flexible benefit plans

A Flexible Benefit Plan Might be the Answer to Your Skyrocketing Adjustments

December 11, 2018

With the cost of group benefit plans rising, many organizations are considering this alternative to the more traditional defined contribution strategy.

The costs associated with group benefit plans have escalated in recent years. Worse, there is often a failure to articulate these costs in a manner that is clear and quantifiable. Just think about your next renewal. You will receive a notice with a diagram outlining the current and renewal rates for each of your benefits to arrive at a premium for each one. At the bottom of the diagram, there will be a total of the overall premium adjustments year-over-year, and perhaps a number reflecting the  percentage change. Whatever the adjustment is — small, medium or alarming — it needs to be considered in the proper context before you react to it.

Imagine if your overall adjustment is a jaw-dropping 24% — enough to make you consider a change. There are two important steps for you to think about first. How does this increase impact your company based on your cost share, and what is the impact to your employees based on their cost share?

For example, employers frequently have employees paying the cost of long-term disability premiums and some form of cost-share on health and dental benefits. Whatever this cost-share deal is, we often discover that it has not kept up with the rate of change to various components of the overall benefit offering. What was started as a 75% employer-paid plan is now 55%, driven by the cost increase on disability insurance.

Now, employees are unhappy.

According to our mid-market database, the shift in the costs of the various lines of coverage in your benefit plans over the past five years has looked like this:

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Benefit 2012 to 2017 % increase
Life and AD&D +10.2%
Disability +25%
Health +27.5%
Dental +15.6%
Total +22.1%

As illustrated, if your cost-share deal with your employees has remained unchanged over the last five years, either the employee or you, the employer, is experiencing a disproportionate cost escalation. In addition, we would suspect that the overall cost is increasing at a rate that is more than the increase to your salaries.

What can you do about this?

First, to better understand your overall employer cost-share, you should quantify the cost of the benefit plan as a percentage of salary. According to our database, the overall cost of benefit plans varies from about 5% to 8% of payroll. The variance is due to levels of coverage, employee demographics and emerging claims experience. Whatever the number is for your company, you need to ascertain your acceptable number, and what, if any, is the acceptable year-over-year cost escalation that your company can sustain. Chances are you might need an alternate solution.

Consider the advantages of a flexible benefit plan

Employers who have chosen to make the leap to a flexible benefit plan have been able to define their overall financial contribution, while giving employees the opportunity to make their own value-based decision about the level of coverage they are prepared to buy. With a defined contribution strategy, the cost of the plan fluctuates due to age or claims, and the employer can choose to maintain or adjust their contribution accordingly. The benefits offered under a flexible benefit plan remain unchanged; however, the price associated with the plan will fluctuate. With a flexible benefit plan, employers don’t choose how to fund the program based upon emerging demographics and claims experience, but rather employees make value-based buying decisions on the coverage they want, while considering the cost they would pay or excess credit they would receive.

Employers who soar with a flexible benefit plan … [give] employees the opportunity to make their own value-based decision about the level of coverage they are prepared to buy.

Think of it this way: if the alarming costs of defined contribution strategy plans are the equivalent of a “market price” three-course meal on a restaurant menu, flexible benefit plans offer employees the option to order the items they actually want at a more reasonable price à la carte. According to the 2017 Sanofi Survey, 97% of plan sponsors who have implemented a flexible benefit plan, and 88% of plan members, say they do not want to return to a traditional benefit plan. Cost certainty and choice are the key reasons for such a high acceptance rate.

In the coming years, benefits costs will continue to increase. This is inevitable due to a number of factors, including:

  • An aging workforce reluctant to retire
  • The treatment of chronic illness tied to aging
  • The cost of new drugs and medical cannabis
  • The increased incidence and duration of disability
  • High-cost drug pooling
  • The 1.25% payroll increase to your employer contributions for the enhanced Canada Pension Plan benefit

Costs are going to go up. We know that cutting benefits to manage costs, though quick and effective, is typically met with disappointment and reduced employee engagement. Employees are prepared to pay for coverages they want to maintain.

So, what can you do? First, know your number. What is your current contribution as a percentage of payroll? Think about how that number has changed over the past five years and whether you can afford a faster increase over the next five years. If it seems unaffordable, it might be time to consider making the switch to a flexible benefit plan.

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Brian Rennie
Brian Rennie is a Senior Vice President, National Leader Mid-market, Health and Benefits, Aon. To see more innovative thinking and unique perspectives see our video at choice.aon.ca.

Financial Wellness