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Employee Benefits 101

Employee Benefits 101

As an employer, you know you need to offer benefits to attract and retain staff. This article aims to explain:

  1. Why is being part of program good for you and your employees?
  2. What benefits are available?
  3. How does the pricing work?
  4. How can you get started or audit your existing program?

Why is Being Part of a Program Good for You and Your Employees?

There are three main reasons why a benefits plan is good for your employees.

  1. Access – your employees cannot generally get a comprehensive plan on their own at the same cost as group plan.
  2. Insurability – group coverage guarantees insurability for everyone – there are no medical questions or disclosures.
  3. Tax Efficiency – the premium an employer pays for extended health and dental benefits is not a taxable benefit to employees – it is non-cash compensation.  Without a plan, an individual will need $200 of gross earnings to get $120 of after-tax spending power, but with a benefits plan the expense is often covered entirely.

However, the main reason why a benefits plan is good for the employer is retention. It’s difficult and expensive to find and train new employees. It’s far better to have loyal people that are committed to coming to work. To get that, employers need to offer more than a competitive salary.

What Benefits Are Available?

Benefits go beyond the standard health and dental most employees expect from their employer. Complete packages can be structured to make the company attractive and competitive in the marketplace by leveraging:

  • Life Insurance: A tax-free lump sum to the beneficiaries of the policy holder upon his or her death.  Many of your employees do not own separate insurance and this benefit is all a family might receive.
  • Accidental Death & Dismemberment: provides funds to help the beneficiaries of the policy holder if the death is accidental (often combined with and pays out in addition to life insurance).  Also provides funds to the insured if he or she is dismembered, such as the loss of limbs or vision.
  • Dependent Life Insurance: A lump sum provided to your employee if they lose a spouse or child.  This sum helps to ease the finanical burden of final expenses.
  • Long-term Disability: Income replacement when an employee becomes sick or injured and can no longer work.  For example, it could take several years to recover from an accident or head trauma – and in some cases, a full recovery is not possible. Long-term disability payments replace a portion of the employee’s income when their disability prevents them from returning to work.
  • Critical Illness Insurance: A lump sum paid to the employee if they are diagnosed with a covered critical illness.  The sum can be used in any way your employee sees fit – ultimately, it provides cash for the family when its needed most.  About 80 per cent of critical illness claims are for cancer, stroke and heart attacks.
  • Dental: Dental care in Canada is expensive. The only government coverage for dental care is for emergency treatment stemming from an accident – and even then, the focus is not cosmetic, so the individual is left to manage the additional expenses. Therefore, dental benefits are hugely sought after by employees.
  • Extended Health and Travel:  This covers prescription drugs, medical supplies, paramedical practitioners (chiropractors, physiotherapists, psychologists, naturopaths, massage therapy), out of province travel insurance, medical supplies and more.
  • Employee Assistance Program: Not all ailments are physical. When it comes to mental health issues, addiction recovery, work stress, and emotional wellbeing, therapy is a great option. The Employee Assistance Program is a benefit that gives employees discreet short-term access to counselling. If additional therapy is needed after the sessions, the councillor can help to arrange longer-term care.
  • Flex Dollars: Chances are that one employee will require sports massage while another needs dental benefits more. Flex dollars allow your employees to allocate funds to the benefits they need the most. It removes the one-size-fits-all benefit plan and really gives your employees the customization they need.
  • WI (Weekly Indemnity)/Short Term Disability (STD): WI, or STD, benefits provide a weekly short-term payout to help replace income when the employee cannot work due to a short-term disability.  This benefit is more commonly added for higher earning employees as Canadians already pay for short term disability through their EI deductions.

How does the pricing work?

Pricing For New Group Plans
Initial pricing is based on the demographic (census data) of your employees with a layer of “WAG” (wild ass guess).  Yes, the honest truth is that small groups are not actuarially credible. There are just not enough lives to make an accurate mathematical estimate of the group’s utilization, so the underwriter makes a “best guess.”

  • Insured Benefits (life, AD&D, dependent life, long term disability, weekly indemnity, critical illness) are priced based on demographic and occupation category.
  • Experience Rated Benefits (dental & extended health) are simply a “best guess” for the first year until a pattern can be established through annual renewals.

Pricing for Existing Group Plans
Pricing a new group is based on the demographic (census data) of your employees and your  group’s utilization experience.  Not many underwriters will offer an existing group new low rates without finding out what they are getting, for the simple reason, they do not want a group paying $25,000 in annual premium and making $50,000 in claims.

  • Insured Benefits (life, AD&D, dependent life, long term disability, weekly indemnity, critical illness) are priced based on demographic and occupation category.
  • Experience Rated Benefits (dental & extended health) are a little tougher for existing groups.  The underwriter needs to look at the type of claims and expense factors and make an educated estimate of future experience (this explanation over-simplifies the process. Contact us for a more information).

Calculating the Annual Renewal 

Group plans are renewed annually. It is common for the plan’s premiums to increase to keep pace with claims, group makeup (census data), and plan usage. Below we will explore some factors that go into the annual review.

  • Target Loss Ratio (TLR): The TLR is the percentage of the plan premium that is used to pay claims. Remember, each plan has expenses in excess of claims, such as administration, taxes, and commissions. When the expenses are deducted from the premium, the remaining percentage, or the TLR, is the pool from which the claims will be paid.The TLR percentage is generally set by the size of the group.
  • Trends Factors (Inflation): The cost of extended health, prescription drugs and dental procedures go up every year.  The insurance company must factor higher future costs into each annual renewal.  Some companies use inflation as a profit center but an experienced benefits specialist will help negotiate this part of your renewal.
  • ims Reserve (IBNR): Not every employee submits a claim in a timely manner, and if a plan sponsor (the employer) cancels or switches carriers, some claims may remain eligible in the interim.  This can affect the carrier’s ability to play claims. To prevent defaulting on these types of claims, the carrier has an “incurred but not reported,” or IBNR buffer – a percentage of the premiums that is held in reserve.
  • Experience Weighting: At renewal, the underwriter has discretion to give a certain weighting to the current year utilization experience.  For example:  a group that has been with a carrier for three years might have 50 per cent weighting from the current years experience and 25 per cent for each of the previous two years.  (the underwriter’s goal is to price the renewal on the average known experience).

You may have been visited or cold called by an agent offering big savings on group plans. Beware! Using marketing dollars, such agents can offer very attractive rates – that last for the first year only. Once that year is up, all the above factors come into play and the premium spikes. It takes time, effort, and money to properly set up an employee benefits plan, but the result is a stable, realistic plan with manageable renewals based on actual plan usage and census data.

Your business is unique, so your employee benefits plan needs to be unique, too. That also means there is no one-size-fits-all when it comes to pricing out the plan. Benefits Consultants and Advisors use the following methods to manage employee benefits plans:

Fully Pooled vs. Hybrid Pooled:

Fully pooled means your annual renewal is calculated together with the other groups in the ‘pool’ and each group gets the same premium change percentage regardless of demographic or utilization.

Hybrid pooled means your annual renewal is calculated using your groups own demographic for the insured lines and together with the other groups in the ‘pool’ for extended health and dental utilization.  Generally, the best hybrid pools will have a formula to smooth the rate change and still account for groups with very high and very low utilization.

Single Group (Stand Alone Group):

Some groups don’t want to be pooled with other companies to leverage more buying power. In some instances, especially for very large, long-term, established corporations, being rated on the company’s own past performance and demographics is a good option.

Administrative Services Only (ASO):

A group can opt for the insurance carrier to provide a administration only – basically, administer and adjudicate claims for extended health, dental and sometimes weekly indemnity.  This arrangement lowers the administrative load (TLR) which is good but the company is responsible to pay all claims.

An ASO plan is a great fit for companies that don’t want to pay a risk charge on their benefits premiums but require the smooth processing of the plan and claims management.  Beware, however, that choosing an ASO design is generally not suitable for groups with less than 50 lives.

Health Spending Account:

A health spending account, or HSA, is a popular option for small or solo-run businesses, but companies can also use an HSA as its benefit plan or to top up benefits coverage.

HSAs are trust accounts regulated by Canada Revenue Agency. Gross income (pre-tax) dollars are put into the account and the money is used for healthcare expenses. With this setup, it’s easy to see why entrepreneurs like this type of account. However, employers can set up a company HSA, or contribute to employee’s HSA accounts.

This is a good option for companies that want to avoid the traditional insurance route, but it does come with a couple of drawbacks. If an employee needs expensive medical treatment or has ongoing healthcare expenses (like dental work), frequent contributions to the HSA can be financially difficult. Additionally, the only expenses that can be reimbursed are treatments from a licensed medical practitioner, or medications dispensed by a licensed medical practitioner or a pharmacist. This excludes non-traditional treatments.

HSA’s are regulated by CRA, but for companies looking to control costs, they can be a suitable alternative to a full benefits plan.

Getting Started with Your Employee Benefit Plan

Putting a group plan in place is not difficult.

  • The plan sponsor fills out a data sheet with the demographic details of the group.
  • Companies with an existing plan must also provide, benefit booklet, most recent monthly billing and the most recent annual renewal.
  • Next, the advisor will present the plan details and benefits available and plan design will be chosen.
  • Finally, the paperwork. The sponsor (employer) distributes an enrolment form to each employee with their basic contact details, dependents and beneficiaries.

With the paperwork complete, it takes roughly three weeks for the plan to roll out – plan booklets and drug cards must be printed.  New plans generally start on the 1st of the month.

Employee Benefits are Part of Your Company’s Success

No matter if your company is solo-run, a thriving corporation, or a multi employer union trust – there is a benefit plan that can be customized just for you.

Contact Shelter Bay Financial Corp today to learn how your company can get started with a tailor-made benefits solution for you and your team.