Flexible Benefits Plans

1. Flexible Benefits Plans • Group #10 Cecilia Martinez Melissa Martin Ravi Arman Jas Sangha

2. Flexible Benefits • Central idea is to let employees choose among cash or nontaxable benefits provided by their employers • To maximize the cost-effectiveness of the plan sponsor’s expenditures for all employee benefits it is important to incorporate work and family issues.

3. Why offer Benefits plans? • Many employers have implemented flexible benefit plans to respond to their workers’ deferring needs • Competitive advantage • Retain existing staff

4. Flexible Benefits Effects on Employees • Employee Ownership • Employee Appreciation • Budgets • Participation

5. Employee Ownership • Basic prerequisite for success. • Important for employees to feel sense of ownership. • Acceptance, understanding, and usage will be enhanced.

6. Employee Appreciation • Plan sponsors feel employees will be more appreciative if given a choice. • Employees’ reactions are favorable to flex benefits programs.

7. Budgets • Flex benefits help solve budget problems. • The plan sponsor can set specific dollar amounts as the plan credits for a given year.

8. Participation • All participants must be employees. • Spouses and beneficiaries may receive benefits due to employees’ participation.

9. Cost and Savings • Flex programs will involve employees in benefit costs. • Optional benefits can create costly adverse selection. • Flexible spending accounts if not designed properly can increase costs. • Redesigning certain programs can create significant administrative savings.

10. Overall Purpose of Flex Benefit Programs • Improve compensation effectiveness. • Increase perceived value. • Contain costs. • Manage compensation more effectively.

11. The Process of Developing a Flexible Benefits Program • Examination of all benefits and compensation issues. • Maximizing savings. • Communicating the program. • Compliance with regulatory issues. • Plan implementation must be accompanied by administrative system.

12. Issues Addressed in Effective Flex Programs • Issues for both activities and retirees • Eligibility • Communication/Education • Paid time off ( Sick Leave, Holidays, Vacation) • Define benefits • Define contribution • Salary compensation

13. Reasons for Popularity • Historically, plans have been more uniform, and had few choices. • Radical changes in the work environment have led to: • More individualized plans. • Greater degree of choices.

14. The Changing Workforce • The major reason plan sponsors implement flex programs is to meet the need of the changing workforce. • The need to address the diversity in the workforce. • Family compensation has also dramatically changed. • Rising levels of education also affect the motivation for flex programs. • Plan sponsors face competition for their customers and their staff.

15. Present Demographic of Family Composition in the U.S. Is • Married-both spouses work, 45%. • Single-head of household-no dependent, 25%. • Married-husband works, wife does not, 20%. • Single-head of household-with dependents, 10%.

16. Other Types of Flexible Benefit Plans Include: • Flexible Spending Accounts • Job Sharing • Section 125 • Cafeteria Accounts

17. Flexible Spending Accounts (FSA) • Generic term for reimbursement accounts. • Allows employees to be reimbursed on a pretax basis for out-of-pocket health care and dependant care expenditures. • Two types of spending accounts: • Health care spending account; for your family health care costs which are not covered by insurance. • Dependant day care spending account; for eligible expenses incurred for dependant daycare while you are at work.

18. Health FSA • Allows employees to be reimbursed for eligible health care expenses. • Ex: insurance deductibles, co-payments, dental work, eye glasses etc. • Employees elect at the beginning of the plan year how much they wish to have withheld on a pre-tax basis each pay period.

19. Health FSA Continued • Amounts set aside which are not used can NOT be rolled over. • City may establish a maximum contribution amount to limit risk, since IRS does not provide it. • Health FSA’s may be subject to federal requirements such as COBRA.

20. Dependant Care Assistance Plan (DCAP) • EE reimbursed up to max of $5000 per year. • EE cannot be reimbursed through a flex plan and then claim child-care credit on their tax return. • Health FSA’s and DCAP’s fall under different section of the IRS tax code.

21. How FSA’s Work • Deduction from paycheck set aside • When expense incurred file claim for reimbursement (tax free) • Help reduce participants taxes • Risk incurred if funds not used • Funds don’t rollover to next year • Account can ONLY be made within 31 days of divorce, or the birth of the child

22. Which Expenses Are Reimbursed Under FSA? • Fee’s paid to doctors, dentists, surgeons, chiropractors, etc… • Fee’s for hospital services • Acupuncture treatments • Inpatient treatment • Dentures, hearing aids, crutches, wheelchairs • Deductibles • Braces • Prescription drugs • NON-elective cosmetic surgery

23. What is the Advantage of Before-Tax Dollars? • Let’s assume you are the sole wage earner in your family and will earn $25,000 next year. You expect to spend $2000 for your child’s orthodontic work. The following illustrates how a health FSA actually increases your spendable income. The table assumes a married filer with 3 dependants.

25. Flex Pricing • Now let’s look at an actual example of pricing multiple health plans. We will start by using three distinct integrated steps in pricing flexible benefit programs.

26. Step 1. Project the costs of the current benefit programs to the first flex pricing year. • Step 2. Conduct an analysis of the relative actuarial values of the options to be offered in the flex program. • Step 3. Calculate the impact selection will have on overall costs, the construction of the plan costs, and prices that reflect selection costs.

27. Step 1. Projection of Current Costs. • The first step is the analysis of costs to the flex pricing year. • By looking at the number of claims submitted per employee per month, an analysis can be made.

28. Step 1. Continued • Graph 4 shows the change in utilization over time. The graph shows the number of claims per employee over the last 30 months. • Time series analysis is applied to the 12 month rolling average to produce a projection of expected future use of the medical program.

29. Step 1. Continued • Graph 5 shows the impact on price inflation on the medical program over time. It represents the average size claim pad in a month. • Graph 6 shows a synthesis of these two projections and the overall future costs.

30. Step 2. Relative Values • The first step is developing a model of employee distribution of claims by size. • Graph 7 shows the distribution of percentage of employees with various sizes of claims.

31. Step 2. Continued • Graph 8 shows the calculation of relative or actuarial values. The area under the curve represents the plans cost commitment. Until the deductible has been satisfied all medical cost are the responsibility of the employee.

32. The final step in the flex pricing process is determining the impact of selection of the program. The original distribution of claims model is used again rebuilding the distribution for various segments of the employee population. Step 3. Cost Selection

33. Step 3. Continued • Figure 10 represents the distribution of claims for an overall population. Rebuilding this graph for 10% of the population will cause a shift to the left, since this segment of the typical employee population has fewer and less severe claims then the overall population.

34. Step 3. Continued • Figure 10 shows the claims for 10% of the employee population. Compared to figure 11 which has shifted to the right because the least healthy 10% tends to have both more claims and more severe claims than the overall population.

35. Step 3. Continued • To analyze the impact of selection on plan costs, build a distribution of claims model for the healthiest to leas healthy of the employee population. • Then with initial enrollment assumptions you can make the determination of over plan costs, including the impact f a flexible benefits program.

36. Step 3. Continued • Cost projections and price tags can be finalized based on enrollment results or feed back from focus groups and survey’s show in figure 12.

37. Job Sharing • Two people share the same position in a company, each working part of the week. • They split the hours, pay, holidays and benefits between them according to hours they each work.

38. Job Sharing • Key necessities: • Compatibility • Co-operation • Communication

39. Sharing Tasks and Responsibilities • Differentiate between major and minor responsibilities. • Identify the type of experience required for the position. • Divide responsibilities. • Learn from each other.

40. Three Main Types of Job Share: • Shared Responsibility • Divided Responsibility • Unrelated Responsibility

41. Job Sharing Fact’s • In 1997, 89% out of 1,777,000 employees sharing jobs were women. • 77% of Women returned to their jobs after maternity leave. Up 7% from 1988.

42. Advantage/Disadvantage of Job Share • Lets you share the responsibilities with a co-worker • Drawback is that since you will be working part-time your income will be reduced and you may lose out on promotions in the future.

43. Cafeteria Plans?? • What is a Section 125 Cafeteria Plan?It is a plan designed and setup by the Internal Revenue Service to allow participants to have money taken out of their paychecks pre-tax for group health insurance premiums, unreimbursed medical expenses, and child care expenses. • What is the maximum that I can claim for the year for Section 125?For the Medical Reimbursement of the Section 125 plan it depends on your company's plan document. You should have been given a copy of the Summary Plan Description when you became eligible for the plan. As for dependent Care Reimbursement the IRS annual maximum is $5,000.00 per household.

44. Cafeteria Plans cont. • What happens when I terminate employment?To claim any money in the Section 125 account after you terminate you can only submit receipts for services that were done before your date of termination. All other expenses will not be allowed, unless you elect COBRA.

45. Claims you may not be allowed to make? • Can I claim getting my teeth bleached?No, teeth bleaching or whitening is classified as a cosmetic procedure. • When I get my varicose or spider veins stripped can I claim that procedure?No, stripping of the veins unless medically necessary, is considered to be a cosmetic procedure. • I went to my Optometrist in 1999, but picked up and paid for my glasses in January of 2000. Can I claim this expense in the 2000 plan year?No, the IRS regulations specify that expenses that are reimbursed must have been incurred during the period for which the participant is actually covered under the plan for that specified plan year. • I am taking treatments for infertility, such as prescription fertility drugs and artificial insemination. Are these claimable?Yes, But only when administered by a licensed physician.

46. Claims cont. • I am currently undergoing Birthing Classes, are those expenses claimable under un-reimbursed medical expenses? Yes, birthing classes are eligible, but only expenses for the mother can be claimed. • Are dietary supplements claimable?Not unless your doctor is willing to write a prescription for them or submit a letter stating that they are a medical necessity • I go to a message therapist can I claim these visits?Yes, recently message therapy has been added as an eligible form of therapy to be reimbursed under Section 125

47. Submitting the Receipts • How do I get a claim form to submit my receipts?There are three ways that you can get our claim forms: • you can get them from your Human Resources Department • you can get them off this website under forms • you can contact our office either by phone, email, or fax

48. Other Types of Flexible Plans • Medical Savings Account (MSA)= is Tax-exempt trusts or accounts allowing individuals to pay certain medical expenses that are not reimbursed under a health plan with pr-tax contributions • Health Reimbursement Arrangements (HRAs)=is a strictly employer funded plan that reimburses employees for certain medical expenses incurred by the employee and the employees spouse or dependent

49. Funding • Flexible benefit plans can be funded by employer & employee contributions or both • The salary reduction that employees agreed to pay before taxes is frequently used to fund health care and dependent care spending accounts.

50. Benefits Of Implementing a Flex Plan • Help Manage Benefit costs. • Pay less in taxes. • Offer employees new or expand benefits. • Respond to the need of a diverse work force.