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What is flex insurance

what is flex insurance

Flex and Match

Today’s employer grapples with changes in employee needs, workforce demographics and market dynamics. This is not surprising, considering that there is a significant concentration of four distinct generations in the workplace as well as new immigrants, each with different attitudes and preferences. And, as businesses continue to globalize, they are competing for skilled workers internationally, which adds to the complexity of attracting and retaining employees. At the same time, employees strive for work/life balance and a greater say in the employment contract.

Although benefits plans alone cannot resolve all of these challenges, they are evolving, adding flexibility and offering creative solutions for employers and employees alike. Flexible benefits plans present a unique opportunity to better connect with the needs of a diverse workforce, especially as flex choices evolve beyond traditional health and dental benefits. Flex plans give employees more than just choice; they allow the employer and the employee to communicate and share in the responsibility and cost of the selected benefits. By choosing what they value the most and assigning their flex dollars accordingly, employees can better understand the relationship between care and coverage costs, and become more informed healthcare consumers.

Managing costs is always top-of-mind with plan sponsors, and employee cost-sharing is the primary cost-management strategy. However, it has not kept pace with benefits cost increases. Employers may compound the situation by adding new benefits in isolation—and at incremental cost—without fully considering the impact on the existing plan design. Too often, plan sponsors are not reaping the benefit of added competitive differentiation for the additional expenditure.

What’s needed is a total rewards strategy in which flexible benefits are promoted and understood within the context of total rewards: pay, benefits, career development and work/life balance. Each addition to the rewards package should be evaluated based on cost, value to the employee and its integration with other reward components. This holistic approach showcases the entire value proposition being offered to employees and prospective employees. When properly executed, this strategy can improve attraction, retention and employee satisfaction without significant incremental expense

Who’s Flexing?

One-third of Canadian employers surveyed in Mercer’s 2007 Policies and Practices Survey provide flexible benefits to their employees. Flex is defined as providing some choice within the benefits plan. Health, dental, life insurance, disability insurance, retirement savings and healthcare spending accounts (HCSAs) are the most common components used to offer employees choice.

Typically, flex credits are assigned to employees based on pay, number of dependents and full-time or part-time work status. Any unused credits are usually put into an HCSA, taken in cash or assigned to a group registered retirement savings plan (RRSP) or other savings plan.

Generation Gap

Benefits for employees were originally designed and based on the principle of insurance: the 80/20 rule, whereby the healthy paid for the sick. This was in the era of the traditional family unit when the head of the household, usually the father, carried most of the financial responsibility. Employers took on a paternalistic role, looking after employees and their families by protecting them from potentially catastrophic life events. The earliest benefits packages featured life insurance, disability income replacement and medical coverage in the event of illness.

Family units have diversified since then and so have benefits offerings. Today’s benefits plans can be viewed as having two components. The first component is pure insurance in the form of life, disability and critical illness insurance—catastrophic coverage that is used by few employees. The second and much larger component consists of benefits that pay for vision care, dental and paramedical coverage. The benefits component is used by the majority of plan members and is a huge employee satisfier. Plan sponsors enjoy the predictable cost structure and the high value these benefits give to a broad base of employees.

The traditional defined benefit plan offers a core set of company-defined and paid benefits with no choice. All employees within a particular class, such as salaried employees, receive the same package. Typically, the components are life insurance, short-term and long-term disability (STD and LTD), and health and dental, with set levels of coverage.

The benefits are clearly defined and typically remain unchanged from year to year. However, annual costs can vary significantly as the plan sponsor’s cost per employee is based on actual claims and expenses for each covered employee. The employer is also accepting the risk of any future cost escalation. Unfortunately, all employees do not benefit from, or value, the plan equally.

These plans account for the majority of the plans in place with Canadian employers. Plan sponsors need to engage a greater number of employees by introducing flexibility, hand in hand with cost-sharing. Employees want more choice, and employers need to maximize the number of participants in the plan to share in the costs.

Optional add-ons to the core set of benefits are available in the form of employee-paid options for additional life insurance, spousal and dependent life, and voluntary accidental death and dismemberment (AD&D). It is a first step toward giving employees some choice, though the choice is limited and employees must pay for it.

Another type of benefits plan is modular flex, in which employees have a series of packages to choose from. As employers choose the package contents, they retain control over the costs. The plan sponsor will typically offer high, medium and low coverage packages. Or, the packages may correspond to employee profiles for young, mid- and later-career plan participants. The flexibility within the packages is limited, which keeps costs reasonable. However, the bundling of benefits may result in only certain elements appealing to individual employees. Optional add-ons, such as life insurance and AD&D, can be selected at the employee’s expense.

Most prevalent among flex plans today is the core plus options plan. It offers a combination of core company-paid benefits plus company-paid credits that can be used to purchase optional coverage from a fixed menu of choices. Plan sponsors still choose the basic coverage components that they feel are essential, such as basic life insurance, LTD and STD, an employee assistance program and high-cost medical. Employees then choose the rest

of their benefits from a menu of options using flex dollars. Flex dollars can purchase the level of coverage that the employee wants for life insurance, LTD, AD&D, health, dental, vision care, HCSA spending, group RRSPs and even vacation days.

Putting more choice in the hands of employees lowers the level of plan sponsor paternalism and generally improves employee satisfaction with the plan. Employees are also encouraged to manage their spending, as they pay for any choices that exceed the allotted credits through payroll deduction.

The Next Generation of Flex

Employers are trying to streamline the scope of traditional insurance benefits in light of employee demands for new flex options, particularly in the areas of wellness and lifestyle accommodation benefits. It’s difficult to add another level of flexibility without further complicating the plan, adding costs and increased plan administration, and affecting the benefits component of the total rewards equation.

For some plan sponsors, a solution may lie in the next evolutionary stage: defined contribution benefits plans. The employer provides a mandatory level of coverage for the basic protection of all employees. This might include basic life insurance, STD, reduced LTD, drug coverage with an out-of-pocket maximum and other key reward elements that support the company culture, such as green benefits (i.e. benefits that support pro-environmental behaviour, such as transit passes and increased telecommuting).

These plans may not include hospital, dental or paramedical coverage. The majority of the funds are assigned as flex credits, which the employee can use to purchase enhancements. Here are some examples.

• Fixed amounts for contribution to the premium cost of additional group insurance, such as drug, dental, hospital and out-of-country medical coverage, paramedical and private duty nursing, optional life insurance, LTD and AD&D.

• Lifestyle accommodation benefits, such as flexible work arrangements, personal and professional growth opportunities, work/life balance options, wellness programs, flexible work hours and vacation purchases.

• An HCSA to cover medical and dental expenses deemed eligible by the Canada Revenue Agency, such as cosmetic dental services.

• Additional voluntary RRSP contributions funded by the employee, with the employer contributing a fixed percentage.

With these types of plans, the risk of future cost escalation is shifted from the company to the employees. Employees enjoy more choice and autonomy, and they have greater visibility to the cost of the plan enhancements they choose. Plan participants become better consumers as they prioritize and make trade-offs for the benefits they value most.

Wellness programs offer fitness memberships, health assessments, stress management and nutrition counselling, creating a good opportunity to stand out from competitors. Career development is attractive to the new generation of employees looking for training, continuing education and skill development. Lifestyle accommodation benefits can be a key to retaining the “sandwich generation” that is juggling work and home responsibilities. Flexible work hours, child care, take-home meals, and support of charitable work, fundraising and hobbies are also in demand.

Standing Out From the Crowd

Flex plans will continue to evolve as plan sponsors seek out opportunities to differentiate the employment brand. But before adding any new options, it’s essential to find out what employees truly value, as this will vary by generation and geography. Then, ask these questions about the proposed benefit.

• Is it tax-effective for the employee?

• Does it enhance the company’s image and branding?

• D oes it offer a discount pricing advantage?

• Does it add cost to the existing benefits plan?

• What is the impact on the total rewards package of pay, benefits, career development and work/life balance?

Is the next stage total flexible compensation? In some ways, yes. It’s foreseeable that a portion of employee compensation could be awarded as earned flex credits. Employees could choose whether to take a salary increase as traditional pay and pay tax on it, or to take it as flex credits to spend on tax-free benefits of their choice.

Salary plus flex credits would make up the compensation package. These credits would be under the employee’s control and could be directed to traditional or non-traditional benefits, including any of the wellness and lifestyle accommodation benefits that the employee chooses.

However, total flexible compensation is not likely the desired end state, and employers are not adopting this option yet. Plan sponsors may feel that it puts too much decision-making in the hands of the employee. What are the consequences if employees make poor choices that fail to provide for catastrophic events and long-term life plans such as retirement? Most employers would want a minimum core benefits plan for the protection of their workers.

Flex credits presented as non-salary compensation could be the future, but not without careful attention to cost management, competitive benchmarking and employee education on the impact of their choices.

Total Rewards

Increasingly, employers are reflecting on what the company stands for, and how it is represented, through both the mandated plan coverage and the flexible choices offered beyond the core benefits. Wellness programs, continuing education, tuition reimbursement and green benefits all speak to the philosophy and values of the organization, and help to differentiate the employment brand. Creating a sustainable competitive advantage requires taking a holistic approach to meeting the needs of current and prospective employees. Flexible benefits can also play an important role in satisfying the growing diversity of preferences in Canada’s workforce.

Plan sponsors are encouraged to maximize the scope of their benefits plans while considering the broader context of the total rewards offered to employees. They should seek out ways to offer plan participants a choice of the rewards they value the most. Empowering workers to make their own trade-offs does more than improve employee attraction and retention; it also creates informed healthcare consumers, which is an important aspect of controlling costs. There are opportunities to leverage spending and expand flexibility without adding cost when organizations take an integrated approach to understanding total rewards.

Marg French is a worldwide partner with Mercer.

© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the November 2008 edition of BENEFITS CANADA magazine.

Category: Insurance

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