Putting flex benefits through their paces

The growing pains seem to be over and employers can start reaping the benefits

To everything there is a season and a time for every purpose. For the last decade or so in the realm of employee benefits that purpose has been to offer employees choice and manage costs through the introduction of flexible benefit programs.

Flexible benefits are plans where various benefits are offered with different levels of coverage available for some or all of the options. Employees may pay some, all or none of the premium cost for these options, depending on the plan design. The range of potential options is only limited by the employer’s tolerance for complexity and ability to administer the plan.

Now that flexible benefits have been put through their paces over the past few years, it’s worthwhile to take a step back and assess whether the plans have delivered what was promised. Have employers realized the savings anticipated? Have employees begun to appreciate the significant dollar investment benefits represent for their employers? Have employees started to live on the edge by opting for little or no coverage rather than the paternalistic security blanket of traditional plans?

What's in it for employers?

Flexible plans are far more complicated to administer than traditional plans. Employers that support flexible benefit plans do so for a number of reasons:

•effectively containing operating costs;

•improving tax effectiveness;

•meeting the needs of an increasingly diverse workforce;

•attracting and retaining high-quality employees;

•increasing employees’ appreciation of the employer investment in compensation beyond wages; and

•enhancing employee productivity.

The findings of a 2002 survey by Hewitt and Associates, Flex-ability: Employer Attitudes Toward Flexible Benefits, shows that 71 per cent of its respondents realized the cost-savings set for their benefits programs.

Where do these savings come from? A large potential for savings comes from the design and pricing strategy of the plan. An effective pricing structure helps to mitigate adverse selection and increases efficient spending. When employees are asked to “buy” their benefits, using their own dollars or the employer’s the typical market forces are brought to bear and many employees become savvy consumers. The personal value of a particular benefit and its accompanying price tag are carefully evaluated before the purchase is made. This conserves both the employee’s and the employer’s resources.

What's in it for employees?

Employees want to make their own choices. In the diverse and challenging world we live in, they want flexible work arrangements, autonomy over their pension and savings plans and more choice in benefits.

The traditional male breadwinner with a stay-at-home wife and “2.5” children is just one of many models in the mosaic of the Canadian workforce. Traditional one-size-fits-all plans can no longer meet their needs or expectations. The Hewitt survey found that 94 per cent of employers that participated believed their flexible benefits program met or exceeded expectations for providing choice and empowerment to employees.

But beyond choice, flexible benefits help educate employees about their value to the organization. Rather than focusing exclusively on the amount of their salary, employees can evaluate their worth holistically. Most employees in organizations not using flexible benefits have no idea how much medical, dental, life and disability plan benefits cost. Many of these employees don’t even know what benefits their packages cover. The findings of the 2002 Morneau Sobeco Compensation Trends and Projections Survey suggest that benefits are worth another six per cent of an employee’s salary, their pension is worth another five per cent and the administration of benefits is worth one per cent.

Another way employees benefit from a flexible benefits plan is through tax effective use of their employer contributions. In many plans, employees have the option of creating health-spending accounts where they can deposit any leftover employer dollars. These funds are pre-tax so their buying power is often 40 to 50 per cent greater than after-tax dollars, depending on their salary.

Health-spending accounts extend the benefits of the employer plan because they can be used to pay for a wide range of services beyond those covered by the plan. The Income Tax Act determines which expenses are eligible expenses and also extends the definition of who is an eligible dependent.

The pace for change

Change has not come without challenges. For many employers, the move to flexible benefits has been difficult, even frightening, as they considered the impact of leaving employees to their own devices.

The complexity of early flex plans was intimidating and there was little existing ability to administer them. Employers often had to turn to outside providers because they didn’t have the expertise in-house and didn’t have the time or interest to develop it.

More than 10 years after the introduction of flexible benefits, employers have learned introducing a program is as much about education as it is about choice. Employees can make informed, intelligent decisions when they have right the right information.

Even administration has become less of a barrier than it used to be. There are two primary reasons for this. The first is that as flexible benefits became more common, the fascination with offering every choice possible became less attractive. A little maturity in the market evolved to more thoughtful plan design.

Now several flexible benefits plans offer little more than basic catastrophic protection for employees along with a flexible spending account. This account may include the option to make contributions to a registered retirement savings plan in addition to health and dental expenses. Employees are completely responsible for their benefits decisions.

The second reason is the dissemination of Internet technology for the masses. As a result of this technology, many employers can delegate a large portion of the plan administration to each individual employee. By using online tools, employees can enrol, make changes to their personal records at their convenience and check claim status information by logging in to a secure site.

Four years ago, 28 per cent of Canadian employers said they had no interest in offering flexible benefits according to the Hewitt survey. This year that number was down to seven per cent. While flexible benefit plans have certainly had their share of growing pains since their introduction more than 15 years ago, it’s safe to say they are here to stay.

Jacqueline Taggart is a principal in the communications practice of the Toronto office of Morneau Sobeco. She can be contacted at (416) 385-2119 or [email protected]

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