How to develop a strategy to compete effectively for key employees

Business owners and top executives are responsible for developing, nurturing and maintaining the crucial relationships, proprietary processes and valuable assets that make an organization successful and sustainable. Often these key personnel are integral to your competitive advantage. And, knowing today’s increasing competition for talent, it’s important to have the right strategy to attract, retain and engage key personnel and set your organization as a destination employer.

Rory Lough, area vice president of Executive Benefits Consulting at Gallagher, says, “It’s critical that employers evaluate their approach to executive benefits as it can lead to long-term sustainability and ensure the future of an organization.”

“Executive benefits help you invest in talent, in the hopes that talent will help grow the business and stay long term,” says Joe Roberts, area vice president of Health & Welfare Consulting and Key Accounts at Gallagher.

Smart Business spoke with Lough and Roberts about how executive benefits work.

How are executive benefits packages different than general employee benefits?

An executive benefits program is more individualized and flexible. Often, business owners like that flexibility because they can be creative, but so many options also can be a challenge. They need to find a plan that benefits the organization and speaks to the motivations of the key employees.

These plans typically aren’t publicized to the general employees. They may be in an employment negotiation contract or retention contract. Depending upon the type, IRS and Employee Retirement Income Security Act (ERISA) rules may or may not need to be followed. Non-qualified deferred compensation plans offer employers many advantages, such as the fact that the plan isn’t subject to these nondiscrimination rules and, therefore, can be customized for each participant. Employers can provide benefits in excess of the qualified retirement plan limits, create financial incentives (golden handcuffs), and supplement disability income protection and key man protection for the company and employee’s family.

What’s important to understand about developing an executive benefits plan?

It’s a good starting point to link executive benefits programs to organizational goals and objectives. It could be based upon performance, total years of service, total income, job title or even a combination.

You also need to decide which roles and employees are instrumental to the business’s growth. You don’t have to target executives alone. You can design a benefits package for top executives, and a second package for another tier of employees.

You’ll want a plan that addresses the underlying motivations. Why will they continue to work for your company? What attracts, retains and rewards one executive or key employee might differ. The art of designing executive benefit packages includes understanding and identifying those sticking points, the risk exposure, and the laws of taxation or power of tax deferral.

Each package has its tax advantages and disadvantages, so you need to understand all of the implications.
It’s a complicated arena, so make sure you work with a team that specializes in executive benefits strategy. There’s no right answer or perfect puzzle piece. That’s why an expert team can help you identity what will work best for your organization.

How often does a plan need to be adjusted?

Typically, when you implement a plan to make sure you’re accomplishing a certain goal, if that goal changes, then the plan needs to be adjusted. If there are tax changes, the plan needs to be adjusted. Every year, your employee benefits adviser will review the plan. The key is to continually keep this topic in mind when evaluating your overall approach to benefits and reward planning.

Insights Employee Benefits is brought to you by Gallagher

This material was created to provide accurate and reliable information on the subjects covered, but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.
Gallagher Benefit Services, Inc., a subsidiary of Arthur J. Gallagher & Co., (Gallagher) is a non-investment firm that provides employee benefit and retirement plan consulting services to employers. Securities may be offered through Kestra Investment Services, LLC, (Kestra IS), member FINRA/SIPC. Investment advisory services may be offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Certain appropriately licensed individuals of Gallagher are registered to offer securities through Kestra IS or investment advisory services through Kestra AS. Neither Kestra IS nor Kestra AS are affiliated with Gallagher. Neither Kestra IS, Kestra AS, Gallagher, their affiliates nor representatives provide accounting, legal or tax advice.

What your employees really want in their benefits package

In today’s job market, employers are finding it increasingly difficult to offer their employees what is of top importance to them — money. This results in the need for employers to get creative when it comes to recruiting and retaining top-notch talent. Where salaries fall short, many employers bolster their benefits packages in conjunction with other incentive-based offerings, says Rob Higginbotham, finance and HR director at JRG Advisors.

Here’s the million-dollar question: What matters most to employees?

Smart Business spoke with Higginbotham about the key areas where employers should pay attention in their employee benefits.

How much does money matter?

Probably without question, the most important factor for any employee is salary. After all, we all want to be paid what we are worth, right? The reality is we are all worth more than simply what a dollar amount reflects, but salary negotiations are a big component to attracting and retaining quality employees.

As an employer, you must pay your best and brightest, and give no reason for these employees to polish up their resumes. Pay attention to the compensation standard in your industry and region. Know what your competitors are paying. And by all means, do not hesitate to proactively talk about compensation with transparency and clarity.

What needs to be included in a comprehensive employee benefits package?

Providing access to a good benefits package that meets the needs of your employees is a worthwhile investment that pays dividends. Although health insurance ranks as the primary concern for employees, providing added benefits to your program goes a long way to strengthening the overall compensation package. Consider including short- and long-term disability insurance, life insurance, dental, vision and voluntary benefits like critical illness, cancer riders, and tuition savings and reimbursement plans. Sponsoring a retirement savings plan is a benefit that can separate your company from the competition, too.

A well-rounded benefits program fosters healthy and productive employees. It bolsters employee morale and demonstrates that you care about your employees’ health, well-being and future potential.

Where does work-life balance come into play?

Your employees’ work-life balance is a crucial factor when it comes to accepting a new job or leaving a current job. Plain and simple, overworked employees develop resentment and that can lead to burn out. There are only so many hours in a day. The more time an employer demands, the less quality time an employee has to spend with his or her family or to pursue interests or hobbies that are critical to his or her well-being.

The balancing act for employers is enabling employees to have lives outside of the workplace, while ensuring that the job gets done. More companies are beginning to offer flex-time schedules, job sharing and unique paid time off plans to help employees achieve the proper work-life balance.

What’s important to understand about career development and providing purpose?

Employees need to know they have opportunities for advancement within a company because it increases the likelihood of loyalty and dedication. If an employee feels stagnant, bored, overlooked or underappreciated in their position, chances are they will actively seek a job opportunity elsewhere. Provide on-going training programs and help employees further develop their skills. Senior management can motivate employees with open dialogue, a chance to work on a new project and constructive feedback, too.

Employees want jobs that provide them with a sense of purpose. In other words, a company’s goals and its measurement of success must be defined by more than financial earnings. Many employees find a great deal of satisfaction working with a company that aligns with their own values, a company that is socially responsible and aims to have a positive impact on society.

Employers can also foster a sense of purpose by taking the time to acknowledge employees, celebrate their achievements and reward hard work. After all, we all want to grow personally and make a meaningful difference.

Insights Employee Benefits is brought to you by JRG Advisors

How to increase employee engagement with alternative benefits offerings

As a trusted partner and advisor, benefits brokers have the opportunity to educate and counsel employees year-round on benefits offerings to keep them engaged. All too often though, benefits professionals become entangled in the process — only focusing on the employer or HR director. They develop tunnel vision when it comes to recognizing and minimizing the impact selecting benefits each year has on employees.

“The bottom line, benefits are confusing and stressful. Many employees make their benefits decisions without fully understanding the offerings available to them, how they work and more importantly whether or not a plan is suited for their unique needs,” says Ron Carmassi, sales executive at JRG Advisors.

Smart Business spoke with Carmassi about how alternative benefits can help alleviate dissatisfaction with benefits programs.

Where do some benefits programs fall short and how can employers fix this?

A 2016 Harris Poll revealed that half of employees find benefits decisions to be stressful, 20 percent regretted their choices and 41 percent found open enrollment to be extremely confusing. The poll also found that while HR directors spend a significant amount of time and effort throughout the year preparing and sourcing options for employees, only one-third of employees actually read the material. This lack of education and knowledge creates anxiety and dissatisfaction around the benefits program.

The secret ingredient lies in education. Most employees associate ‘benefits’ with ‘health insurance.’ While health insurance is the main staple, there are a wide array of lesser-known benefits to offer and employees may not be aware of all their options. Alternative benefits offerings, aside from standard health insurance, can play a vital role in increasing employee satisfaction and ultimately their engagement.

What are examples of alternative benefits?

Voluntary benefits: These benefits are a great way to enhance your total program and increase employee satisfaction, with little impact on the budget. Some types of voluntary benefits that can deliver convenience and value are accident, critical illness and pet insurance. Employees need a clear understanding of not only how the coverage works, but also the benefits of having coverage and the potential risks of going without.

Life insurance: While it can be depressing to prepare for your mortality, it’s an important topic. LIMRA, a research and consulting firm, determined that 30 percent of Americans don’t have life insurance, and 48 percent of households have an insurance gap of $200,000 or greater. The research also found that from 2010 to 2016, life insurance enrollment increased 10 percent among millennials as they began aging, buying homes and having children. A life insurance plan can be valuable to younger employees who may be starting families. If you already offer life insurance, all employees should be reminded to review and update their policies.

Short-term/long-term disability: Regardless of whether your workforce is young or old, long-term disability should be considered. No one is immune, so take a multi-generational approach. Many of the older employee population have families and recognize the importance of protecting themselves in the event they’re unable to work. For younger employees, it’s an opportunity to remind them that disabilities are a real possibility. While ‘disability’ is commonly associated with a catastrophic condition, it could simply mean being temporarily unable to work due to back problems or surgery. In any case, it’s always better for employees to be safe than sorry.

Retirement plans/401(k): Whether employees are close to retirement or have decades left in the workforce, saving for retirement is a key component of financial security. Offering a 401(k) or other retirement benefits can increase employee loyalty and is a great recruitment and retention tool. But they are only helpful if employees are aware of and understand them. Many people participate in a 401(k) contribution plan and develop an out-of-sight, out-of-mind mindset. Open enrollment is the perfect time to review retirement savings. If an employer provides a 401(k) match up to a certain percentage, employees should be encouraged to increase their contribution to that threshold.

Insights Employee Benefits is brought to you by JRG Advisors

What benefits approach makes a positive impact for your business?

Historically, if you are like many businesses trying to provide employees with a quality benefits package at the most affordable price, it is likely that you repeat the same old process year after year and at the plan renewal.

It typically begins with a few prayers to the renewal gods for a low premium increase, followed by reviewing quotes, comparing benefits and networks — leap frogging from one insurance company to another and shifting more costs to your employees.

To make matters worse, the Affordable Care Act (ACA) has placed even more regulatory requirements and administrative burden on employers.

Now more than ever, employers need to break tradition and work with a broker who can negotiate, innovate and leverage technology to support your plan’s enrollment, communications, data and reporting.

Smart Business spoke with Ron Smuch, insurance and benefits analyst at JRG Advisors, about key areas employers should consider when selecting an insurance broker.

Are you provided with year-round support?

Accessibility and support is the foundation for maintaining an effective benefits program.

While it’s true that open enrollment is a challenging time of year, employers need to ask themselves, ‘What is my broker doing for my benefits plan the other months of the year, when it comes to customer service, compliance support, education, technology and strategic planning for the next renewal?’

What advantages can ACA compliance tools provide?

The rules and regulations governing employee benefis plans are complex, but technology is available to guide employers.

For example, there are tools to determine your number of full-time employees, ensure that your health plan provides minimum value and deciphers complex IRS reporting requirements.

To avoid compliance violations and penalties, choose an experienced, technology-based broker who provides access to tools, resources and offers qualified guidance.

What are examples of how technology can be used in benefits?

Technology now exists that allows an employer to gain de-identified employee health data and risk factors. Armed with this information, gaps in care can be identified, employee education can be specific and emerging health insurance claims can be reduced.

As far as open enrollment, this process can be not only a lot of work for the employer, but also a very confusing process for employees.

By using technology-based enrollment, however, an employer can save time and money and make the process more efficient and user-friendly for the human resources department and their employees. Many technology-based systems have forged their way toward improved communications, increased productivity, streamlined processes and cost savings for employers.

What are the takeaways for employers that want to become more innovative when it comes to their benefits?

The balancing act for an employer, which is trying to maintain a cost efficient, effective and competitive benefits package, requires an innovative benefits expert who can implement and maximize technology to meet your company’s unique employee benefit needs.

As an employer, ask yourself, ‘Is my broker making a difference for my company?’ A benefits expert who provides technology, resources, data analysis, targeted solutions and strategy to impact cost has the expertise and innovation you should be demanding.

Insights Employee Benefits is brought to you by JRG Advisors

Benchmarks to help you attract top talent and compete

The employers that win the current and future talent wars are those that address talent issues and rewards from a human capital investment management perspective. They make decisions about rewards resource allocation that align with their organizational fingerprint and that maximize return on talent investment.

With an ongoing process of situational assessment, strategy and tactics development, and decision-making, these organizations are moving away from budget-driven rewards tactics and toward strategy-driven rewards budgeting.

Smart Business spoke with Joe Roberts, area vice president of Health & Welfare, Key Accounts, and Keith Friede, area vice president of Talent & Organization Development, at Gallagher, about how employers can move in front of their competitors as a destination for talent.

What challenges are employers facing?

A tsunami of benefits and HR legislation and accompanying regulations during the past few years has inundated employers — so much so that most employers, from a practical perspective, cannot successfully comply with all the requirements to which they are subject. The workforce continues to diversify. A one-size-fits-all approach to rewards, while simpler, is no longer a sustainable approach for employers wishing to attract, retain and engage top talent. Technology continues to change, which can disrupt revenue and profit models. This may result in difficult decision-making and in some cases, reluctance to make changes.

How does this impact benefits and HR?

Employers have to rethink and refocus their strategies. Attracting and engaging top talent is the ultimate goal, so employers should couple competitive short-term and long-term rewards with a strong engagement program. They should also focus on linking local outcomes and costs to employee career and global business success. Two other closely related elements, controlling health care costs and improving employee total wellbeing, require employers to balance increasing health care costs with other total rewards costs by reducing controllable spend. In its simplest form, the process starts with creating a culture of employee health that accounts for a person’s social, emotional, career, community and physical wellbeing.

For regulations, employers must develop a comprehensive human capital risk approach that identifies all types of human capital (not just compliance) risks comprehensively, and then assesses risk potential and degree of severity, determines the appropriate treatment for each risk (across a wide range of possibilities), and finally communicates decisions to key constituents. Too many employers wait for the next wave of legislation/regulation and then react, often in a way that complicates strategic objectives.

Employers should look at customizing rewards and overall employee experience. This isn’t just about generations. It’s about recognizing a range of differences, including life stage, career aspirations, risk tolerance, financial circumstances, family size and situation, health, spouse’s employment, etc.

Most employers utilize technology to address regulatory compliance and administration needs. But the employers that harness technology to help drive organizational and human capital strategy will have a competitive advantage.

What trends have you seen? What do you anticipate seeing this year?

Legislation and regulation will continue to proliferate. Workforce demographics will continue to diversify. Technology advances will result in greater choices and complexity (and cost). Compensation and benefits costs will continue to increase.
In 2018, there should be a bigger focus on employee engagement. Many organizations focus on improving customer satisfaction, increasing the bottom line and achieving other crucial business outcomes. These can be optimized with improved engagement.

Are companies structuring compensation or benefits differently as a result?

Too many organizations try to maintain the status quo — the same human capital investment mix, and with each legislative change, the same compensation or benefit investment within the new requirements. Top-performing organizations are clear about the human capital implications of their strategy, and then make decisions consistent with those implications and their strategy.

Insights Employee Benefits is brought to you by Gallagher

Your office spring cleaning should include employee benefits files

As spring approaches, many of us get the itch for a little “spring cleaning.” It’s less hectic with end of the year issues and open enrollment out of the way. It’s also the perfect time for employers to pull out benefits records for review, confirmation and updating, says Chuck Whitford, consultant at JRG Advisors.

Smart Business spoke with Whitford about the tasks that employee benefits professionals should consider when spring cleaning.

Why should employers review and confirm items in their employee benefits this spring?

Many employers use benefits confirmation statements once employees have completed their open enrollment elections. Although these statements are generally utilized for electronic enrollments, some employers also provide them for paper elections. During this time, an employer should compare the confirmation statements to what is on record for an employee’s benefits choices and dependents enrolled. Furthermore, an employer should ensure that payroll records reflect any premium changes because of the employee’s elections.

This is especially important when an employee’s premium insurance elections are done on a pre-tax basis through an employer’s Section 125 plan. Section 125 rules provide that an election is irrevocable for the 12-month plan year unless there is an IRS permissible reason for a mid-year election change. There are some events not in the 125 rules that could allow an individual to make a mid-year election change, such as a mistake by the employer or employee, or needing to change elections to pass nondiscrimination tests. To make a change due to a mistake, there must be clear and convincing evidence that the mistake has been made. For instance, individuals might accidentally sign up for family coverage when they are single with no children.

What could need to be updated with life insurance and disability benefits?

Two popular benefits that employers provide their employees are group term life insurance and disability (both short and long term). Life insurance premiums are usually based on the age of the employee, while disability premiums are based on an employee’s wages.

An employer should take advantage of spring cleaning to ensure that its records (payroll and invoices) reflect the age changes of employees as well as any pay increases that may have occurred at the beginning of the year. Also, the employer should double-check these benefits for issues such as the removal of terminated employees, employee classification change, which affects the amount of a benefit, and proper taxation.

Depending on the employer’s policies, an employee may be able to have the premiums for disability insurance paid on a post-tax basis, instead of pre-tax, which enables an employee to avoid taxation upon receipt of a disability benefit.

How should beneficiary forms be reviewed and updated, if necessary?

Beneficiary designations are frequently used in retirement and life insurance plans to determine entitlement to benefits payable upon death of the participant. In the case of certain benefits subject to spousal protections, federal law imposes requirements on both the form and timing of beneficiary designations. Other types of beneficiary designations are a matter of plan design. A beneficiary designation that doesn’t accurately reflect an employee’s intent can result in disputes following the death of a participant.

There are a multitude of life situations that could be costly to an employer if a proper beneficiary designation is not on file — think divorce, simultaneous death of the participant and beneficiary, or lost forms as examples. An employer may be required to defend a lawsuit, correct improper payments or find the proper beneficiary.

Does the Tax Cuts and Jobs Act make other changes necessary?

The IRS updated the income tax withholding tables for 2018 to reflect changes made by the new tax law. The updated tables, which were to be used no later than Feb. 15, 2018, reflect the new rates for employers. As part of its spring cleaning, an employer may want to have its employees complete new W-4s. Employers should visit the IRS website for the release of 2018 W-4s.

Insights Employee Benefits is brought to you by JRG Advisors

Health data should be used for more than just keeping score

Benefits consultants use data as a part of the consulting services provided to employers. The consulting strategy includes looking at health claims throughout the benefits year, creating reports and reviewing the reports with the benefits administration team.

“But this approach of simply ‘keeping score’ of data doesn’t accomplish the goals of every employer, which is to drive down the costs of a health insurance program,” says Michael Galardini, director of sales at JRG Advisors. “The next generation benefits consultant uses predictive modeling and data analytics to lower the largest cost of a health insurance program: emerging claims.”

Smart Business spoke with Galardini about how employers can get better results with emerging claims to lower the costs of a health insurance program.

How can predictive modeling and data analytics software identify risks and improve a health insurance program?

Predictive modeling and data analytics software is a population health management service that can identify the high-risk members of a health insurance program.

Once identified, these members are ranked by severity and gaps in care. A web-based reporting system will provide access to the actionable information to target these high-cost and high-risk members. The system reveals the members who are noncompliant with preventive care — and members who require disease management, prescription drug maintenance or health coaching intervention.

Managing this data properly can ensure that these high-risk members don’t fall through the cracks.

Once properly identified, the next step in the risk management strategy is to evaluate the actual cost and forecast the cost in the next 12 months for each member. These include things like the number of emergency room and inpatient stays for each member in the next year. By identifying and evaluating these emerging claims, consultants can now get ahead of the costs that are driving the increases in premiums.

What’s the benefit for employers?

Identifying and managing these claims helps stabilize or lower the premium costs. The old process of reviewing claims data after the claim already occurs doesn’t allow the benefits consultant to provide a strategy to mitigate the costs to the employer.

Using predictive modeling and data analytics to identify high-risk members gives time to develop a population health management strategy to better manage the emerging claims.

What is population health management?

A significant component of reducing the identified health risk is using care managers to work with high-cost and high-risk members. Benefits consultants partner with care managers to review the data provided by the predictive modeling and data analytics software to motivate these members to manage their health care. Care managers can work directly and confidentially with the members to ensure the proper medical care is being provided for their specific medical conditions. These members will be guided through actions, such as timely preventive care, prescription drug adherence and coordination of care.

How do employees benefit?

The goal of the care managers is to teach the high-cost and high-risk members to self-manage their health care, comply with care instructions and pursue ways to improve their health status. Care managers can also use cost transparency tools to guide the member to find the best price for medical services. This not only keeps the claims costs lower for the health insurance plan, but also can help lower out-of-pocket costs the member has in the form of a deductible or co-insurance.

Incorporating predictive modeling and data analytics with a population health management strategy can produce the result that every employer expects from a benefits consultant — disrupting the current distribution model to move the needle of the emerging claims to lower the costs of a health insurance program.

Insights Employee Benefits is brought to you by JRG Advisors

How alternate funding and tools can help control small group health plans

Today’s health care environment is riddled with complex plan designs and rigorous government regulations, leaving many employers to feel as though their hands are tied when it comes to finding unique, innovative and cost-saving solutions.

But a new concept is emerging that will enable small employers to identify current and future risk, influence behavior and control costs.

Smart Business spoke with Aaron Ochs, managing consultant at JRG Advisors, about strategic analysis and risk management in the small group health insurance market.

How is the small group health insurance market changing?

Typically, small employers have been unable to maximize the value of their medical benefits due to lack of claims utilization and analysis from their insurance company. In the typical buying arrangement, the small group market is a fully insured contract that does not offer the employer much control over the health plan. Self-funding works differently.

In addition to providing protection against excessive costs in years with high claims and the opportunity to keep the profits from favorable years, the availability of data, including claims utilization, is a significant advantage for the employer. Knowing the health and risk factors of the employee population helps the employer determine the appropriate benefits strategy.

Self-funding is not a new concept; but it is new to the smaller employer — with many insurance companies offering partially self-funded premium options to groups with as few as 10 insured employees.

With partial self-funding, the employer puts aside enough money to cover anticipated claim expenses and the monthly premium remains level for the entire plan year. If claims are less than the funded amount at the end of the year, a rebate or credit is issued. If claims exceed the funded amount, the employer is protected by stop loss.

How can employers use data as a tool to help?

The ability to anticipate or predict claims costs hasn’t been available in the small group market due to the absence of claims data from the insurance companies — until now.

This is where newly developed risk management and predictive modeling tools come into play, making it possible to take a much ‘deeper dive’ into the composition and risk of the smaller employer, proactively identifying members with markers for chronic illness to predict health risks and determine if self-funding is a viable solution.

The deeper dive begins with employee data that is captured through a custom access portal, scrubbed and reviewed. The portal is an insurance company-accepted, Affordable Care Act and HIPAA compliant online benefits application tool designed to reduce the amount of time, cost and paperwork for employers. Employees are asked to complete an online enrollment interview. The employer receives a confidential de-identified aggregate report with an overall analysis.

This expert analysis guides the business owner through the benefit decision process with the power of knowledge. Gaining insight into the composition and health status of the group means plan design decisions can be strategic rather than an annual game of ‘pinning the tail on the donkey’ to find a tolerable solution.

What kind of results can employers expect?

Often, the same portal technology can reduce or eliminate many administrative burdens by providing the added support of employee enrollment, communication and plan election/waivers. The solution is a faster and more efficient approach to benefits. This means employers can essentially build their own health plan, which can lead to generous cost savings, greater transparency and understanding, and better overall cost control.

Over half of an average employer’s health care budget is spent on members with preventable conditions. It’s time for small employers to take control of their health care plans. Talk to your advisor to learn how these funding arrangements and risk analysis tools can help with your strategic benefits planning needs.

Insights Employee Benefits is brought to you by JRG Advisors

Does it make sense to keep doing the same thing with health insurance?

Insurance in its purest form was designed to transfer unknown risk to another entity, the insurance carrier.

“But fully insured health insurance can be more accurately described as a payment plan for known or predictable expenses, which includes an element of insurance layered on top,” says Joe Roberts, area vice president of Health and Welfare Key Accounts at Arthur J. Gallagher & Co.

“A large number of frequently used medical services are predictable expenses,” Roberts says. “Consider your annual maintenance medication or a well child visit. Those are things that you can plan for or expect to pay. Funding predictable expenses through an insurance premium is essentially a payment schedule for a known expense and, therefore, like other financing mechanisms, financially inefficient.”

Smart Business spoke with Roberts and Ethan Hendrickx, an area vice president in Gallagher Benefit Services, about why it is important to understand the “financing” behind health insurance and how gaining this knowledge can lead to a more efficient and cost-effective benefits strategy.

What should employers understand about the financing of health insurance?

Paying premiums to an insurance company to fund predictable expenses is financially inefficient. Here is a simplified example. Let’s say you take a medication that costs $100 a month, but because your health insurance includes pharmacy copays, you only have to pay $20 to fill the $100 prescription. For the insurance company to collect enough premium to pay its $80 share of this prescription and cover the cost of doing business, it needs to charge $92-$96 in premium. Thus, you paid $116 for the $96 in premium plus a $20 copay.

Apply that scenario across all of the known or predictable expenses consumed each year by your employees and the numbers get very large.

Why is this important for employers to understand?

When purchasing a fully insured health insurance plan, there is a common misconception that insurance companies are going to pay your claims and lose money in the process without increasing premiums to make up for their losses. The reality is insurance companies formulate their premiums based on past claims experience and future risks.

Employers need to understand how health insurance works at the insurance carrier level in order to determine the best way to manage risk and fund the claims of their employees.

In many cases, employers are able to more efficiently manage their health benefit spend by purchasing an appropriate level of insurance for their business and then funding claims as their employees consume health care on a variable cost basis. This structure is commonly referred to as a partially self-funded plan.

How can employers save money with a partially self-funded arrangement?

There are five main areas from which savings can be derived in a self-funded arrangement:

  1. Insurance company profit.
  2. Administrative costs.
  3. Risk transfer costs.
  4. Fees/taxes.
  5. Pharmacy programs.

A self-funded arrangement may not be right for all employers; however, they should evaluate the feasibility of an alternative to a fully insured arrangement. In making this determination, there are several issues to consider, like risk tolerance, contract provisions and cash flow implications. It is important to find an adviser who understands the technical aspects of self-funded programs and has experience in structuring and managing those types of programs.

How large does an employer need to be in order to benefit from adopting a partially self-funded approach?

More and more small to midsize employers are converting to self-funding. There are organizations in Northeast Ohio with fewer than 50 employees on their plan that successfully self-fund their medical and pharmacy benefits. And a growing number of stop-loss insurance companies developing new products and contract features make it increasingly prudent for smaller employers to take advantage of self-funding.

Insights Employee Benefits is brought to you by Arthur J. Gallagher & Co.

How to avoid the plan administration pitfalls of employee benefits

There are numerous employee benefits laws requiring compliance. Staying on top of compliance can be daunting, and it’s easy for something to fall through the cracks.

As you gear up for the New Year, take some time to review the pitfalls of employee benefits plan administration.

Smart Business spoke with Frances Horn, Employee Benefits Compliance officer at JRG Advisors, about what to watch for with employee benefits compliance.

What’s the first step to compliance?

As employers gear up for 2018, they need to set some time aside to review their employee benefits plan administration. An employer may not be subject to every law, due to size or type of benefit offered, but no employer is not subject to any of the laws.

The major laws are the Employee Retirement Income Security Act of 1974 (ERISA), Consolidated Omnibus Budget Reconciliation Act (COBRA), Health Insurance Portability and Accountability Act of 1996 (HIPAA), Internal Revenue Code (IRC) Section 125, Family and Medical Leave Act of 1993, Medicare and the Affordable Care Act, with many having several compliance provisions.

How is failing to properly communicate with the plan participants a pitfall?

Under ERISA, plan administrators have disclosure and reporting requirements. Every plan may not be subject to these requirements, due to size or type of plan funding, but every plan subject to ERISA has disclosure or communicating requirements, such as distribution of a Summary Plan Description, Summary of Benefits and Coverage and numerous other notices.

Under COBRA, many administrators don’t recognize that there are several more notices required than just an election notice. These include, but are not limited to, an initial notice, notice of early termination and notice of unavailability of COBRA coverage.

Other communications that remain the plan administrator’s responsibility are the Medicare Part D notice, HIPAA Special Enrollment Rights, Women’s Health and Cancer Rights Act notice and the Children’s Health Insurance Program Reauthorization Act of 2009 notice.

Where else do employers go wrong with plan administration?

Understanding who is actually the plan administrator can be another pitfall. With most laws governing employee benefits plans, the responsibility for compliance rests with the plan administrator, which is the person usually designated in the plan documents. If no such designation exists, the administrator role defaults to the plan sponsor, i.e. the employer.

While the plan administrator is responsible for disclosures to participants, plan document preparation and penalties for any noncompliance, many employers incorrectly feel these requirements fall with either the insurer or the insurance broker. Even for a self-insured plan, the third party administrator rarely agrees to be the plan administrator, but may assist with an employer’s documentation responsibility.

The pre-taxing of an employee’s premium contribution share is another pitfall. Many employers require that employees pay a portion of the premiums, particularly medical, dental and vision insurance coverage. To assist employees with these contributions, an employer will take the premium out of an employee’s compensation before applying taxes, thus the term pre-tax. An employee’s taxable wages for the Federal Insurance Contributions Act, federal withholding and state withholding are then reduced. This practice is often referred to as being a tax-favored treatment for employees.

The capability to pre-tax benefits comes under Section 125 of the IRC. The code requires that an employer establish its pre-tax plan, often referred to as a cafeteria plan, Section 125 plan or a premium-only-plan, in writing. Not meeting this requirement means a Section 125 plan doesn’t exist and that the employer is more than likely improperly taxing its employees’ benefits.

Numerous laws govern employee benefit plans. Ultimately the employer is responsible for complying with these laws and can be subject to costly penalties for noncompliance. As the year draws to a close, employers should review the governance of their benefits plans and determine if they need assistance to climb out of any pitfalls.

Insights Employee Benefits is brought to you by JRG Advisors