In the culinary world, it is common for a chef to prepare a dish three ways. In this manner, the chef offers a food with three preparations, often including an option the diner has not tried or even considered. Depending on your career experience as either an employee or a business owner, you may be familiar with only one or two types of employee benefit programs. While some large employers have the ability to offer employees a wide and varied benefits menu, most small employers will only have a set benefits plan for their employees. In this post we’ll outline three basic ways to offer an employee benefits plan.
Preparation Number 1: The Experience-Rated Benefits Plan
We’ll start with a traditional insured benefits plan, also known as an experience-rated benefits plan. Put simply, a company chooses benefits coverage to offer to employees and an insurance company quotes a monthly premium cost for the plan. As a group, employees have the advantage of higher levels of coverage but limited or no flexibility in selecting their benefits personally. A common misconception, especially with first time benefit buyers, is that your quoted monthly cost will be your recurring cost for the plan you’ve offered. An experience rated benefit plan’s premium is directly tied to the claims of your group; higher claims equal higher premiums in the following year. In companies with a small employee group size, the claims of even a single employee could have a significant impact to the rates. While this arrangement works well for some companies, many are faced with the challenge of balancing the benefits offered to employees with the pressure on annual budgets.
Preparation Number 2: The Pooled Benefits Plan
If you want to offer a traditional insured benefits plan but have concerns over claims experience driving premiums there is an option for you to consider, jump in the pool! In a Pooled Benefits Plan, your company group joins a number of other companies in a pool, essentially a larger group (either an association, industry, or provider arrangement). In this manner, you’ll offer the same benefits coverage to all employees but you’ll balance your claims experience with all of the other companies in the pool. The goal is that each company will pay a more stable rate; however, companies need to be aware, just as they won’t be hit with the full increase in years of high claims; in years of low claims, they won’t get the full decrease either.
Preparation Number 3: The Health Spending Account
Step away from the traditional plan that offers benefits coverage and offer benefit dollars instead. Many individuals will recognize this as an extra benefit that may be part of some company’s traditional benefit plans. The Health Spending Account (HSA) however also makes a great stand-alone solution to start a small, flexible and budget-controlled benefits plan. As opposed to offering defined benefits coverage like a traditional plan, the HSA offers employees a defined amount of benefit dollars. The amount is offered to each employee each year to spend on any CRA-approved health or dental expense (think any of the typical benefits that may be covered). Employees have flexibility in their spending while employers retain complete control on the total cost of the program each year. The downside, as an employee, is that once your money is spent, your coverage is done for the year. For some businesses this may not provide the higher level of benefits they need to offer their employees when compared to hiring competitors.
In summary, we’ve seen that there are three basic options to consider with varying pros and cons. A traditional benefits plan offers employees little or no flexibility in coverage but higher limits than an HSA. On an experience-rated basis companies must be aware that claims drive premiums and in small groups especially, can be significant from year to year. On a pooled basis, that same traditional benefits plan can be offered but with premiums that are based off the experience of the whole pool of companies. For small employers or first time benefit buyers with limited budgets, there is also an option to offer a simple HSA. The cost controlled HSA, while offering employees the greatest flexibility, is limited in its extent of coverage. It should be noted; another basic, flexible and cost-controlled benefit is a simple Group RRSP (Read: “Busting Three Employer’s Myths in Group RRSP). Depending on employee group size and budget constraints, different employers may find an advantage with either an experience rated benefits plan, a pooled benefits plan or an HSA.
There are several nuances and rules to be mindful of in each arrangement; however, after an understanding of your needs, an advisor should be able to evaluate and recommend which option is best suited for you.