Dollars for Opt Out

[Guest jreddi]

Don't you just love this time of year when this or that executive wants to tamper with the established benefits plans? Or is it just me?

Anyway, been asked to look into companies offering money to employees to take their family coverage elsewhere. That is, if the employee chooses self-only coverage where s/he would have normally chosen family or spouse coverage, then the company would pay him/her money. Got several questions on that:

1. How much do you pay someone? $20? $100? Percentage of premium?

2. If lots o' employees choose this option, won't some adverse selection ideas come into the insurance carrier's mind?

3. One can assume that the money paid to the employee is taxable income, ain't it?

Many thanks.

JPR

[david rigby]

2. If lots o' employees choose this option, won't some adverse selection ideas come into the insurance carrier's mind?

Duh!

The very essence of adverse selection.

[Guest jreddi]

The "duh" is a good point.

What I MEANT to say is if you have already implemented such a buy-out plan, how have you skirted around the adverse selection issues? Or, if you have not implemented such a plan, was it adverse selection that kept you from not offering it?

[mroberts]

Answers to your questions:

1. It depends. If there is not enough of a financial incentive, then you're probably not going to get the migration you're looking for. A lot of employers who choose this option usually give a perntage of the savings, say 50% or 25%.

2. Not really, since you are only talking about having the dependent spouse or children get coverage through a different employer's plan. Additionally, you should require to see proof of insurance elsewhere before compensating your employees to ensure they are not forsaking healthcare coverage on dependents for a few hundred dollars in their pocket. If you were applying the same principle to employee only coverage, then yes, you would run into adverse selection, amongst other problems.

3. Yes the money paid to the employees would be taxable. Most employers who set up this kind of arrangement, however, do it through a cafeteria plan. Therefore, if employees wanted to purchase other types of benefits with this extra cash, they could do so.

Just my $0.02....I'm not too high on these types of plans. I find it easier just to lower the contribution % that the employer is paying for dependent coverage. The "payoff" option creates a lot more administration (verifying other coverage, verifying whether the pouse is working elsewhere and is eligible for other coverage if you decide to make this option mandatory....) and it's not without cost (you do have to pay the employees some decent percentage to make it worthwhile). One could argue that lowering the contribution percentage could hurt attraction and retention of employees, however, so could forcing an employee's spouse on to a plan that is either significantly more expensive or has significantly less coverage.

[Guest llerner]

I agree with the above .02 however if there is a union or a workforce that could be unionized involved, sometimes this is the only way they will accept an employer not covering dependents.

If they decide to go ahead with the plan, reimbursement is typically 1/4 to 1/2 of dependent premium but they can do whatever they want. If the dependent cost is $300 more, they usually will reimburse $100 to $200 or less if it is a smaller employer because they wouldn't save anything by giving them the full dependent amount. Adverse selection may not be a problem depending on demographics of the workforce/ and the dependent base involved. If the employer has mostly males in their 20's or 30's by dropping spouses and children they may be underwritten more favorably for example. I have seen that happen in silicon valley and it does make a difference.

They should do it through the FSA to recoup some of the payroll tax benefit they will lose for workers comp purposes although some set it up as cash payout by running it through payroll then permitting the employees to increase their 401(k) election as an incentive. The reason it can't go directly into the 401(k) is that the FSA tax exemption includes social security & medicare taxes and 401(k) deductions does not. Once the money is moved to the 401(k), it will reduce the employees state, federal incomes tax only.

Good luck projecting and budgeting! Insurance shopping, don't you love this time of the year? I do.

[Guest jreddi]

Thanks, all for your input. As it turns out, we decided not to offer such an opt-out program this year. Our premium increase was an increase, but a favorable one.

Llerner: we are in the Valley too and most (76.96%) of our population are male with 24.8% of total pop (males and females) in the 21-30 age group; 43.9% in the 31-40 age group. We made a wholesale shift from the dreaded Benefits Alliance last year to a single carrier with changes in the premium contributions last year. We didn't want to make that much of a change this year.

It's cool to have things quiet on the premium front. Although with two acquisitions and three concurrent Open Enrollment periods, it is hardly quiet at my desk.