) Offering employer-sponsored insurance continues to be an expectation as part of the business culture or necessary to compete for talent

Question 31

The elements of a data collection request to an employer in order to advise on Health & Welfare benefits (4)

Answer 31

1) A Summary Plan Description which includes employee eligibility and plan design details for the various benefits available to employees
2) Documents detailing the costs for each benefit, splitting out the employer and employee portions
3) Contacts for medical, dental, vision, life and disability providers to request detailed claims and enrollment data for the various programs
4) A census file, including demographic data (age, gender, salary, years of service, etc.) as well as plan election information (medical, dental, vision plan elections and coverage tier)

Question 32

Examples of overarching philosophy, guiding principles, and objectives developed after merging two employer groups (8)

Answer 32

1) Provide tools and resources to encourage employees to become better healthcare consumers
2) Promote accountability for lifestyle and healthcare choices
3) Ensure affordable payroll contributions for lower paid workers
4) Minimize barriers to seeking appropriate healthcare which may be caused by high out-of-pocket costs
5) Utilize best-in-class and industry-leading solutions to maximize financial efficiency
6) Limit year over year volatility for employees
a) Minimize increase in payroll contributions
b) Minimize disruption of existing patient/provider relationships, particularly PCPs
7) Maximize financial efficiency by offering high performance networks
8) Optimize employee health and well-being and productivity through effective care coordination and healthy lifestyles programs

Question 33

Examples of objectives for a new benefits structure after merging two employer groups (11)

Answer 33

These are actionable items that should follow the guiding principles:

1) The new medical benefit structure should be close to cost neutral to the current separate programs
a) Limit year over year trend in employer cost share for medical benefits to X%
b) Limit total benefits spend to a given cost on a per employee basis
2) Maintain current competitive position to comparator groups with respect to overall company subsidy for medical benefits
3) Offer medical benefits that cover the same percentage of charges as local employers along with similar payroll contributions
4) Minimize provider disruption, particularly disruption of member relationships with their PCP
5) Retain the parent company’s salary banded contribution structure to increase affordability for lower paid employees
6) Phase out old plan designs that are less prevalent
7) Retain a highly efficient staff model HMO plan (considered best-in-class)
8) Complete a vendor selection process to identify the best-in-class medical carrier with the lowest cost of care for the combined population
9) Minimize the number of employees who would be negatively impacted by benefits changes
10) Manage the impact of adverse selection
11) Implement medical plan designs that foster participation in HSAs

Question 34

Key terms needed to discuss the Employer Shared Responsibility (ESR) (5)

Answer 34

1) Minimum Essential Coverage (MEC): MEC plans cover all essential benefits, including hospitalization, outpatient and physician services, and prescription drugs
2) Full-Time Employee (FTE): is an employee who work an average of 30+ hours per week, measured monthly (130 hours a month)
3) “Affordable” coverage is if the FTE required contribution for self-only coverage under the medical plan does not exceed 9.5% of their household income for the taxable year
4) Minimum actuarial value (MV): plan must pay at least 60% of covered expenses
5) Federal or State Insurance Exchange - an online marketplace where consumers may shop for qualified insurance coverage and request a federal subsidy

Question 35

Penalties that apply if the ACA enacted ESR rules are not met (3)

Answer 35

1) U.S. Code Section 4980H(a): Penalties may apply if an employer:
a) Does not offer MEC to at least 95% of its FTEs (and their eligible non-spouse dependents) and at least one FTE enrolls in an Exchange (state or federal) plan and receives a federal subsidy to assist with payment of the monthly insurance premium
b) The penalty is $2,000 per each year for each FTE(less 30 employees). The fee is nondeductible for income tax purposes and the employer pays regardless of whether some employees elected employer provided coverage. The fee is increased annually after 2014
c) The penalties do not apply to employers with fewer than 50 FTE in the prior year
2) U.S. Code Section 4980H(b): Penalties apply if an employer:
a) Offers MEC for at least 95% of its FTEs, but coverage is either “unaffordable”, or does not provide MV
b) The penalty is $3,000 per year for each FTE who enrolls in an Exchange plan and receives a federal subsidy. The fee is nondeductible for income tax purposes and is increased annually after 2014
3) The employer must do some reporting to show compliance with MEC
a) IRC Section 6055 reporting focuses on enrollment in MEC
b) IRC Section 6056 reporting focuses on the offer of MEC to FTEs

Question 36

Steps to understand how benefit designs impact the company financials after merging two employer groups (5)

Answer 36

1) Determine “total cost rates”, which represent the average expected cost PEPM paid by the plan (claims and administrative expenses)
a) These rates are often referred to as a premium equivalent rate
b) The rates will vary by coverage tier
2) Determine the enrollment distribution. Use current enrollment by plan and coverage tier and make “migration” assumptions about which plans employees will choose once the merger is complete
3) Determine employee contributions (can vary by salary and coverage tier)
4) The “company subsidy” is the difference between the total cost rates and the employee contribution
5) The total company cost is determined by cross-multiplying the company subsidy with the enrollment for each group of employees for whom the subsidy varies.

Question 37

Make up of a HDHP (4)

Answer 37

1) HDHP has a specific meaning under the IRS code to be accompanied with an HSA
2) An eligible plan has cost share limits with minimum deductibles and caps on OOPM
a) In 2019, self only coverage has a minimum deductible of $1,350 and OOPM cap of $6,750
3) The plan must have limited first dollar coverage
a) The deductible must be met before any other cost sharing can be applied, except for preventative care
4) For self only coverage, an embedded deductible is used while for family coverage the deductible is aggregate
a) If the individual deductible is less than the minimum deductible for family coverage, then the family deductible is required to be administered on an aggregate deductible basis

Question 38

Make up of an HSA (7)

Answer 38

1) The savings account is owned by the individual employee
2) Either an employer or an employee can contribute to the account
3) The account can be used to pay the cost share of the HDHP or other qualifying expenses
4) Account contributions are exempt from personal income tax
5) Contributions are limited to a specific amount no matter if an employer, individual, or both are contributing to the account.
6) The account also acts like a tax advantaged retirement account since amounts can be invested and accumulate interest tax free over time
7) As long as funds in the HSA are used for eligible medical expenses, they remain tax-free at the time of withdrawal

Question 39

Comparison of key features of health care accounts (8)

Answer 39

1) Who owns the account?
HSA - employee/individual
HRA - employee
FSA - employer
2) Who can contribute?
HSA - employee/individual and employer
HRA - employer
FSA - employee and employer
3) Are contributions tax-deductible?
HSA - Yes
HRA - Yes; contributions made by employer are excluded from gross income
FSA - Yes, except LTC contributions made by the employer
4) What are the contribution limits?
HSA - Indexed: in 2019, $3,500 for single and $7,00 for family
HRA - Unlimited, except small employers have limits
FSA - $2,700 in 2019
5) Can the funds roll over to the next year?
HSA - Yes
HRA - Yes, but not required and commonly forfeited at employment termination
FSA - A small amount is allowed; most employers have annual use-it-or-lose-it policies
6) What distributions are tax free?
HSA - Medical, Rx, dental, vision, LTC premiums, Medicare premiums
HRA - Medical, Rx, dental, vision, health insurance premiums, LTC premiums and limited expenses
FSA - Medical, Rx, dental, vision, as well as other not health care items
7) What distributions are not eligible?
HSA - Amounts covered under another health plan (subject to penalties)
HRA - Amounts covered under another health plan
FSA - Health insurance premiums, LTC premiums or expenses, amounts covered under another health plan
8) Is an HDHP required?
HSA - Yes
HRA - No, but can be used with HDHP
FSA - No, but can be used with HDHP

Question 40

Consumer choice and empowerment that is encouraged through the use of HDHPs (7)

Answer 40

1) Saving for health care services: account fund ownership encourages regular deposits
2) Selecting appropriate treatment venues: for example, using urgent care instead of the emergency room
3) Avoiding unnecessary care and/or avoiding those treatments that have marginal benefit
4) Brand to Generic drug substitution: generic drugs have lower costs and lower cost trends
5) Comparing quality ratings of providers: using online tools
6) Negotiating prices with providers, particularly for costs under the deductible
7) Improving their own health and taking other illness avoidance measures: financial incentives are aligned with health improvement

Question 41

Situations where consumer engagement is less likely to have an impact even under a HDHP (2)

Answer 41

1) Urgent care needs without time to engage in proactive consumer behavior
2) Individuals with higher cost chronic care needs are more likely to hit the OOPM

Question 42

Important impacts of HDHPs (3)

Answer 42

1) The probability that a market average risk member will exceed a given deductible
a) For a $1,350 and $3,000 deductible there is a 48% chance and 32% chance, respectively
2) As members have access to account funds to help pay for point of service claims less than the deductible, it will erode the impact of the HDHP
3) The impact of account funding is likely to be on the lower side of the cited ranges of impacts if the employee owns the account (HSA), but on the higher side if an employer owned account such as an HRA or FSA is used

Question 43

On a raw level, factors that primarily drive HDHP cost savings (3)

Answer 43

1) The relative health of individuals selecting the different plans
2) The utilization impact arising strictly from plan design and funding
3) Cost savings resulting from increased consumer engagement
Note that HDHPs have not shown a clear ability to bend the cost curve beyond initial impact

Question 44

Factors that could make HDHPs more effective (5)

Answer 44

1) Cost transparency: price shopping in this market is still difficult
a) Prices can be different based on network discounts
b) Many providers don’t even know the costs of their own procedures
c) Claims costs may differ because of factors that are not known before a procedure
2) Discussions between providers and patients particularly in:
a) Value based care arrangements
b) “Reference based” plans
3) Pre funding of HSAs at the beginning of the calendar year
4) Allowing more first dollar coverage to curb the feat of members forgoing necessary care
5) Lengthened consumerism: allow more design flexibility, allow a longer coinsurance period (lower deductible paired with a higher OOPM)

Question 45

Categories of regulatory guidance that have been proposed to change HSAs (4)

Answer 45

1) Expansion of plans that can be paired with HSAs
2) Expansion of contributions made to HSAs
3) Expansion of major medical use of HSA funds to a broader variety of expenses
4) Expansion of non-major medical use of HSA funds

Question 46

Types of flexible accounts in Canada (3)

Answer 46

1) Health spending account (non taxable if requirements are met) - may cover any health care expenses that would be tax deductible under the Income Tax Act, as long as they are not covered by the provincial plan or other private insurance
2) Personal account (taxable) - may cover a wide range of benefits, at the employer’s discretion, such as child care, financial counseling, or even sports equipment or gym memberships
3) Executive perquisite account (taxation depends on the taxability of the covered expense) - normally administered separately from the flexible plan

Question 47

Advantages to the employer of offering flexible accounts (5)

Answer 47

1) Expand the types of benefits offered with little or no additional employer cost
2) Add a new benefit without subsidizing an expensive coverage area
3) Offer a benefit that might appeal to only a small segment of the employee population
4) Contain costs (by setting a defined contribution) while providing employees with flexibility over how funds are spent
5) Test the appeal of flexible benefits without committing to a full-choice program

Question 48

Additional advantages of health spending accounts (5)

Answer 48

1) Deliver compensation tax effectively
2) Encourage employees to self-insure predictable and budgetable expenses (such as vision and dental)
3) Soften the impact of higher employee cost sharing
4) Replace existing coverage, allowing the employer to gain control of future cost increases
5) Obtain the maximum value from health benefits under the Quebec tax system

Question 49

Requirements for Canadian health spending account reimbursements to be tax-free (2)

Answer 49

1) An employee’s election to allocate funds to the account must be made in advance of the plan year and must be irrevocable. An exception is allowed for family status changes.
2) The plan must require forfeiture of any unused account balances, using one of the following methods:
a) One year rollover of unused balances - funds allocated to the account can be used to reimburse current year expenses or rolled over to next year’s account. Unused amounts are forfeited at the end of the second year.
b) One year rollover of unpaid claims - roll over unpaid claims from the prior year to be paid by this year’s account balance. Funds remaining at the end of the year are forfeited.

Question 50

Source of funds for health spending accounts (4)

Answer 50

1) New contributions by the employer
2) Employer savings from reducing medical plan costs
3) Employees directing employer-provided flexible credits to the account
4) Employees allocating a part of annual bonuses or company savings plan matches to the account

Question 51

Considerations for designing flexible accounts (6)

Answer 51

1) Type of approach - decide whether to introduce a flexible account and which types of accounts to offer
2) How will the presence of the account impact other benefit choices?
3) Funding considerations - for example, decide if contributions to the accounts will be monthly or annually
4) Should there be limits on how much the employee can allocate to the flexible account?
5) How will mid-year changes be handled? - this will vary by account type and the reason for the change (family status change, termination, retirement, or death)
6) Disposition of funds at year end - funds are forfeited, rolled over, or (for personal or perquisite accounts) paid in cash

Question 52

Advantages (7) and disadvantages (3) of health spending accounts replacing health and dental plans

Answer 52

Advantages for the employer:

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

Advantages for the employees:

1) The accounts provide flexibility as to how the money is spent
2) Benefits are non-taxable to the employee
3) Can be used to buy insurance
4) The employee can decide what expenses are covered

Disadvantages:

1) Benefits are inadequate since there is no insurance
2) Inequities
a) A flat contribution per employee means families receive relatively less protection than singles
b) A percentage of pay contribution means lower-paid employees receive less protection than higher-paid employees
3) Inflation is borne by the employees

Question 53

Plan design approaches for controlling adverse selection (10)

Answer 53

PD CONTROLL

1) Parallel design should be maintained - e.g., include vision and orthodontics at the same coverage in all plans
2) Delay full payment - have lower benefits during a waiting period of 6 to 12 months
3) Certain coverages can be grouped together - predictable expenses (such as dental or vision) could be grouped with less predictable expenses (such as supplemental medical)
4) Offer a health spending account instead of insurance - useful for vision and dental
5) Not allow a large spread between options - could be done by requiring a core coverage level
6) Test the program with employees - to bring to light potential design weaknesses
7) Require proof of insurability for increases in coverage
8) Only allow mid-cycle changes if a life-changing event occurs
9) Limit the frequency of choice - allow benefit changes once every 2-3 years, instead of annually
10) Limit the degree of change - restrict changes to one level of coverage per year (staircase rule)

Question 54

Pricing strategies for controlling adverse selection (2)

Answer 54

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

Question 55

Options for spreading the cost of adverse selection (3)

Answer 55

1) Load the prices of the lesser-valued options - reduces the reward for opting down
2) Load the prices of the highest-value option - this may cause more employees to opt down
3) Spread the cost of the adverse selection over the price of all options

Question 56

Comparison of the core attributes of public and private exchanges (5)

Answer 56

1) Who sponsors?
- Public exchange: government
- Private exchange: employer
2) Who can enroll?
- Public exchange: Individuals and small groups
- Private exchange: Employees and retirees of sponsor
3) Types of coverage available
- Public exchange: Medical and Rx
- Private exchange: Medical, Rx, dental, vision, and other voluntary benefits
4) Plan designs available
- Public exchange: Plans with AVs of (0%, 80%, 70%, and 60%
- Private exchange: Exchange operator or employer defines the plan designs
5) Who pays for coverage?
- Public exchange: Individuals and small employer groups. Individual subsidies and small business tax credits exist.
- Private exchange: Employers provide a subsidy and members pay the rest

Question 57

Common elements of private exchanges (5)

Answer 57

1) Employee choice - private exchanges often offer more plan design options than traditional employer-sponsored plans
2) Employer subsidies - the employer typically makes a defined contribution
3) Ancillary product offerings - products such as dental and vision are often offered alongside medical and pharmacy benefits
4) Online enrollment and decision-making tools - these tools allow members to evaluate their health care needs, understand their employer’s subsidy, and elect benefits that meet their needs
5) Benefits administration - most private exchanges offer end-to-end benefits administration, including enrollment, eligibility, customer service, and billing

Question 58

Advantages (8) and disadvantages (4) or private exchanges

Answer 58

Advantages:

1) Increased employee choice
2) Cost-savings potential from increased competition across carriers and best-in-class carrier pricing
3) Increased consumerism from members buying-down benefits as a result of a transparent defined-contribution approach
4) Robust online decision support tools and customer service
5) Benefits administration simplification
6) Shift of financial and regulatory risks (for fully-insured models)
7) Cost predictability (for fully insured models)
8) Improved cost transparency

Disadvantages:

1) Additional expenses for exchange operator financing
2) Less control over plan design, clinical management, and member outreach
3) The need for the employer to increase the defined-contribution amount over time
4) Other member concerns, such as loss of plan-sponsor support and less generous benefits

Question 59

Considerations for determining the employer’s optimal defined-contribution amount for a private exchange (5)

Answer 59

1) Current funding approach - what is the employer’s current philosophy around subsidies and how does it compare to a defined-contribution approach?
2) Variations by coverage tier - does the employer want to subsidize dependents at a different level than the employee?
3) Member impact - how does this impact the member payroll contributions and what sort of dissatisfaction could arise?
4) Financial goals - does this change meet the employer’s financial goals?
5) Competitive pressures - how does the subsidy compare to the benefits provided by other organizations that compete for similar talent?