The Buy-Up Solution to Curtailing Benefits

Overhead expenses continue to rise but so does the competition to hire qualified employees, so it's important to create a balance between cost-effective benefit packages and those that will attract employees. As the unemployment rate goes down, there is more mobility in the marketplace. Therefore employers must create compelling and affordable benefits in order to retain good workers and attract new talent – but without going overboard.

Last year, the average premium for health care insurance at mid-size and large companies increased 4.4 percent, up from 3.3 percent the prior year. That nets out to about $10,717 per participant, who in turn contributed an average $2,487 toward insurance premiums and spent an additional $2,295 in out-of-pocket costs.

According to a corporate health and benefits consultant, this year increases are expected to rise 5.5 percent (after plan design changes and vendor negotiations). This percentage increase nets out to an average of $11,304 per worker. Participants are expected to contribute $2,664 toward premiums and $2,487 in out-of-pocket costs, for an average total increase of $369 for workers and $218 for employers in 2015.

By year end, the average worker's share of health care costs will have increased by more than 52 percent, or $1,762, since 2010. While transferring the high cost of benefits to workers has been a popular strategy in recent years, clearly employers need to devise more effective ways to relieve this increasing financial burden on members. As such, many organizations and labor unions are working to create a mix of traditional and non-traditional tactics to rein in benefit costs.

Contribution Strategy
Employers should be mindful of the impact of uncertainty on their employees. In other words, changing your plan design and subsequent shared costs each year can lead to more member anxiety than higher but fixed contributions each year. An organization should strive to develop a long-term sustainable contribution strategy for its overall group benefits program.

The Patient Protection and Affordable Care Act (PPACA) required employers to eliminate varying plan levels based upon organizational hierarchy. In response, employers today are trending toward a defined contribution strategy, many in conjunction with the private insurance exchanges. The employer contributes a set amount of dollars and the employee chooses what level of insurance to purchase with those dollars. This may include a contribution level appropriate to cover minimum required healthcare benefits, with the option for members to "buy-up" to a higher level (silver, gold or platinum), purchase ancillary coverages, such as dental or vision, or increase life or disability insurance options.

This approach harkens back to the days when IRC section 125 plans were first introduced. These "cafeteria" benefit plans allowed participants to use their available benefit credits to customize a package appropriate for their situation – whether single or part of a family. Similarly, the defined contribution strategy paired with buy-up options offers both a fair and level playing field for members.

In developing an effective contribution strategy, employers consider the following questions:

• Do we want to shift costs?
• Currently, what percentage of claim costs is paid for by plan members through co-pays, deductibles and other out-of-pocket costs?
• Do we want to transfer risk or absorb it?
• Do we want to drive enrollment into one type of plan (e.g., high-deductible health plan) over another?
• What are our workforce demographics (age, gender, etc.)?
• Should we base benefit levels on worker engagement in health and wellness programs?
• If so, what programs (and incentives) should we offer?

Buy-up Coverage
Some employers offer members a base health insurance plan and may even pay for the entire cost of minimum essential coverage. Workers can then use additional fund credits to "upsize" for richer coverage at an increased premium that may offer lower deductibles, copays, and the ability to visit out-of-network providers.

Needs and Wants
The assessment process for members to "buy up" insurance options is similar to planning for retirement income. Financial advisors often ask their clients to categorize their expected expenses in retirement under two headings: "Needs" and "Wants." "Needs" represent necessities, such as housing, food, utilities, and transportation. Expenses that fall under the "Wants" category may include travel, country club membership, or season tickets.

Similarly, the buy-up tactic stratifies the minimum level of insurance coverage a worker needs, and then enables him to select additional coverage based on his wants. For example, would he rather offset out-of-pocket expenses for vision and/or dental care, or secure more peace of mind for his family by increasing his life and/or disability insurance?

Coverage Considerations
The buy-up approach also places a burden of due diligence and decision-making on individual workers versus the one-size-fits-all approach. Unfortunately, this burden may be overwhelming for some workers, as they may have to weigh numerous factors across multiple insurance options. For example, if deciding whether to opt for vision coverage, the worker should investigate the premium and what is covered by the policy, and then compare that with what he might reasonably spend annually on eye exams, contacts, glasses, etc. In some cases, a worker could come out ahead by paying these expenses with current income or by saving via a tax-free healthcare reimbursement account (HRA) or health savings account (HSA).

Moreover, participants should make a similar assessment for each type of additional or buy-up coverage option made available by the employer. All in all, the learning curve for some members may too onerous to expect good decisions.

Buy-up Options
Some organizations have opted to offer health insurance coverage only to its workers, so the spouse and dependent coverage may be a buy-up option. For example, the additional premium to add one dependent may be $2,600 per quarter or $5,000 to add two or more dependents in addition to the worker's share of his own premium.

Dental
While some employers provide dental insurance as a basic coverage for workers, a growing number offer it as either a buy-up option or as a voluntary benefit. Voluntary benefits are 100% paid by members via payroll deductions. Another option is to purchase a base dental plan and allow each member to buy-up additional benefits as needed, or for more family members. The same types of coverage options may be offered for vision, long-term care, and life insurance coverage.

Disability
Disability insurance has traditionally been offered in two forms: Short-term (typically from 90 days to a year) and long-term (beginning after 90 days to a year). Some companies offer a small, base amount of disability coverage at no cost to the worker, and then require members to buy-up a higher level of disability coverage using their own salary or benefit dollars.

This type of coverage may be challenging for a participant to assess on his own. To evaluate his options, he must discern the percentage amount of salary that will be paid out, how that percentage may change over time, and what that percentage is based on. When you tack on the buy-up option, this analysis becomes even more complicated. For example, if the employer-sponsored portion provides 50 percent of salary benefit, the worker may be able to buy-up additional protection to bring the total coverage to 60 percent. This would increase the monthly income payout for a worker with an annual salary of $40,000 from $1,667 to approximately $2,200. As a general rule, the premium for the additional level of coverage is nominal compared to the benefit received should the worker become disabled.

Tax Considerations
Many employers offer buy-up options through the use of an IRC Section 125 plan. Here the employee can purchase both the base and the buy up with pre-tax dollars. For the most part, the benefits received are not taxable. One of the exceptions to this is disability insurance. If the employee purchases disability coverage with pre-tax dollars, any benefit he might be paid will be taxed.

Curtailment Option
Some employers decide to offer a buy-up option when it has decided to cut-back a benefit-rich plan. For example, in Middleton, Delaware, the Rose Tree Media School Board recently approved a new contract with union teachers. In the past, teachers paid nine percent of their health care premium costs each year and, if they opted for a premium plan, the union members covered the balance. Under the new contract, the school district is changing its health insurance coverage to a less expensive policy. However, members may "buy up" to maintain their current coverage by paying the difference in the premium between the plans.

Choosing appropriate benefits is a difficult process for each member. It's a good idea to make benefit specialists available to help each participant customize a plan that meets his or her needs.

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