Flexible Benefit Plans: Offering choice and equity
(from Maine Townsman, January 1998)
By Jo Josephson

How do you design a benefit package that reflects contemporary society? One that not only reflects the diversity of the work force, but is also equitable, allows for choice, and comes at no increase in cost to the employer?

The folks in Ellsworth think they are on to something like that. For the past year, a team of non-union employees has been drafting such a plan, transforming the city's traditional benefit package of one-size-fits-all-or-nothing into what those in the trade call a "Flexible Benefits Plan" or a "Cafeteria Plan", where choice and equity are the name of the game. It’s a plan where employees are given "credits" based on their years on the job to purchase the benefits they need, want, and can afford. In doing so, says City Manager Tim King, they are developing a much greater appreciation and awareness of the value of their benefit package.

This article looks at what the folks in Ellsworth are up to. But first, the article looks at the growing national trend towards flexible benefit (cafeteria) plans.

GROWING NATIONAL TREND

According to the U.S. Bureau of Labor Statistics, in 1994 (the latest figures available) some eight million full-time state and local government workers had access to flexible benefit plans.

As described by the Bureau, in a flexible benefits plan, employers provide each worker with an amount of "benefit credits". These credits may equal a fixed dollar amount for each worker, or an amount that varies among workers according to earnings, length of service, size of family or other characteristics.

The employee then chooses from various benefits and benefit levels, using credits to purchase the desired benefits. If the credits are not sufficient to pay for the benefit, they have the option to fund the difference with so-called pre-tax contributions.

Some employees covered by flexible benefit plans may receive cash in lieu of benefits or deposit unused credits into reimbursement accounts. Participants are often required to purchase minimum levels of coverage, a basic level of life insurance for example.

According to a national survey of public and private sector employers conducted in 1996 by the employee benefits consulting firm of J&H Marsh & McLennan:

The number of employers offering a flexible benefits program stands at about 26 percent, with an additional five percent of employers saying they intend to offer such a plan within the next two years and nine percent saying they are considering it. Larger employers are much more likely to offer flex plans.

Almost half of flex plan sponsors believe that flex has reduced their costs, while 36 percent say their costs have remained the same , and only two percent say their costs have increased. The rest say it is too soon to tell.

Sponsors experiencing cost savings selected these reasons for cost reduction: Employees are selecting less costly options (56 percent); new managed care options were added (50 percent); lower levels of coverage and/or higher employee contributions were implemented (43 percent); more employees are waiving coverage (30 percent).

92 percent of the flex plans allow employees to waive medical coverage; about half of them require proof of other medical coverage. In flex plans which allow waivers, on average 15 percent of employees waive their coverage.

Most flex programs (71 percent) offer at least two medical options, and 43 percent offer three or more options. Flex program sponsors have been very successful at steering their employees into managed care plans.

About a fourth of flex sponsors (28 percent) include a 401(k) plan.

Vacation buying and/or selling is part of 19 percent of programs and 17 percent offer an integrated paid time-off plan combining sick leave, vacation, and sometimes personal holidays.

A WORK IN PROGRESS

As Ellsworth’s Tim King describes the benefit plan that a team of non-union employees has been drafting and redrafting for the past eight months, the plan has three major characteristics: it is equitable; it is flexible (allows for choice); and it is driven by longevity (the number of years an employee has worked for the city).

King notes, the current plan is anything but. The city pays 100 percent of the cost of health insurance for families as well as for singles. As such, an employee with a family receives $2,500 more a year in total compensation than a single employee. Another way of putting it is to say the city spends $2,500 a year less for single employees, no matter how many years they have worked for the city, than it does for new hires with a family. But the inequity doesn’t end with single employees. An employee, whose medical coverage is paid for by his/her spouse, under the current plan, loses not just $2,500 but actually $5,500 in total compensation!

Where was it writ that employees with families receive more benefits than single employees? To that question, King would say "nowhere". But in the past, some 50 years ago when health benefits were cranking up, the workforce was comprised mainly of working dads. At least that’s what we told ourselves. Today, it’s definitely not the norm. Just ask the working wives and single moms and divorcees and other singles who work.

What follows is a look at Ellsworth’s attempt to reinvent the employee benefit package to respond equitably to the needs of the diverse labor force of the 21st Century.

An Overview

Under the proposed plan, Ellsworth’s employees will receive credits based on the number of years they have worked for the city. New hires will receive eight credits, with which to purchase their benefits; after six months on the job they will be given 11 credits. By the time they have worked for the city for 10 years they will be receiving 19 credits; by the time they have worked for 20 years they will be receiving 22 credits; and by the time they have worked 35 years they will have maxed out at 25 credits.

Under the proposed plan, each benefit and level of benefit is given a specific credit value. As currently proposed, the plan provides employees with a choice of seven basic benefits:

Health Insurance. There are two choices: Point-of -Service (POS) plan , a form of managed care, and a so-called "Comprehensive" or Indemnity plan. The POS has three levels of coverage and hence three values: individual (5 credits), employee and children (8 credits); family (11 credits). New employees who choose the Comprehensive over the Point of Service plan must pay for the difference.

Medical Services Account. This is a singular version of the pre-tax dollars of the "flexible spending account" (discussed on page 14). There are five levels providing $100 per credit: i.e., level one (one credit) provides the employee with 100 tax-free dollars to spend on medical expenses not covered by their health insurance plan while level five (five credits) provides employees with 500 tax-free dollars. The monies are only to be spent on medical expenses incurred by the employee, not their dependents. Moreover, the monies are only to be spent on medical expenses not covered by their health insurance plan. Also, the monies cannot be used to pay the employee’s share of the health insurance premium. The funds are not cumulative.

Dental Insurance. This is a new benefit. As with health insurance, there are three levels: individual (.5 credits); employee and spouse (1 credit); and family (1.5 credits).

Life Insurance. As with health insurance, there are three levels: 1x salary (.25 credit); 2 x salary (.50 credit), 3x salary (.75 credit). Those enrolled in the city’s health insurance program automatically are covered by a life insurance policy equal to one time their salary. In the past, if you wanted additional coverage, you had to pay for it.

Income Protection Plan. Also known as short-term disability insurance. This is a new benefit. There are three levels of benefits that provide for 40, 55 or 70 percent of salary/wages. The three levels have the same (credit) value as the three levels of life insurance.

Retirement. This includes the city’s contributions to Maine State Retirement and the ICMA Deferred Compensation plan. There are five levels of benefits ranging from 2 percent of salaries and wages to 10 percent; the credit value ranges from 1 to 5.

Paid Leave. This includes what was formerly known as sick leave, vacation , and personal days; it does not include holidays. There are seven levels, ranging from 5 days (1 credit) to 35 days (7 credits). Not only will this approach cut down on paper work, King believes it will eliminate the abuse of sick time. But there are limitations. Paid leave is cumulative from year to year to a maximum of 60 days (the current plan is 120 days). Employees may only purchase 5 days during their first year of employment and no higher than Level 3 (20 days) after one year of full-time employment.

Some Game Plans

As noted above, the city currently will pay 100 percent of the health insurance premium of a new employee, whether they are married, divorced with children, or single. Under the proposed cafeteria plan, a new employee, no matter what their marital status, will receive eight credits of benefits for the first six months of their employment.

The following includes a few scenarios of how new employees might use their eight credits.

If they are single, they might wish to use five of their eight credits to purchase health insurance coverage, and the remaining three credits on five days of paid leave and put $200 into their medical services account. Or they may wish to spend the remaining three credits on their retirement.

If they are a single mom, they will probably want to use all of their eight credits to purchase health insurance for them and their dependents.

If they are a working wife, covered by their husband’s health insurance, they might wish to spend their eight credits on paid leave, retirement, and life insurance.

If they are married, with children, they might want to use all of their eight credits to pay for health insurance, but the credits will only pay for 50 percent of the insurance; they will have to wait six months (when they are granted 11 credits of benefits), before they can "purchase" full-family coverage.

You get the picture: choice and equity based on longevity.

Some Hurdles

Change and choice

It’s not an easy thing to implement, says King, noting that initially some employees were skeptical of the proposed plan. They equated change with loss of benefits, despite the fact that a team of employees had come up with the idea in the first place, "in the name of equity", says King. But change means coming up with a way of transitioning from the old to the new, which King admits is a hurdle that has to be overcome, possibly through some form of grandfathering.

King says the anxiety of making their own benefit decisions is another hurdle. Choice is something brand new when it comes to employee benefits, which traditionally have been handed down from on high by one’s employer. Choice is equivalent to treating employees as adults. This is not to say there are no limits. As described above, a new hire cannot spend all of their eight credits on paid leave.

Skepticism and fear can be overcome by education and constant clear communication. Perhaps the best selling document in explaining the proposed plan, says King, was the "worksheet" employees were asked to fill out, indicating their preliminary choices. It showed that most of them would be gaining benefits. Out of the 20 non-union employees that participated in the exercise, all but six showed some gain; for the most part, the six were relatively new employees.

Time and commitment

In addition to overcoming the hurdles of skepticism and anxiety, it takes a lot of time to reinvent an employee benefits plan, says King. He figures each of the seven employees engaged in the redesign has put in more than two hours a week in meetings for about eight months and that doesn’t count the research.

Cost

But selling the idea to employees isn’t all you have to do. King says it is critical that your board or council buys into the concept before you get too far into the process. King says his council was interested in the concept from the start, as long as it did not increase the cost of benefits, which in Ellsworth come to about 45 percent of payroll, when you count in direct and indirect benefit costs (discussed on page 16). King says the council was particularly interested in the long-term impact it would have on curbing health insurance costs.

The initial analysis of the results of the above-mentioned worksheet indicated that based on the employees’ choices, comparing apples with apples, benefits under the proposed cafeteria plan would come to about $20,000 more than the current plan.

King says one way of reducing the current gap would be to reduce the value of the credits; another would be to stretch the interim between increased levels of credit. In the long run, King sees the program saving the city money as employee turnover occurs and new hires come on board with their less costly benefits (compared to the current program). The city will also be saving money at the other end of the time line, as employees retire and the city is required to buy back fewer days of sick leave and vacation days.

New Hires, Equity & Morale

While the current employee benefits package lacks equity, providing more value to employees based on one’s marital/family status and does not take into account an employee’s years of service to the municipality, except in the area of vacations, one could say the proposed plan comes with its own equity issues, favoring so-called veterans.

Under the proposed plan, however, while new hires will receive less benefit value than they do under the current one-size-fits-all plan, they will have greater flexibility and choice, says King. And, when it comes to the issue of how to treat new department heads, King says it is likely that these new hires will enter at a higher level of benefits based on their experience elsewhere.

King advises those considering a cafeteria plan that distinguishes between employees to be aware of what federal law says about benefit programs that treat employees differently.

Insurance industry

At this point in time, King says one of the unresolved hurdles is dental insurance. It’s hard to get, he says, without assurances or guarantees that a set number of employees will buy into it and we can’t guarantee what people will select. As King sees it, insurance companies are somewhat stuck with what he calls the "vanilla mindset". While dental insurance is a proposed new offering, King is reluctant to drop it.

Adoption

If all goes according to schedule, King says he expects the plan and the city’s revised personnel ordinance to go before the council sometime late this winter or early spring. And, while the proposed plan is currently under consideration by the city’s 20 non-union employees, King says it is likely to become part of the negotiations with the 40 unionized employees when their contracts expire later this year.