Full Cafeteria Plan Design

[Guest DAHO]

Our leadership team has indicated that they would like a full (we currently do premium only) cafeteria plan considered for 2008. While I know this was a hot topic several years ago, I'm wondering who is doing this today and what's working and what's not? Currently about 25% of our population opt out of health care and are not receiving any type of opt out payment. My concern is that while this approach provides greater choice to the employees that it will be a cost increase to the employer.

Any feedback on plan designs that are working in providing choice while minimizing cost are appreciated!

[J Simmons]

DAHO,

Right now the company is benefiting from the savings in health care premiums for 25% of the employees choosing not to take the insurance coverage. If you allow those employees to apply those dollars that the company would have paid for their coverage (had they not waived it), to other benefits, then the company will be paying for those other benefits what it currently is saving in premiums due to those waivers. It can't be cost neutral compared to the current state of things if the company is going to provide other benefits for as elected by those employees waiving the health insurance. However, it may be much more equitable in the treatment of those 25% of employees compared to the other 75% for whom the company is paying their health insurance premiums.

If the leadership team wants to keep its arrangement for paying health insurance premiums cost neutral, but give employees more flexibility, it could add options that would have be funded by electing employees to compensation reductions equal to the cost of these other, elected benefits. That could be the payment of premiums for certain other types of insurance (disability, group term life, or other health like dental, vision, supplemental health), medical flex accounts, and/or day care flex accounts. That would require a "full" cafeteria plan subject to IRC 125.

What you have now may not be an IRC 125 cafeteria plan. You only have to deal with IRC 125 if the employees have an option between cash (or some other taxable benefit) and a tax-free one (like payment of premiums for health insurance coverage). Right now, if your employee declines the health insurance, he or she doesn't get anything else. What you would likely have is a plan governed by IRC 106a.

[leevena]

DAHO, I would say that the answer to your is yes it does work, but you/employer need to work at making it successful. A cafeteria plan provides an employer with a great deal of flexibility and opportunity to achieve their "benefit objectives." My personal belief is that most employers go into a cafeteria plan with good intentions, but fail to understand the level of strategy, work, and commitment that is needed to make it truly successful.

My suggestion would be to start with your company's benefit plan objective(s), and see how a cafeteria may/may not help you achieve those objectives. If you do not have any objective(s) you should get one right away.

Once you have objective(s) in place for your benefit offering, then you can consider what benefits to include and how to fund them. Remeber, the cafeteria plan is optional, because depending on your objective(s), it may not work for you.

Good luck.

[GBurns]

DAHO

So that we are all on the same page:

What do you mean by "full cafeteria plan"?

What does it matter that some employees opt out of the employer's offered coverage and get no compensation for making that choice?

What does management hope to, or think that they can, achieve by having a "full cafeteria plan"? Or, as leevena so aptly puts it, What is the objective?

[Guest DAHO]

GBURNS

The leadership objective is to offer more choice but have costs remain neutral. I agree with the comments above that this may not be feasible considering the current 25% opt out rate. We do offer quite a bit of choice today= multiple medical, dental plans, life & add(with buyups), std/ltd, voluntary benefits (auto/homeowners, LTC, Vet, Group Legal). The intent of what I referred to as a "full" cafeteria plan is to provide employees X amount of dollars and have them use this to buy the various benefits.

DAHO

So that we are all on the same page:

What do you mean by "full cafeteria plan"?

What does it matter that some employees opt out of the employer's offered coverage and get no compensation for making that choice?

What does management hope to, or think that they can, achieve by having a "full cafeteria plan"? Or, as leevena so aptly puts it, What is the objective?

[Jacmo]

DAHO: We recently set up a plan where the employer also wanted it to remain cost neutral. They already had a POP plan in place, and added FSAs--MedRe and DayCare.

There was the initial set up fee. They anticipated that their FICA savings would offset that well within the first plan year. The monthly admin fee was $6.50/mo/participant. For the employer to break even on this, they communicated to the employees that anyone who elected less than 1,000 for their annual election (MedRE and/or Daycare combined) would pay the $6.50 monthly admin fee (which was made an eligible benefit under the POP portion of the plan which allowed it to be pre-taxed too). The math: 6.50x12=78.

78 divided by .0765=1019.61.

A first class presentation was made to the employees of this high tech group. Judging by the response, it is anticipated that there will be 50-75% participation. The average annual MedRe election in this part of the country is 1200.00 per year. The employees will have the use of a debit card, which tends to raise participation rates. Participation rates will vary from 20-80% depending on the group demographics, specifically, discretionary income.

Under this scenario, your group should be in better than a break even situation. And the 25% who don't have your insurance will be able to benefit from this program.

You will find that participation will increase each year (word of mouth +plus employee meetings) and then begin to level off in the 3rd year. But this assumes that you do a good job of communicating the benefit each year.