It’s been over a decade now since now Nobel Prize winner Richard Thaler wrote the New York Times bestseller, Nudge. From the back cover “we can use sensible “choice architecture” to nudge people toward the best decisions for ourselves, our families, and our society, without restricting our freedom of choice.” His ideas have moved through our culture in numerous ways but for this paper, we’ll explore the impact on employee benefits. We’ll start with retirement plans then turn to health and wellness programs.
One place you have likely seen this idea in action in the workplace is the now well established practice of automatic enrollment of new hires in your company’s 401(k). The IRS calls this Automatic Contribution Arrangement or ACA. As an aside, don’t you just love the government and their choice of acronyms. Technically, this was first as showed up in the Federal Register in early 2009. The ACA or Obama Care, as it’s now referred to, is actually the Patient Protection and Affordability Care Act.
Back to your 401(k), this practice is now largely accepted as commonplace and employees expect this. Congress just passed the SECURE Act at the end of 2019 where they expended on some of these provisions. It is now permissible for your company’s 401(k) plan to automatically increase employee contributions up to 15% of pay from the 10% level established in 2006’s Pension Protection Act (PPA). This nudge is expected to be good for employees over the length of their careers. Specially it is expected to support mid-career employees who may not have saved enough. Check with your record-keeper about the need for a plan amendment for this new provision. Many of the optional provisions can be implemented in advance of amendment adoption but will require one by specific deadlines. Many retirement plans will also default employees into a Qualified Default Investment Alternative (QDIA) such as a target-retirement date fund or balanced fund.
While the above is more tightly controlled through law and regulation; what we’ll look at next is a bit more flexible. One aspect of the bespoke solutions we develop with our clients are other ways to nudge your employees toward behaviors that are beneficial to your company while also providing them value. We have conversations with our clients about developing alternative employee premium contribution structures or what we’ll call a Wellness Rate or Credit. Essentially by an employee completing certain actions, she or he will qualify for a lower premium contribution. So this is the carrot method of achieving a desired outcome.
Based on what I’ve called it; you’ve probably seen this strategy too. A typical example of this would be to requiring proof of annual physical, complete a health survey, or take a tobacco free pledge, among others. While I won’t suggest that wellness programs are bad, generally the lifestyle component of these programs don’t realize any return on investment (ROI). Things like biomedical screens and health coaching are expensive to implement and depending on how you are funding your health plan may have little or no impact on your future premiums. Oh and you need to be careful about not violating Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA) when asking for medical information. When run well, by committed organizations, they can reduce absenteeism and therefore provide an increase to productivity. This may be hard to quantify for small companies. A disease management component to wellness is a bit different. It can have a significant impact on your employee benefit’s expenses in an alternative funded environment.
There are other ways to nudge employees to take actions that are mutually beneficial. These don’t require significant investment while improving employee experience. Here is where I hope to offer something a bit different. Just recently we met with a vendor that has an innovative solution to reduce or eliminate the need for claim substantiation on Health Reimbursement Arrangements (HRA) and Flexible Spending Accounts (FSA). Employees often fail to substantiate HRA and FSA claims as required for a number of reasons. When an employee has this problem, where is the complaint box? Human Resources of course. One simple and obvious solution is having a vendor that provides a low friction customer experience. I hope no one reading this has a vendor that requires faxes or emailed receipts. This should be done through a portal, a phone app or in the case of the vendor above an even more unique solution that requires some activities by the employee. Free up your time for you and your team in dealing with these issues by requiring enrollment in this program to qualify for the wellness rate for your health plan.
Another idea that may impact claims but should improve productivity would be mandatory registration in your telemedicine program. If you are alternatively funded, then this will check two boxes as it will divert claim cost from your core health plan while also affording employees the ability to visit a doctor without leaving the office for half a day. If you have a carrier funded arrangement while you will not see the benefit of reduced claims experience, you will afford the employees an enhanced experience for managing their time and healthcare while also reducing absenteeism.
There are creative ways to structure the benefits programs to encourage certain behaviors and increase the likelihood of certain outcomes. This is where having the right resources and an expert advisor on your team pays off. We are working with clients in numerous markets and industries which affords us the practical insight, experience and expertise to support both the development of your benefits strategy and delivery tactics but also the implementation of both.
For more information on Wellness Rates or Insurance Funding Alternatives please reach out to me at email@example.com.
As a quick recap from last week’s post, most employees a have a health insurance plan with a deductible. Deductibles and premiums are rising. To fund a deductible with tax benefited dollars an employee generally needs a program sponsored by their employer.
The good news is employers have several options to help employees fund deductibles based on the goals of the company, medical plan options offered to their staff, and individual employee benefit elections. There are six primary ways to fund a deductible. One is totally up to the employee which is cash. As I wrote in my last post, this is the worst option for everyone. The other five require an employer to sponsor a program and in some cases, share in the cost. These five are: Flexible Spending Accounts (FSA), Health Savings Accounts (HSA), and Health Reimbursement Arrangements (HRA), gap policies, and worksite (think Aflac) policies. Come to think of it, I guess you could buy an individual Aflac policy without your employer’s involvement but that’s not the focus of this article. Each employer option has its own advantages which I will begin to describe in this post and continue to explain as part of this series.
You may know this as that “use-it or lose-it” money. Ever felt the overwhelming urge to buy a lot of band aids at the end of the year….me neither but I’ve done it to make sure I use as much of this money as possible.
To be eligible for a Flexible Spending Account (FSA) the employer must set up a plan and offer it to eligible employees. FSAs allow for an employee to set aside money each paycheck to pay for medical and/or child care and/or transportation costs. The employer can choose which of these to offer but for this blog, I’ll focus on medical expenses. Essentially the employee authorizes their employer to withhold some money from each paycheck to pay for certain medical expenses (medical, dental, or vision) whether covered by insurance or not. The expenses just must be allowable by the IRS. This money must be used within the designated plan year with some minor exceptions. The employee gets the added benefit of having this money withheld pretax lowering her or his taxable income. This pretax withholding also benefits the employer.
Money set aside in a FSA this way is immediately eligible to be used by the employee. For example, an employer sets up a medical FSA with a $1,500 limit per employee. The employee signs up and authorizes the employer to deduct this amount out of her or his paycheck based on the number of payrolls in their plan year. So, for a semi-monthly payroll the employee is authorizing the employer to deduct $62.50 per paycheck. The risk to the employee is that if he or she doesn’t spend $1,500 in the allowable time, they lose the unused money. The risk to the employer is the employee can claim all $1,500 right away even though only a fraction of that amount has been withheld. If she or he leaves the company there is no collection option for the employer. This risk to the employee generally results in a personal medical expense budget being built to only put aside money for likely expenses. Or you end up by a lot of band aids at the end of the year. This risk to the employer often results in newly established FSA plans to have smaller limits than the maximum allowed by the IRS. Typically, neither the employee or the employer get too “hurt” year after year with this type of plan.
I’d encourage you to have your FSA plan year in sync with your health insurance plan year. The type of health insurance plan will dictate how employees participate in the plan. If they are out of sync for some reason it can be fixed. To align the plan years, you generally would run a short year on your next plan year but not shorten an already active plan year.
There is also a Limited Purpose FSA which I will address in a later post.
A Health Savings Account (HSA) is part of the High Deductible Health Plan (HDHP) “family” and are sometimes referred to as Consumer Driven Health Plans (CDHP). “Consumer Driven” is a good bit of marketing. The theory is that American’s are good consumers, so if we have more responsibility for what we spend our health care dollars on, we’ll get better deals. Healthcare isn’t a retail store or Amazon. We haven’t been able easily price compare in any meaningful way. Besides, if you have a major-medical condition that requires treatment that’s 10x to 20x your deductible why worry too much about the cost, right? The deductible is going to be met no matter what, so what’s the difference at least from the employee’s perspective. From the employer’s perspective those high claims are exactly what they want to control but a HDHP doesn’t do this. So, the theory is very flawed in my mind but there can be a place for HSAs in both the carrier-funded and employer-funded scenarios. There are better ways to control those high dollar claims for the employer which I'll cover in another post.
To be eligible to open a HSA and to continue depositing money into the bank account, the employee must be enrolled in a HDHP that is a HSA qualified health insurance plan. To be clear HSA is often used interchangeable to describe both the health plan and the bank account but the term is correctly associated with only the bank account. HSAs provide a similar tax advantage to FSAs but the money doesn’t have the “use-it-or-lose-it” expiration date like the FSA does. Again a HSA is a bank account that is opened and owned by the employee. Money can be deposited into a HSA by the employee through payroll deduction and/or deposited by the employer. Unspent funds at the end of a plan continue to grow year over year and can be used for allowable medical, dental, and vision expenses without incurring taxes. Some accounts allow for the funds to be invested in the market allowing for the funds more growth potential. A HSA qualified health plan has a minimum deductible of $1,350 for a single and $2,700 for a family. These minimums are going up slowly every year or two. HSA qualified plans require the insured to pay the full allow amount for all expenses both medical and pharmacy before any copays with an exception for preventative services. Preventative services are basically routine check-ups and screenings for someone without a current disease or condition under management. This has changed somewhat recently due to updated regulations by the IRS.
So, a family of three (or more) would have a minimum deductible of $2,700. Minimum as the employer may not offer a plan with a deductible this low. You could be offered a $10,000 family deductible or higher. The most you can put into a HSA account in any calendar year in 2019 is $7,000. That’s right you could offer a plan with a deductible that is higher than the annual contribution maximum.
Any non-preventative expense would be subject to the deductible first. For example, your then 13-year-old son somehow curled a ballpoint pen spring around one of his finger tendons (I know cringe, shiver or squirm whichever suits you best) while in class…you’ll pay $1,200 (or whatever the bill is based on your experience). Not that I have any experience with that scenario…but my lovely wife has been to the ER for this very thing!
As mentioned in an earlier post, most American’s don’t have $1,000 saved up in the case of an emergency; so, where does this money come from? A HSA is not a credit card, money must be in the account to use for payments to providers or reimbursements to yourself. You will notice when you look at the difference in price for a copay plan and a HSA plan that typically the HSA is lower by a factor that is close but often less than the copay plan. Meaning the extra financial risk of the your HDHP plan isn’t completely offset by a reduction in monthly premiums. Insurance companies don’t lose money.
I don’t necessarily dislike HSA qualified plans but they are not a solution to rising healthcare costs in any way. A tax advantaged account doesn’t provide the employee with the tools necessary to make complex medical decisions, it’s only a method of payment. You wouldn’t buy any product from Amazon without knowing it’s cost but we do this every day with our healthcare dollars, but that’s a different article.
If you spend HSA money on non-eligible expenses then you will have to pay both taxes and a penalty when you file taxes for that year. Although money in a HSA can be spent on anything after age 65. If you buy a TV with your HSA funds after 65, you would just be required to pay whatever your personal tax rate is for that year the funds were used for this ineligible expense but not a penalty. There are no taxes on eligible medical expenses at any time.
So, this can function as a secondary retirement savings account that does give account holders access to the funds for normal medical expenses throughout her or his life without having to take a 401(k) loan or hardship withdrawal. Those that can employ this type of strategy tend to be higher earners. This isn’t a financial strategy that the average employee will see any real value in except for the lower premiums. This can be a trap as without a solid financial and insurance literacy campaign your employees may sign up to save money and never fund their HSA or in some cases not even set one up. This is where things can get tough. If the employee incurs a claim prior to the HSA being established and funded they likely will not be able to reimburse themselves. Established technically requires funding. Where these types of plans can be more successful is when the employer allows contributions to be payroll deducted and when the employer puts some money into the account for the employee. A caution, employer contributions once made to a HSA account can’t be pulled back by the employer and are 100% vested or owned by the employee. As far as the banking relationship is concerned the employer can dictate the institution they will deposit money into via payroll deduct but they can only deposit money because the accounts are owned by the employee.
Why would the employer want to allow payroll deductions besides it being the best thing for employees? To save on taxes. A dollar withheld into a FSA or HSA saves the employer’s FICA matching requirement on that dollar. So, for every $1,000 an employee withholds the employer saves $76.50 in taxes. While this isn’t any great amount of money, it does help pay for any administration costs of the plan. It’s simple math to figure out if the program will break even. Your insurance professional should help you with this. Also, it’s just the right thing to do. If you are offering plans with deductibles, you should allow your employees the most efficient and effective way to manage their household finances.
Hey, if you agree, disagree or have any valuable contribution please post a comment.
Cash in Lieu
Ever had an employee ask for you to pay them since they aren’t taking your health insurance? I have and without a plan it’s a bit of a mess. First and foremost, having a stated corporate compensation philosophy will mitigate the risk of making decisions on the fly that could open you and your company up to liability. Too many times I’ve seen a back of the napkin calculation from an executive wanting to hire this “rock star”. It appears disorganized and while it may provide the candidate with what he or she wants, it may compromise your company’s internal structures. I’m necessarily for or against these types of arrangements but am proposing that they be thought out and documented.
I’ll outline a couple of simple steps to help you develop your own plan. First you need to determine what you are willing to pay the employee cash in lieu of enrolling in and what value you assign to it. Certain benefits aren’t waived and the employee is automatically enrolled such as basic life and disability coverage, at least for most employers. Retirement plans are structured and regulated in a such a way that most employers don’t have much they can do there.
There are benefits that allow for some creativity by the employer. They are typically what’s called contributory benefits. Meaning that the employee will have to pay some amount if they choose to enroll. Since they must elect to enroll, they can then waive enrollment. That’s really the first test, can the employee waive this benefit. The second is does the employer pay some portion of that benefit if the employee were to enroll. Health, dental and vision are benefits that typically meet the above criteria. Next you would need to determine which and then how much each of these benefits are valued at. Do you have two health plans with different contribution strategies? Do you have a HSA that the employer deposits employer funds into? Think these things through up front.
One of the most important steps is determining the eligibility of the employee to waiver coverage. For an employee to be eligible for a cash in lieu program they should have other qualified coverage in place and provide HR with a waiver or attestation to that effect. Should the employee’s life situation change and the enroll in your group plans then the cash in lieu arrangement would cease. Aside from having a compensation plan this type of arrangement for be part of a plan document to ensure that your company is abiding by the required laws and regulations of your jurisdiction.
Hey, if you agree, disagree or have any valuable contribution please post a comment.
Compensation & Retention.
In my experience in the Government Contracting sector, compensation is basically comprised of pay in various forms and benefits. They are Base Compensation, Retention Based Compensation, and Owner/Partner Compensation from personal experience, I’ve seen the big messes when the Incentive and Retention tiers aren’t well thought out by the company. I’ve also witnessed the challenges that small businesses face when the base compensation tier isn’t well defined and left to the mercy of the hiring manager, recruiter, and human resources to negotiate per candidate.
Base Compensation Program
Base Compensation Programs are comprised of pay rate or salary and benefits. Benefits can include insurance coverage, training, education, retirement plans, holidays, and paid time off, student loan payments to name some.
It is ideal for an organization to have a compensation philosophy. This creates a framework for executives, managers, recruiters, and human resources personnel to operate within. This philosophy is highly dependent on your industry and the type of work your organization does.
For example, a company providing highly technical and specialized services or one that recruits from a small pool of available candidates based on experience, expertise and suitability may look something like: We provide above market pay and benefits programs.
Having a philosophy will enable your team to operate more effectively as the philosophy will enable the creation on a framework that streamlines recruiting of new staff by eliminating “one off” decisions. It also can support your performance management program which should entail parameters for merit increases and professional advancement of staff into management and potentially executive roles.
Incentive Based Compensation Program
Every employee is hired to perform a certain set of defined tasks and other tasks as assigned. What types of behaviors does your company want to reward employees for performance? Incentive compensation is designed to encourage and drive those behaviors that the employee can reasonably obtain through their own efforts. They should also understand clearly how these are measured, calculated and paid.
A very simple Incentive Based Compensation Program for a government contactor could reward an employee that bills 460 hours (based on a 1,840 billable hours/year) in a quarter with a “x”% quarterly bonus. To build on that, if that employee qualifies in “x” quarters per year then that employee qualifies for an additional “x”% annual bonus.
Managers can be incented in other or additional ways based on what financial metrics are valuable to your company such as project profitability, deployments completed on-time, additional positions added to the contract or others that meaningfully drive performance toward your company’s annual plan and are reasonably obtainable and understandable.
Retention Based Compensation Program
Retention and incentive compensation programs can easily become lumped together if care and forethought aren’t taken to develop each independently. Unlike incentive compensation, retention compensation isn’t paid to the employee as a cash bonus. Retention compensation creates a longer-term commitment between the employer and a key employee or company executive.
This can be accomplished in many ways short of providing real equity to this person. A simple solution could be to provide some profit sharing or non-elective contributions to the key employee within the company retirement plan. There are ways to provide different levels of corporate contribution to employees in addition to simple matching and safe-harbor programs (which typically fall within the Base Compensation Program).
There are other programs that fall outside of ERISA and allow for the company to make choices for specific individuals that can be funded and/or insured while providing the company with protection in case the employee departs. These types of programs need to be thought out and commitments made beyond what is expedient today. If clear bright lines are developed and directly communicated to the key person(s); he or she will not see the value. I’ve seen employers fail to understand the difference between incentive and retention pay resulting in frustration on behalf of the employer and employee.
In addition to the based benefits and the ability to utilize some of the same instruments from the Retention Programs, owners and partners should develop and curate an exit strategy.
An exit strategy should encompass both the sale of the corporation and in the case of multiple owners the exit (death, disability, retirement, etc.) of a partner short of a corporate sale. Health of an owner/partner or partner family member can impact corporate performance. Other life events could result in an owner/partner choosing to move on from the corporation.
A plan should be in place beyond the basic founding documents that were developed and executed prior to achieving any measure of financial success. These are detailed and personal discussions that result in the creation and/or modification of legal documents. These discussions are best done well in advance of any real need to ensure the best outcomes for all are achieved. Some of these risks can be funded internally and others insured. Simply put if your partner dies, would you want to be in business with his or her spouse? What if your partner is incapacitated in any number of ways and can’t contribute to the business, would he or she still be entitled to pay, profits, and distributions?
Deductible Funding - That high deductible you offer your staff comes with another responsibility.
You get a big renewal and your broker suggests a plan with a deductible or a higher deductible to mitigate the renewal increase. The broker will suggest various ways to help the employee pay for the deductible, but will only push so hard because they are afraid to challenge too much which could hurt their relationship with you, their client. Who gets hurt, the employee. Why? Because of bad information coupled with poor insurance consulting.
There are two very important reasons and many ways to help employees manage the deductibles for the plans you offer them. I believe employers have a responsibility to help their employees with this. There are numerous tax advantaged ways to pay for a deductible and those generally provide some financial benefits to companies as well.
Without you setting up some sort of spending, savings, or insurance program for your employees to manage their deductible; an employee is left to pay out of their pockets. While paying out of my personal accounts is simple and easy, it is the most expensive option for both them and your company. This is because the employee gets no tax advantage from these payments and you will not get any tax benefit either. It’s also important to keep in mind that most people don’t have enough saved to pay for a $1,000 unplanned expense. So, higher deductibles can impact the financial wellness of your employees.
Now with only 15% of health plans having a deductible of less than $1,000, I think it’s important for an employer to provide some help in this area. Of covered workers, 85% have an individual deductible over $1,500 and that has doubled since 2008. This increased cost sharing for health care services coupled with increases in both total health insurance premiums and your employees share of those premiums has laid the burden on your employees to pay more and more of their healthcare expenses. Increasing deductibles, consumer directed or otherwise, is not the complete solution to your company’s nor our nation’s healthcare problem. Providing a tailored solution to your company’s needs is what I do. Regarding our national healthcare problem, that’s a topic for another blog(s) and may be out of my area. I focus on helping my clients navigate within the system to increase engagement and control costs.
I think having your employees pay out of standard checking or credit accounts is the worst option but a burden that is placed on many of them. This generally means using a credit card and that likely makes this even more expensive as most people carry a balance on their credit cards. The average American has over $6,000 in credit card debit and the average credit card interest rate is over 16%. Another reason it’s the most expensive method is because almost everyone reading this can’t write medical expenses off on their taxes. You can only deduct your medical expenses when they are in excess of 7.5% of your adjusted gross income. In today’s tight labor market with 3.7% unemployment, you should think it’s a bad option as well. Your staff can find gainful employment easily and the recruiter they are talking to will convince them that they are getting better benefits and higher compensation. Employees will leave you for a $6,000/year raise even if they don’t understand the total compensation you or the new employer is providing them.
So what’s the financial benefit to the company? In short, money that is paid by you or deducted by your employee through payroll to fund medical expenses through an employer sponsored plan will reduce your company’s tax liability. So, if the employee sets aside money in a spending or savings account then you aren’t matching the FICA on that set-a-side. Simply calculate the cost of setting up and maintaining the plan(s) and if the employees are appropriately educated to foster participation, the company may very well satisfy what I believe is their responsibly while gaining a tax advantage.
To be clear, deductibles and deductible funding strategies are not cost containment strategies. These are tools for addressing ways to spend money but not ways to lower healthcare costs. I’ll discuss cost containment elsewhere.
I’ll detail the many ways to support your employee’s deductible funding needs in upcoming posts. Hey, if you agree, disagree or have any valuable contribution please post a comment.
Bryan (@nsurancing) is an experienced consultant. He has a successful history of working in insurance, retail and government contracting.