Developing a Holistic Benefits Strategy

Overview

At FirstPerson, we don’t do benefits because we love poring over all 906 pages of the Affordable Care Act, or facing the formidable consequences of noncompliance, or even trying to remember a slew of acronyms that would make anyone’s head spin—as fun as those are.

We do benefits because we believe they are at the heart of the employer-employee relationship; because what you offer and how you communicate it makes a world of difference. We do benefits because we believe in turning one of your biggest variables into one of your strongest assets.

In this white paper, we’ll discuss the ins and outs of benefits as they stand today, and how to consider your strategy in the broader picture of your employment experience as you strive to create meaningful work for your employees.

Market Segmentation

The benefits market divides employers into one of three market segments based on their number of full-time employees (FTEs) and full-time equivalent employees. The government defines FTEs as employees who work at least 130 hours per month. Each market segment corresponds with several strategy options. Below is a brief overview of the three segments:

Between 2 and 50 full-time employees

  • Grandfather the previous plan. Continuing the plan you already use is understandably a convenient, popular choice; however, it only serves as an option during this transitionary period. As of October 2017, it will no longer be on the table.
  • Join an association. Pool your resources together with other small companies to create a sort of safety net and more easily meet compliance requirements.
  • Drop your plan. This is an increasingly appealing option for this market segment, because organizations with less than 50 FTEs are not subject to reporting requirements or penalty taxes.
  • Join a professional employer organization (PEO) or consider alternate funded plans.

Between 51 and 99 full-time employees

  • Self-fund. Use the organization’s money to cover healthcare expenses while enjoying the efficacy of financial and employee-related autonomy.
  • Join an association. Pool your resources together with other small companies to create a sort of safety net and more easily meet compliance requirements.
  • Join a professional employer organization (PEO) or consider alternate funded plans.
  • Continue with business as usual, maintaining an experience-rated fully insured plan—though read on to see if this is still the best option for your company.

100 or more full-time employees

  • Self-fund. Use the organization’s money to cover healthcare expenses while enjoying the efficacy of financial and employee-related autonomy. Especially among these larger companies, this becomes a really common, advantageous option.
  • Join an association. Pool your resources together with other companies to create a sort of safety net and more easily meet compliance requirements.
  • Continue with business as usual, maintaining an experience-rated fully insured plan—though read on to see if this is still the best option for your company.

With each of these, there is no one-size-fits-all approach. It’s important to weigh the pros and cons, and strategize what is right for your company, your people, and your best future—and a trusted advisor can help you do that.

Your Health Plan Funding Options, Explained

The world of benefits is nothing if not complex—and completely enmeshed in your people. The first step is getting a sound understanding of your options. Here’s the skinny:

Fully Insured

In a fully insured platform, an organization pays a monthly premium to an insurance company who “fully” owns the risk, even if incurred expenses are above the premium. This is the more traditional approach used by the (shrinking) majority. It’s popular, because it’s perceived as less risky due to the fixed monthly cost and attractive with its decreased internal administrative costs.

Pros

  • Known, consistent costs with the same premium each month
  • Insulation from the risk of high claims incurred

Cons

  • Possibility of paying excessive premium fees, particularly if you have a healthy population with low claims
  • Lack of flexibility in plan design that comes with self-funding

Self-Funded

In a self-funded platform, an organization assumes the financial risk associated with group benefit programs. It will typically partner with a third party administrator (TPA), but use its own money to fund claims and cover healthcare expenses and administrative costs. Sounds daunting and complex, but we see it becoming increasingly popular—with good reason.

When self-funding, you can get stop loss insurance to protect your organization against the catastrophic risks associated with medical expenses by reimbursing your company at a certain threshold. You still get the autonomy of being self-funded, while adding a layer of financial protection for the company.

Pros

  • Additional autonomy in designing your medical plan
  • The ability to avoid certain premium taxes applicable to fully insured platforms under the ACA
  • More leverage in negotiating administrative and risk management costs
  • Financial rewards when low claims expenses

Cons

  • Added responsibility of managing data and complying with policies and procedures
  • There’s an unpredictable cash flow
  • The immediate impact is measured in bad claims years, as opposed to impact at the next renewal

Essentially, the decision comes down to your organization’s cash flow and risk tolerance. Self-funding is not a shoe-in for everyone, but with the rise of additional taxes on fully insured plans and the huge savings potential of self-funding, it’s definitely worth evaluating for your organization.

In addition to selecting a funding option, you’ll have to determine what type of health plan is right for your organization. You have two main options:

Preferred Provider Organization (PPO)

PPO plans offer a network of healthcare providers to choose from and allow you the freedom to receive care from any in- or out-of-network doctor, specialist, or hospital without a referral. It usually offers lower deductibles and requires co-pays for services. But with greater flexibility comes a higher monthly premium.

High Deductible Health Plan (HDHP)

HDHP plans provide insurance coverage with the same flexibility and wide network of as a PPO; however, it allows for greater discretion over how your healthcare dollars are spent and offers a tax-advantaged way to save for future medical expenses. They have lower monthly premiums but higher deductibles, and you have to pay out-of-pocket until you hit your deductible.

Employee Investment

On the other end of the health benefit decision spectrum is determining how employees pay their personal medical expenses. There are three types of healthcare savings vehicles you can offer:

Health Savings Account (HSA)

This option functions like a checking account, where what you put in you get out, and you can only spend what’s in there. Contributions are made pre-tax, and the money you put in stays with you forever, even if it goes unused in a year. Both employees and employers can contribute to it, up to a maximum value set each year by the IRS. HSAs are only compatible with high deductible health plans, and they are becoming more popular because high deductible health plans are also on the rise.

Health Flexible Spending Account (FSA)

This option used to be far more popular, but is now losing ground to HSAs—you can’t have a FSA with a HDHP. Money in a FSA is “use it or lose it,” and whatever is unused at the end of the year is forfeited, unless it includes a carryover provision. The advantage is that you get the money up front, so if you have high-cost medical needs, you can spend the money in January and pay it off all year. Health FSAs work if you have a PPO plan, and but can also work with a HDHP if it is a limited flex account for dental and vision only.

Health Reimbursement Account (HRA)

A Health Reimbursement Account, or HRA, allows the employer to reimburse eligible expenses by making contributions to an employee’s account. It’s an excellent way to supplement health insurance benefits and enable employees to pay for a wide range of medical expenses not covered by insurance. And unlike the HSA, there is no limit to the amount of money an employer can contribute. HRAs are compatible with High Deductible Health Plans, but usually you cannot have both a HRA and HSA. They have lower monthly premiums but higher deductibles, and you have to pay out-of-pocket until you hit your deductible.

Reporting Requirements

Affordable Care Act (ACA)

Reporting under the ACA is the responsibility of both the individual and the employer. The individual mandate requires that you as a person have insurance; however, beginning in 2019, you will no longer incur a penalty if you choose not ot have coverage. The employer mandate requires that you as a company offer “affordable, minimum-value coverage to qualified employees,” if you have 50 or more employees (defined as full-time and full-time equivalents).

  • Did you offer coverage to your qualified employees, defined as people working at least 30 hours per week/130 hours per month?
  • Is that coverage deemed affordable? The ACA generally defines “affordable” as 9.56% of total household income, which can be calculated based on W-2 wages, or rate of pay.
  • Does that coverage provide minimum value? The general definition for “minimum value” is at least 60% of the total cost of medical services for a standard population, along with substantial coverage of inpatient hospital and physician services.

Who has to report?

  • For groups with less than 50 full-time equivalent employees: There are no reporting requirements in play right now, although that could change in the future.
  • For those with 50-100 FTEs: You have to both report and are subject to penalties for noncompliance.
  • For those with 100+ FTEs: You have to both report and are subject to penalties for noncompliance.

Consequences of noncompliance

If you fail to report to the IRS, you pay $250 per every form you don’t file, up to three million dollars. If you fail to offer coverage, or if your coverage doesn’t meet the required affordability thresholds, you can incur some serious penalties.

The sledgehammer penalty (or “A penalty”) is for not offering coverage to qualified employees. You pay $2,320 per every FTE, minus a credit given by the IRS.

The tack hammer penalty (or “B penalty”) is for coverage that doesn’t qualify as “affordable.” You pay $3,480 per every FTE for whom coverage is deemed unaffordable and who receives a subsidy on the Exchange. The tack hammer penalty can never be more than the sledgehammer penalty.

The Big Picture

Okay, let’s take a step back. Health care can get dizzyingly complex, and it’s easy to get so caught in tunnel vision trying to solve for X that you mess up Y and Z. Holistically, here are some broader trends and issues to drive the conversation.

Attract top talent by making yourself an employer of choice

Think about what providing benefits really means. First, focus on creating an optimal culture, then make benefits an essential part of getting you there. Move beyond medical coverage to a more holistic view of well-being. Social, financial, physical, professional, and emotional well-being all play a prominent role in employee happiness and success. Employee expectations are shifting from just a secure paycheck to a meaningful work experience with shared purpose. Leading employers are changing the way they define and market themselves to attract top talent.

Health care is personal

The definition of “generous benefits” has changed. It’s moving from generalized plans to individualized packages. Build an approach that offers meaningful, personalized benefits to your employees and meets their unique needs by letting them shop, choose, and drive demand for the products that work best for them.

Market trends are changing

For years, the healthcare market sat stagnant. From year to year and company to company, benefits looked more or less the same. But with Health Care Reform, we’re seeing big changes.

  • Health insurance costs will continue to rise.
  • A growing majority of employers will drop their group health plans, and it will no longer necessarily carry the stigma of turning employees out to fend for themselves.
  • More companies will embrace technology to empower employee choice.
  • People will be able to engage with what they specifically want and need, and get help from experts as they navigate the changing market.
  • Individual employee choice will keep driving the marketplace to create packages that make sense with easy, simple services.

Forward-thinking employers are revisiting their policies and procedures early, anticipating these trends, and making big changes to stay ahead of the curve. New flexibility can mean you don’t have to mess with the cost and frustration of benefits—a huge plus. It can also mean that something crucial to the employer-employee relationship gets lost along the way. Savvy companies will continue to meet employee needs by providing guidance and support on all things benefits-related, even if they opt to no longer provide the benefits themselves.

In Summary

The ACA, for all its merits, took an already complex world and made it even more difficult. Understanding the system and successfully navigating these changes can mean huge benefits not only for your bottom line, but also for your employee culture and business strategy. It’s our job at FirstPerson to utilize our team of compliance specialists, advisors, and benefits experts to transform the labyrinth of health care into a strategic, actionable plan that means best results for your organization.

Developing a Holistic Benefits Strategy

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