Benefits, buffet style – flexible plans
Mary Allen
Benefits, Buffet Style
Too good to be true. To some smaller companies, that might be a fitting description of a benefits plan that employees can shape to suit their needs–and that holds down company costs.
But across America, increasing numbers of small and midsize companies are discovering that so-called flexible benefits plans are not a luxury available solely to the largest corporations– or those with the biggest budgets. Plans that provide choices among types of medical and life insurance and other options are now seen by many smaller employers as a way to solve some of their most pressing concerns. Those concerns include attracting the best talent, curbing spending, improving employee morale and increasing the value of compensation packages at little or no added company expense.
The key to any flexible benefits plan is choice, whether the options include a few levels of insurance coverage or many different kinds of benefits. At one time, most employees’ needs were similar; today the work force is more varied and more demanding. By providing benefits choices, employers can equitably and cost-effectively meet employees’ individual needs–from extended parental leaves to child care assistance to varied medical insurance.
For some employers, meeting employees’ needs and increasing their awareness of their total compensation package is no small task. One such employer is the Master Chemical Corporation, in Perrysburg, Ohio. A written survey of Master Chemical’s 120 employees showed that 70 percent considered the benefits in their traditional plan “below average’–even though the company was spending more than the national average.
“I didn’t think throwing more money at the plan was going to improve it,’ says Treasurer Ron Sladky. “The demographics of our work force had changed, and people needed different benefits. We had to offer benefits more attuned to those differing needs.’ In April, 1984, Master Chemical set up an array of benefits choices.
Employees can choose among seven different medical insurance and health maintenance organization options. If they have medical coverage under another plan, they can waive this benefit entirely; they receive a benefits credit instead. Last year this credit was for $175 worth of any medical expenses that the Internal Revenue Service says are tax-deductible. Other options include four different levels of life insurance, three levels of long-term disability, voluntary accidental death and dismemberment insurance, and optional reimbursement for dependent care and uninsured medical expenses.
The result? “I don’t have to decide what is the best benefit for employees,’ says Sladky, “I just give everyone the choices, and they decide for themselves. Everyone really likes it that way. No one comes into my office any more complaining about their benefits. Instead, employees understand and appreciate what they are getting. After all, you can’t choose benefits until you know what you’re choosing.’
Successfully communicating the options is a key part of setting up a flexible benefits plan and, says Sladky, is “probably the most difficult part of the whole flexible plan concept.’
“We had a booklet written by a consultant who specializes in flexible plans,’ he says. “We also held a series of meetings with 20 to 30 employees at a time’ in which the value of various options was explained. Employees experimented with trial selections of benefits. The sessions were videotaped for absent and future employees.
Although reducing costs was not the primary motive for starting a flexible benefits plan, the company has saved far more than it invested in the plan. Partly, this is because the company self-insured its medical coverage. Costs for the “flex plan’ totaled $10,000, with $2,500 going for communication materials, $6,500 for consulting services and $1,000 for computer programs and forms. Savings generated from the combination of flexible benefits and self-insured medical coverage totaled $47,000 for 1984 and $65,000 for 1985.
In addition, the administrative load has been minimal. Although no Master Chemical employee chose a plan exactly like the original package, Sladky says it takes the plan administrator only two to three days each year to sort out all 120 employees’ annual selections, plus a half-day each month to administer the plan, which includes paying the premiums and doing any paper work involved. “Under our old plan, it took a half-day a month to pay premiums and make rate changes,’ says Sladky, “so the only real difference is the two- or three-day annual enrollment work.’
Cost Control attracts other smaller employers. At the San Antonio Development Agency, for example, medical insurance premiums rose 5 to 18 percent each year from 1980 to 1985. The local government agency, which specializes in low-income neighborhood revitalization, then offered each of its 45 employees a fixed number of dollars to spend on benefits and let each decide how those dollars would be spent.
Says Business and Project Manager Robert Clayton: “Now the agency isn’t locked into paying more for benefits each year. If a benefit’s price increases, employees are the ones to decide whether they will choose a less expensive benefit or make up the difference in cost from their own salaries.’
Like many flexible plans, the San Antonio agency’s has a handful of requirements and many options. All employees must take some medical insurance, life insurance and disability insurance, but they are encouraged to choose among a variety of deductibles and coverage levels. Life insurance for a spouse and dependent children is also available, as are two dental insurance plans.
Employees who opt for certain additional benefits or more costly selections than their benefits budgets allow are enabled by government regulations to cover the added expense with untaxed dollars from their own salaries. The agency subtracts these expenses from the employee’s total salary and withholds taxes on a lowered gross income. Dependent care expenses and uninsured medical expenses can also be paid for legally with untaxes salary dollars as long as employees declare at the beginning of the plan year how much they will spend on these expenses. Employees who choose this option are taxed on a lowered gross income as well.
Thus, when the agency’s dental insurance premium increased in 1986, the organization could continue to offer dental coverage to employees as one option. Though employees must use $5 more of their benefit dollars per month to get the coverage, the agency is only paying $2 more to include it in the plan. By passing this cost on to employees, the agency saves a total of $225 per month. And while the agency has been able to put a cap on its benefits expenditures, employees feel they are getting a better plan. Says Clayton: “Employees like the idea of being able to choose what’s best for them.’
Other smaller employers adopt a flexible benefits plan because it expresses a particular company philosophy. When Richard Ponder and several colleagues took over a closed, bankrupt hospital three years ago in Richmond, Calif., they wanted to build strong employee relations so they could attract and keep the best recruits. A successful East Bay Hospital innovation has been a flexible benefits program.
Each employee is given a monthly credit of $350 to use toward benefits, or a total of $4,200 for the year. At the beginning of each calendar year, the employee shops from a benefits menu that includes medical and life insurance plans, child care, additional life insurance and group legal services. A worker covered by a spouse’s medical plan can forgo coverage under the company’s medical plan and choose, for example, the equivalent dollar amount in child care instead. Executive Director Ponder explains that “75 to 80 percent of our employees are women, many of whom are covered under an employed spouse’s insurance plan. We didn’t want to require that they duplicate that insurance and thereby waste it.’
East Bay employees not only decide among insurance benefits, but they can also allocate vacation, sick leave and holiday time. All this leave is combined into one “paid time off’ account; employees decide when and how they will use it–within certain parameters. They must use paid days off for some legal holidays and at least five consecutive days for rest and relaxation purposes, but they can exchange some of their paid time off for other benefits. A healthy employee who has taken few days off for illness might decide to use paid days off to pad the vacation allotment for that year. An employee who does not want a lengthy vacation might trade in some paid days off and receive their equivalent in cash.
A result: East Bay employees do not feel they need to beat the system in order to get the full value of their benefits. Says one: “I really love the paid time off program; if I want to take an additional day away from work, I don’t have to call in sick.’
Because employees find the plan so satisfactory, East Bay’s human resources staff can successfully compete with the many other hospitals in the San Francisco area for the best new talent. “Offering flexible benefits gave us a distinct advantage in staff recruitment,’ says Ponder, “even though our location and physical plant can’t compare with other facilities in the area.’
The hospital’s payroll administrator spends just 12 to 15 hours per month maintaining the plan’s records. Moreover, East Bay’s insurance premiums have been kept low in the three years since implementation of the plan, in part because employees are given cash incentives not to use their insurance frivolously. For example, employees might choose to take a less expensive health insurance plan with a high deductible in order to spend more of their benefits dollars on other benefits or keep the savings in the form of cash. Since their deductible is high, however, employees think twice before using this insurance.
What enables these employers to set up flexible benefits plans and administer them so easily? Some have found it advisable to get a skilled consultant and an experienced insurance company to help set up the plan, communicate it to employees and devise administrative systems to keep it running smoothly. Others have assigned their staff benefits administrator to work with a topnotch broker, accountant or lawyer to figure out details of implementing the plan and maintaining records.
The planning process requires a substantial time commitment in order to reap long-term gains. BGS Systems, a 155-employee computer software company in Waltham, Mass., considered the possibilities for nine months before implementing a plan. The company’s broker and insurer both helped design the plan, and introduce it to employees. BGS’ management reports that the plan’s advantages for employees and the company far outweigh the time and effort it cost in those early stages.
Ted Kelly, BGS human resources director, says: “We found that for the same amount of money, we could increase the value of our benefits.’ Through the new plan, for example, 40 percent of BGS employees are paying for child care expenses–which can add up to thousands of dollars each year– with untaxed salary dollars. This translates into sizable savings for employees, who also benefit if they have medical coverage elsewhere and decline coverage under one of BGS’ plans.
For simply opting to use the spouse’s coverage, an employee is entitled to a $300 cash bonus. Providing bonuses of this kind helps BGS cut its benefits costs, since the company’s investment would be greater if the same employee had used one of BGS’ medical insurance plans.
If employees decide to receive BGS’ medical insurance, however, they are invited to choose between a plan with first-dollar coverage or one with a deductible and co-insurance, meaning that medical costs are shared by the employee and the insurance company. Life insurance options include coverage of up to three times an employee’s salary.
What does the future hold for flexible benefit plans? Experts, including W. Brian Harrigan, a vice president of Johnson & Higgins, a benefit consulting and insurance brokerage firm, are optimistic. Says Harrigan: “The number of flexible benefit plans will grow in geometric proportions each year for two simple reasons: spiraling benefits costs and diverse employee needs. Flexible benefits are the most appealing way to deal with both of these issues at the same time.’
Photo: When Richard Ponder and several colleagues took over the closed and bankrupt East Bay Hospital in Richmond, Calif., they wanted to attract and keep the best possible employees. An innovative flexible benefits plan has helped them to do so.
Photo: Ron Sladky (center), treasurer of Master Chemical in Perrysburg, ohio, introduced flexible benefits to his firm when a survey showed that employees did not believe their traditional benefits plan met their needs. The flexible plan met those needs without costing the company any more than the traditional one.
COPYRIGHT 1987 U.S. Chamber of Commerce
COPYRIGHT 2004 Gale Group
