Benefit Credit Plans

Benefit Credit Description: The Tax-Saving Flexible Benefit Plan (Benefit Credit Design)

One of the more creative design tools on the employee benefits scene is Benefit Credit Plans.

Also called "cafeteria plans", this design allows an employer to provide an allowance of benefit credits, with which the employee can purchase desired benefits from an array of offerings.

Examples:

• A young employee with a growing family might choose family medical insurance, a Dependent Care FSA, and additional group life insurance. If the cost exceeds the credits granted, the excess can be paid through pre-tax salary reduction.
• A single employee may choose single medical, no FSAs, and the minimum life insurance. This selection may cost less than the credit allowance and, depending upon plan design, this excess might go into a 401(k), purchase after-tax benefits (such as universal life insurance), or be converted fully or partially to taxable cash.

The classic Benefit Credit design involves an employer providing "x" dollars in benefit credits, and offering an array of benefits from which to choose. Alternative designs include:

• Providing a base allowance of credits, and offering additional credits on a cost formula (example: 50 cents on the dollar);
• Providing certain "core benefits" that everyone must have (example: $25,000 basic group term life, and a long term disability plan) and providing an allowance of credits to purchase excess coverages; or,
• Providing credits equaling the cost of basic benefits (example: single medical coverage, single dental coverage), but allowing those not needing these coverages to waive participation and use the resulting credits to purchase alternative benefits.

Variations on the Benefit Credit design include providing no allowance of up-front credits, but awarding credits for waiving certain unneeded coverages.  Example: Provide $100/month in credits to any employee waiving medical coverage, based on proof of substantially equivalent coverage in force through a spouse's plan. This helps both parties, since the employer's actual cost of single medical coverage may be $180/month.

Benefit Credit plans provide advantages including:

• Changing philosophy to a defined contribution approach,
• Maximizing personal choice in benefit selection, and
• Creating incentives to avoid unneeded coverages.

We will be happy to discuss Benefit Credit designs with you, to accommodate your objectives!

Our Administrative Services for Benefit Credit:

Plan Setup:

Refer to steps under "Full Flex" Plans.  The following is a list of ADDITIONAL steps involved in Benefit Credit Plans.

• Plan Design: Assist in decisions on basic benefits, core benefits, and non-core benefits. Assist in determining credit formulas, and whether a credit-release feature is recommended.
• Group Meetings: Promote the Plan to eligible employees with appropriate meetings and handout materials. The slides and handout materials are designed to clearly convey the plan design, so employees can make clear, informed decisions in selecting from among their benefit options.
• Enrollment Form: Design the initial Enrollment Form to clearly show benefit credit allowances and the available benefit selections with related costs.

Ongoing Administration (Partial List):

Refer to steps under "Full Flex" Plans.  The following is a list of ADDITIONAL steps involved in Benefit Credit Plans.

• Plan Administration: Once communicated and enrolled, the ongoing administration of a Benefit Credit Plan does not differ significantly from a Full Flex Plan. We do assist by providing technical support to the Benefit Administrator and Payroll Administrator, who frequently have questions about booking the proper entries in the payroll system.

Key Point Outline:

1. Who Can Establish?

   • Employers with Statutory Employees
   • Careful understanding is needed for Partners, Sub-S Stockholders, and some other entities
   • Businesses under common control must generally be combined as one employer and all employees covered under a single plan.

2. Who Can Participate?

   • Employees who satisfy waiting period (example: 90 days)
   • Employees who meet eligibility requirement (example: Regular Fulltime; 30 hrs/week)
   • Non-discrimination rules apply; normally no problem

3. "Benefit Credit" Plan Design

   • Employer grants Benefit Credits to all employees; allow benefit selections from "menu"
     1. OR - an "Opt Out" plan design - grant credits to those waiving coverage
   • Advantages:
     1. Defined Contribution approach to providing employee benefits. ("We have budgeted this amount for each employee for benefits.")
     2. Maximizes employee choice, gratification.
     3. Recognizes that employees differ markedly in need for various benefits.
     4. Shortfall in credits can be solved by pre-tax salary reduction to pay for additional desired benefits.
     5. Excess in credits is paid in taxable cash to employee; does not have to be dollar for dollar. This cash can be directed pre-tax into 401(k) if desired.
   • Disadvantages:
     1. Very few. Only slightly more involved than a regular Flex Plan to administer, and only at enrollment time. Otherwise, uneventful.
     2. See rules applying to all Flex Plans, below.

4. Flexible Spending Accounts

   • Dependent Care FSA - for work-related dependent care up to $5000/yr.
   • Medical/Dental/Vision Care FSA - for out-of-pocket medical, dental, and vision care. No IRS maximum, but cautions apply! (Discuss)

5. Flex Plan Rules

   • Salary reduction deposits are pre-tax - federal, state, and FICA
   • Benefit reimbursements are tax-free
   • Medical/Dental/Vision Care FSA benefit must be annualized (discuss!)
   • Use it or Lose it criteria applies!
   • Cannot change election during plan year (except for Change in Status)

6. Employer Duties

   • Remit employee salary reductions
   • Form 5500 submitted annually
   • Assure non-discrimination
   • Possibly advance funds to meet Medical/Dental/Vision Care FSA Claims

7. Our Approach as a "Third Party Administrator"

   • Perform Turnkey Plan Administration - minimize employer paperwork
   • Provide Legal Documents via Attorney
   • Communicate, Enroll, Administer - then Perform all plan maintenance and reporting

Plan Design Comparison:

Characteristic	Traditional Plan	Benefit Credit Plan
Design Approach	Defined Benefit Plan	Defined Contribution Plan
Explanation	A Benefit is promised (for instance, Ee-Only Medical). Variable: "How much will this cost?"	A Benefit Credit is promised (for instance, $300 monthly). Variable: "How much will this purchase?"
Who bears Cost Risk?	Employer	Empolyee
Employee Advantages:	Assurance of a fully paid benefit	Choice in benefit selection
Employee Disadvantages:	Lack of choice in benefits	No assurance that needed benefits will be fully funded now or in the future
Employer Advantages:	Simplicity; one size fits all	Employee gratification Ability to cost-shift in future
Employer Disadvantages:	Some employees don't appreciate certain benefits	Complicates benefit enrollments Harder to get required participation in group programs

Benefit Credit Plan - Design Considerations:

• Decide on Base Benefits (benefits that will not be subject to the Benefit Credit plan).
  • Typically, Group Term Life and LTD
• Decide on monthly Benefit Credit allowance.
  • Typically, in year 1, make sure credits are sufficient to pay for traditional benefit programs.
• Decide on Core Benefits (benefits that must be selected, unless covered elsewhere)
  • Typically, this is Employee-Only Medical
• Decide on Benefit Offerings (other benefits to be offered under the plan)
  • Typically, Dependent Medical, Dental, FSAs, Accidental Death, Cancer, etc.
• Decide whether Excess Credits are Cashable
  • If so, at what rate? (dollar-for-dollar, 50 cents on the dollar, etc.)