June/July 2003: by Darrell Nordstrom

Employee benefit plans - increasing the ''bang for your buck''

Introduction: Many employers have decided to provide a group insurance program as part of the compensation package to their employees. These plans offer valuable benefits to individuals and are generally well accepted, particularly when they are efficient.

Advantages: Both employees and the employer should understand and enjoy the benefits provided by their benefit plans. For the employer it is important that the program is regarded as a positive part of the overall compensation plan and that it can be used as an effective hiring and retention tool. To achieve this goal, all involved parties must be educated and knowledgeable about the design and structure of the program. The employee advantages include lower costs, cost sharing by the employer, tax-free benefits, relaxed or no medical requirements, availability, security, and the list goes on.

Benefits: Typically most programs will include a list of insured benefits such as life insurance, accidental death benefits, dependent life insurance and long-term disability. A relatively new product now being added by some carriers is critical illness. The plans also usually include experienced rated benefits such as short-term disability, health care and dental benefits.

Costs: The general approach for most people is ''the best price wins.'' This is not a particularly difficult achievement for the insured group of benefits because it can be treated like buying any commodity. The lowest price does win. On the other hand, the second list of ''experienced benefits'' is a different story. Insurance companies price these benefits based on claims experience. Additionally, they charge premiums to cover administration charges, set money aside for claims fluctuation reserves, inflationary increases and for incurred but not reported claims. On smaller groups these items can add up to 30 per cent of the total cost. It is important to know that the lowest premium does NOT necessarily represent the lowest cost. The most efficient program results from understanding the ''hidden'' costs that become the insurance companies ''reserves.''

Design: Getting the most mileage from a program involves several steps. Tax efficient design means the employer should pay for the premiums based on the health and dental benefits and the employees should pay for the disability and life insurance benefits. This guarantees all benefits will be received on a tax-free basis. Secondly, most groups allow different divisions within the program to accommodate various groups within the group. For example, shareholders will often want to be in a separate class with no long-term disability benefits so they can obtain individual disability coverage. Another design ''perk'' is the establishment of a cost plus benefit to cover claims that otherwise are not included. This allows payments for such claims to be made with tax-free corporate dollars rather than personal after tax money.

Efficiency: Several steps are necessary to accomplish the ''biggest bang for your buck'' from this area. Perhaps the most important step is to continuously educate your workforce about the cost structure, benefits level, and advantages of the program. Employer and employees should take ownership of the plan. Secondly, the pricing of the insured group of benefits should be negotiated with the insurance companies on a regular basis to maintain a competitive edge. Next, it is important to analyze the pricing of experienced benefits and to cost compare the typical 30 per cent insurance company levy to an administrative cost of 10 per cent, for example, run by an independent provider on a selfinsured basis. Fourth, efficiency results from design of the program including tax efficiency, premium sharing, setting divisions within the group, including tax-free cost plus benefits, cost containment measures and similar consideration.

Summary: The perfect world of the employee benefit package includes acceptance, appreciation and understanding by all constituents. This can be achieved by efficient pricing, efficient design and efficient administration. The required ''bang for your buck'' can now be achieved.

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About the author
Darrell Nordstrom, CLU, Ch.F.C., CFP, RFP, Senior Financial Advisor, Assante Financial Management Ltd. He can be reached at 1-877-837-3377 or 306-665-3377, or click to email Darrell Nordstrom.

Disclaimer
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. This material is not intended to provide and should not be construed as providing individual financial, investment, tax, legal or accounting advice. You should consult your professional advisor(s) prior to acting on the basis of the information herein.

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