The Financial Advisor Guide to Employee Benefits
Self-Study Course # 3
EMPLOYEE BENEFIT PLANS
AN OVERVIEW OF HOW EMPLOYEE BENEFITS ARE CHANGING
In 2011, more than $200 billion was spent for health care in Canada with approximately 70 per cent of the costs paid for by the federal and provincial governments’ publicly funded system. Canadian employers pay for most of the remaining 30 per cent of non-essential medical and dental expenses, according to the Canadian Institute for Health Information and Statistics Canada.
While employer medical and dental plans were originally designed to be supplementary to the publicly funded government plan, as a result of the federal and provincial cut backs in healthcare services employers and private insurers across this country have had to alter and redesign their medical and dental plans to keep up with emerging trends of higher claims and new cost realities. In an age where publicly covered services continue to be reduced, we are likely to see corporations in Canada share continue to increase in the coming years.
In the midst of these economic pressures on the current healthcare system, employees are demanding better company medical and dental benefit plans. While the traditional corporate employee medical and dental benefit plans in Canada provide coverage for semi-private hospital rooms, prescription drugs, dental, chiropractors, physiotherapists, vision care, extended health coverage and travel medical insurance, employees are asking for more options than ever before.
Opinions on what to add are largely influenced by age and experience - items like teeth whitening can compete with orthotics. Older employees want expanded drug coverage, while younger workers are concerned about their deductibles.
The end result is employees want choice and employers want/need to contain their costs.
The vast majority of Canadian small and mid-sized businesses offer medical and dental benefits to their workforces by utilizing insurance carriers.
With the consolidation frenzy of the last decade, the number of insurance carriers has dwindled in an effort to make the Canadian players more globally competitive. This new, streamlined landscape has been good for the carriers, but not for the small and medium sized Canadian business, which have been underserved by the carriers focused on delivering shareholder value with big premium clients which are $500,000 or more in annual premiums.
The increasing pressures on the current healthcare system, the consolidation of the insurance industry and the growing employee demand for more flexible and expanded coverage is having the greatest impact on the small and medium-sized Canadian business.
With health and dental care costs escalating by approximately 15% for health and 7% for dental. Small and medium sized employers are facing uncontrollable and unpredictable costs to their businesses to provide these benefits. Employers have tried to curtail these costs by introducing annual limits, co-insurance, deductibles and exclusions to their medical and dental plans.
Throughout this course, we will take a look at the flexibility of different Employee Benefit Plans, as well as how the Government Plans complement or sometimes integrate into Corporate Employee Benefit Programs to provide a comprehensive and wide ranging support system for employers and employees in Canada.
We will study such Employee Benefits as Life & Accidental Death & Dismemberment, Health, Dental, Short Term Disability (Weekly Indemnity), Long Term Disability (LTD), Employee Assistance, Group Critical Illness and Best Doctors. We will also cover Health Spending Accounts, Health & Welfare Trusts, Cost Plus, Administrative Services Only (ASO), and Individual Health & Dental plans.
On the Government side of benefits, we will look at the various programs that are available.
AN INTRODUCTION TO EMPLOYEE BENEFITS
Canadians and Health Insurance
The vast majority of Canadians and their dependents are protected by one or more of the health and life insurance industry’s products and services. In 2010, 23.1 million Canadians had extended health care coverage, 12.9 million had dental coverage, and 10.5 were covered by disability insurance.
In 2010 Canadians paid 28.5 billion in premiums on new and existing health insurance policies and received 22.4 billion in payments from health benefit programs.
Insured health benefit plans played an essential role in providing protection against financial loss for millions of Canadians
The Aging and Health Insurance
The senior population (adults 65 and up) is the fastest growing population group in Canada. In 2011, 4,981.200 Canadians were 65 years old or older. This is more than double the Canadian senior population in 1981 (2,361,000).
· The senior population in Canada is expected to reach 5.9 million in 2016, 6.7 million in 2021 and 9.2 million in 2041.
· As Canadians are living longer, we will have long-term health care needs
· Health insurance responds to these needs, without threatening personal savings, assets and financial security
· Health insurance provides the flexibility to deal with individual needs as they arise
Even though Group Insurance benefits (also known as Employee Benefits) have been in existence since 1920, there have been substantial gains, to the point where today they are more significant than individual insurance. Employee Benefits do however, have limitations that make it clear that it is to be regarded as an add on and not to be relied on as the main foundation of any individual’s financial security.
Many businesses, industries and associations are concerned with holding on to their employees. Although Employee Benefits can be considered an expense to many companies, the employees look at it as a fringe benefit. In this day and age where job vacancies are very competitive, many applicants want to find out more about benefits before they accept a position with the company.
Although a Company does not have to be incorporated to have Employee Benefits, there are many benefits of incorporating a business for the opportunity to obtain tax advantaged employee benefits. The benefits provided could cover the many formats of Employee Benefits to plans that provide individual retirement accounts or traditional Registered Pension Plans and a host of other plans.
Corporate and Government Benefits can cover the following areas:
· Health Benefits
· Disability Benefits
· Retirement Benefits
For the purpose of this course, we will only deal with the first two.
Description of Employee Benefit Plans
Employee Benefits are plans whereby the employees of a firm may be insured as a group under one contract, with the insurance being payable for the benefit of persons other than the employer.
By issuing insurance in this way, it is possible to insure employees at a low net cost and also extend the benefit of insurance to many employees who, because of age, physical condition, occupation or cost, would not be able to secure individual policies. Approximately 50% of all Canadian workers are covered by Employee Benefit programs.
THE TRADITIONAL SOURCES OF BENEFIT GROUPS ARE:
Employer Groups
The Employer groups are the main source of groups and the Employer/Employee Group Benefits are the most stable in the industry. There could be one company or family of companies with the Master Contract being issued to the Employer or Head Office that would cover all the employees in the firm.
Trade Associations
Group Benefits provided for Trade Associations are based on the fact that while they may have many different employers, all the employees are engaged in similar occupations such as building supply companies or automobile dealerships.
Professional Associations
Groups of Professionals like Doctors, Dentists, Lawyers etc. who are often too small to purchase Employee Benefits individually by office, but when banded together with other professional offices constitute a very large group.
Unions (Health and Welfare Benefits)
Unions often provide Group Benefits for their “actively at work” members who may work for many different employers or group of employers. As long as the member is working, the Union Benefits are funded by a system known as “Bank Hours” meaning a contribution (pennies per hour) paid for by the employer. When the employee is laid off, the surplus in their “Bank” will carry their health benefits for an indeterminate length of time.
Many Insurance carriers break these groups down into size bands:
· Large Group - 200 to 20,000 lives plus.
· Standard Group - 25 to 200 lives plus,
· Small Groups - 3 – 25 lives.
Medical evidence is usually required for any group of 10 lives or under.
WHAT ARE THE ADVANTAGES OF EMPLOYEE BENEFIT PLANS?
Employer
· Employers can pay a substantial amount of the cost.
· Employer premiums are tax deductible.
· Attracts and helps to maintain valuable employees, therefore reduces the high cost of turnover.
· Can be used to meet the competition when looking at employees who already have Employee Benefits.
· Provides the employer with a sense of moral obligation when dealing with families of deceased or disabled employees.
· Provides employees with a sense of security, therefore loyalty and productivity are increased.
· Employee Benefits plans are flexible when it comes to implementing, administration and changes in personnel.
· An unincorporated owner of a business can be included for coverage, even though these premiums would not be deductible.
Employee
· No evidence of health is required, depending on the size of the company insured.
· Employers paid premiums are not a taxable benefit.
· There is an added amount of financial security in the event of death, disability, and out of country expenses for the employees and their dependents.
· Employees have the right to convert the Life Benefit to a private insurance plan.
· On termination, the Group Life remains in force for 31 days without charge.
· Group Contracts do not contain a suicide clause.
FUNDAMENTAL PRINCIPLES OF EMPLOYEE BENEFITS
Employee Benefits exist for the benefit of the complete group and therefore the individual member is not required to submit medical information, depending on size of the insured company.
There are five fundamental principles of Employee Benefits, which are required:
1. The employee must be actively at work
If the employee is on disability leave, their coverage will not be effective until they return to work. This guarantees the principles that all employees can be insured.
2. Non-discriminatory Insurance Schedule
No one employee can pick or choose the type or size of their individual coverage. The Master Contract exists between the employer and the Insurance Company and details with the type and amount of coverage.
The only choice that the employee has, if membership is not a condition of employment, is whether to join or not. There generally is a waiting period of between 30 and 90 days.
3. Deductions at source
Employee’s contributions are source deducted and then combined with the employer’s share so that one cheque is remitted.
4. Mandatory Employer Contribution
Usually the employer will pay one half of the premium billed each month, but sometimes they may pay a larger percentage. If they pay 100%, this is known as a Non-contributor Plan.
5. Spreading the Risk
To ensure that the risk is spread over the entire employee group, each group size has a minimum enrolment. Small plans with 10 lives or less may demand 100% participation and may request a health statement. A medium size plan of 50 employees or more might require 85% and a large plan would require 75% participation.
WHAT ARE THE FACTORS THAT DRIVE THE PREMIUM FOR AN EMPLOYEE BENEFIT PLAN?
1. Premium Rates
Premium Rates are set based on number of employees, age, sex and amount of insurance. The price is charged at a monthly rate per thousand of coverage (i.e. .18 per $1000 of coverage). All members therefore will pay the same amount per month regardless of age or sex.
The premium required may also have been adjusted in part to claim experience or occupations that are more hazardous as well as gender bias.
The premiums are generally adjusted each year according to experience. If the policy is participating, the adjustment may be in the form of a dividend and in a non-participating policy will take the form of an increase or decrease in rate.
2. Experience Basis
At the Anniversary of the plan, the past years claims are compared to the amount of premium charged. This is known as “the experience” and the plan is experience rated. The Insurer will wish to retain a small percentage of the premium charged i.e. 26%, and therefore if claims were higher that 74%, the premiums will be increased so as to guarantee next year’s percentage.
At the same time, anticipated increased costs from health care providers are factored into the renewal premium. This anticipated cost is known as “Trend or Inflation”.
3. Pooled Basis
It is common practice for a carrier to place all their small group cases in a common “pool”. Premiums and claims are accounted on a pooled basis and the rates rise or fall based on the claims vs. the premiums paid. It is not unusual for larger groups to have the Life Insurance, AD & D and LTD benefits also pooled. In this way, one large claim will not adversely affect next year’s rates.
4. Retention Basis
The insurer may on the other hand indicate how much they wish to retain at the start of the year. This is used for administrative costs, commissions, taxes and reserves. The claims will be the unknown factor. The refund or reduction of rate will depend on the claims and retention costs. In effect, this transfers the risk element to the employer. Retention Basis is generally used for larger groups.
5. Target-loss Ratio
The ratio of the expected amount of claims divided by the anticipated premiums for the next year gives the Insurance Company their profit margins. It is even more of a concern to the employer, as this figure drives their premium.
6. Inflation
The increase in the cost of the expenses the Insurance Company covers on a group plan, such as the rising cost of prescriptions.
7. Utilization
This represents how often an insured certificate holder has used any benefit of the plan. The number of claims per year per certificate usually measures utilization. Inflation and utilization are blended to provide an average figure.
8. Natural Aging
This is the portion of a rate increase that results simply because each certificate holder has aged by one year since the last renewal.
9. Composition Change
The change in rates caused by actually insuring different employees. The variables, which affect the change, are age, sex, dependent status and earnings of the employee. For example, a single male age 22 and earning $28,000 replacing a married female, aged 53 and earning $48,000 will have a downward effect on the group rates.