Category Archives: Case Studies
On March 25, 2015, the U.S. Supreme Court ruled in favor of a former employee of United Parcel Service (UPS) who was faced with the choice to either continue working her labor-intensive job during pregnancy or take unpaid leave. In a 6-3 decision, the Supreme Court held that the employee should be given the opportunity to prove that UPS violated the Pregnancy Discrimination Act (PDA) by not giving her the same light-duty accommodation that was given to other UPS employees who were considered injured or disabled.
The Supreme Court’s decision establishes a legal framework for this type of pregnancy discrimination case. Due to this ruling, it may be easier for employees to succeed on claims that their employers violated the PDA by failing to accommodate them. To help limit liability under the PDA, employers should review their employment practices and policies regarding accommodations to make sure pregnant workers are treated the same as other workers with similar restrictions.
Pregnancy Discrimination Act
Title VII of the Civil Rights Act prohibits a covered employer (15 or more employees) from discriminating against any individual with respect to the terms, conditions or privileges of employment because of the individual’s sex. In 1978, Congress added the PDA to Title VII. The PDA has two clauses:
- The first clause clarifies that Title VII’s prohibition on sex discrimination includes discrimination based on pregnancy, childbirth or related medical conditions.
- The second clause requires that women affected by pregnancy, childbirth or a related medical condition be treated the same for all employment-related purposes as “other persons not so affected but similar in their ability or inability to work.”
The employee, Peggy Young, worked as a part-time driver for UPS. When Young became pregnant in 2006, her doctor advised that she should not lift more than 20 pounds. UPS, however, required drivers like Young to be able to lift up to 70 pounds. When Young presented UPS with her doctor’s note, she was told that she could not work while under a lifting restriction. Young consequently stayed home without pay during most of the time she was pregnant and eventually lost her employee medical coverage.
Young sued UPS, alleging that her employer violated the PDA’s second clause because it had a light-duty policy for other types of workers, but not for pregnant workers.
Under its light-duty policy, UPS accommodated workers who were injured on the job, those suffering from disabilities under the Americans with Disabilities Act (ADA) and those who had lost their Department of Transportation (DOT) certifications. According to UPS, because Young did not fall within one of these three categories, it treated her the same as it would treat other relevant persons and therefore did not discriminate against her based on pregnancy.
The district court granted UPS’ motion for summary judgment, concluding that those who Young compared herself to—those falling under the on-the-job, DOT and ADA categories—were not similarly situated groups of employees. The 4th Circuit Court of Appeals affirmed the district court’s decision.
The Supreme Court vacated the 4th Circuit’s decision and remanded the case for further proceedings. The Supreme Court ruled that Young created a genuine dispute as to whether UPS provided more favorable treatment to at least some employees whose situations were similar to hers. Thus, the Supreme Court gave Young another chance to show that UPS violated the PDA when it failed to accommodate her light-duty request.
The Supreme Court also outlined the framework that applies in this type of disparate treatment case under the PDA. Under this framework, an individual alleging pregnancy discrimination may establish a case by showing that:
- She was pregnant at the relevant time;
- Her employer did not accommodate her; and
- Her employer did accommodate others who are similar only “in their ability or inability to work.”
According to the Supreme Court, this burden is “not onerous” for an employee. It also does not require the employee to show that she and the non-pregnant employees who were treated more favorably were similar in all non-protected ways.
The employer may justify its refusal to accommodate the employee by relying on a legitimate, non-discriminatory reason. The employee may then in turn show that the employer’s justification is a pretext for discrimination. An employee may show pretext by providing sufficient evidence that the employer’s policies impose a significant burden on pregnant workers and that the employer’s reasons are not strong enough to justify the burden. A significant factor that will help prove an employee’s case is if the employer accommodates a large percentage of non-pregnant workers while failing to accommodate a large percentage of pregnant workers.
Impact of Decision
The Supreme Court’s decision in Young v. UPS is a victory for pregnant workers because it establishes an easier framework to prove illegal discrimination. However, many employers may have already changed their policies to allow light-duty accommodations for pregnant workers due to other recent legal developments.
- In 2008, Congress expanded the definition of “disability” under the ADA to make it clear that physical or mental impairments that substantially limit an individual’s ability to lift, stand or bend are ADA-covered disabilities. This expanded definition, as interpreted by the Equal Employment Opportunity Commission (EEOC), requires employers to accommodate employees whose temporary lifting restrictions originate off the job.
In July 2014, the EEOC issued enforcement guidelines that cover employers’ light-duty policies for pregnant workers. According to these guidelines, if an employer provides light-duty assignments to any of its employees who are temporarily unable to perform their full duties, then similar accommodations should be made for pregnant employees who cannot perform their full duties. Although the Supreme Court decided not to take these guidelines into consideration in Young vs. UPS, employers may have reevaluated their accommodations policies based on this guidance.
CIBC of Illinois, Inc. Merges With Strategic Employee Benefit Services of Champaign
FOR IMMEDIATE RELEASE
Kankakee, IL– (February 9, 2015)- William Johnson, Chairman and CEO of CIBC of Illinois, Inc. is pleased to announce the successful merger of CIBC of Illinois and Strategic Employee Benefit Services of Champaign (SEBS). The new organization will operate as CIBC of Illinois, Inc. and include offices in both Kankakee and Champaign.
“This is an extremely exciting development for both of our organizations,” said Johnson. “The expertise that CIBC possesses in the ever-changing world of employee benefits and group health insurance is exactly what businesses are demanding, and the SEBS connection to the Central and Southern Illinois markets is a great opportunity for us to deliver these solutions on a consistent basis. The synergies we gain via this new powerhouse organization will position CIBC as an industry-leader in both size and capabilities that we deliver to businesses.”
As a result of the merger, former SEBS Benefit Consultant Tony Johnston was named as President and Chief Operating Officer for both the Kankakee and Champaign offices, and Erin Beck remains as Chief Financial Officer for CIBC.
“This is a great opportunity for the SEBS team to further commit to the exciting business opportunity of employee benefits, “said Tony Johnston. “Our extensive client base will now have access to the cutting edge benefits knowledge, wellness resources, technology, and regulatory compliance that is requisite in the healthcare reform era.”
About CIBC of Illinois, Inc.
CIBC is a leader in the development and implementation of innovative employee benefits plans. Headquartered an hour south of Chicago in Kankakee and with a branch office in Champaign, CIBC serves private sector clients, non-profit organizations, governmental bodies and agencies and Taft-Hartley health and welfare funds across the Midwest. Over the past two decades, they have creatively addressed the employee benefits needs of hundreds of organizations — some with as few as two employees and others with as many as 25,000 employees around the globe.
The Affordable Care Act (ACA) provides that group plans or health insurance issuers offering group health insurance coverage may not apply any waiting period that exceeds 90 days. On June 23, 2014, the Departments of the Treasury, Labor and Health and Human Services (the Departments) released final regulations clarifying the maximum allowed length of any “reasonable and bona fide employment-based orientation period” as it relates to the waiting period limit. The final regulations apply to group health plans and group health insurance issuers for plan years beginning on or after Jan. 1, 2015. Until then, employers can comply with the proposed regulations issued earlier this year.
Waiting Period Limitation
A waiting period is the period of time that must pass before coverage can become effective for an employee or dependent who is otherwise eligible to enroll under the terms of a group health plan. The ACA prohibits excessive waiting periods, or those that exceed 90 days in length. Under the final waiting period regulations issued on Feb. 24, 2014, being “otherwise eligible to enroll” in a plan means having met the plan’s substantive eligibility conditions. These conditions include being in an eligible job classification, achieving job-related licensure requirements specified in the plan’s terms or satisfying a “reasonable and bona fide employment-based orientation period.”
The ACA’s limitation on waiting periods applies to both grandfathered and non-grandfathered plans. It is effective for plan years beginning on or after Jan. 1, 2014.
The final waiting period regulations issued on Feb. 24, 2014, provided that a reasonable and bona fide employment-based orientation period was a permissible eligibility condition. During an orientation period, an employer and employee could evaluate whether the employment situation was satisfactory for each party, and standard orientation and training processes would begin.
Proposed regulations issued at the same time as the final rule provided that one month would be the maximum allowed length of any such orientation period. The final regulations issued on June 23 confirm this one-month limit.
One-month Maximum Time Period
The Departments stated that orientation periods are commonplace and they do not intend to call into the question the reasonableness of short, bona fide orientation periods. However, to ensure that an orientation period is not used as a subterfuge for the passage of time, or designed to avoid compliance with the 90-day waiting period limitation, an orientation period is permitted only if it does not exceed one month. The one-month limit is intended to avoid abuse and facilitate compliance with the waiting period restrictions. For any period longer than one month that precedes a waiting period, the Departments refer back to the general rule, which provides that the 90-day period begins after an individual is otherwise eligible to enroll under the terms of a group health plan.
While a plan may impose substantive eligibility criteria, such as requiring the worker to fit within an eligible job classification or to achieve job-related licensure requirements, it may not impose conditions that are mere subterfuges for the passage of time.
Measuring the One-month Orientation Period
Under the final regulations, the one-month orientation period would be determined by adding one calendar month and subtracting one calendar day, measured from an employee’s start date in a position that is otherwise eligible for coverage.
For example, if an employee’s start date in an otherwise eligible position is May 3, the last permitted day of the orientation period is June 2. Also, if an employee’s start date in an otherwise eligible position is Oct. 1, the last permitted day of the orientation period is Oct. 31. If there is not a corresponding date in the next calendar month upon adding a calendar month, the last permitted day of the orientation period is the last day of the next calendar month.
For example, if the employee’s start date is Jan. 30, the last permitted day of the orientation period is February 28 (or February 29 in a leap year). Similarly, if the employee’s start date is Aug. 31, the last permitted day of the orientation period is Sept. 30.
If a group health plan conditions eligibility on an employee’s having completed a reasonable and bona fide employment-based orientation period, the eligibility condition is not considered to be designed to avoid compliance with the 90-day waiting period limitation if the orientation period does not exceed one month and the maximum 90-day waiting period begins on the first day after the orientation period.
The Departments provided the following example as part of the regulations:
Employee H begins working full time for Employer Z on Oct. 16. Z sponsors a group health plan, under which full-time employees are eligible for coverage after they have successfully completed a bona fide one-month orientation period. H completes the orientation period on Nov. 15.
In this example, the orientation period is not considered a subterfuge for the passage of time and is not considered to be designed to avoid compliance with the 90-day waiting period limitation. Accordingly, plan coverage for H must begin no later than Feb. 14, which is the 91st day after H completes the orientation period.
If the orientation period was longer than one month, it would be considered to be a subterfuge for the passage of time and designed to avoid compliance with the 90-day waiting period limitation. Accordingly, it would violate the waiting period regulations.
Employer Shared Responsibility Rules
Employers should note that compliance with the final orientation period regulations does not constitute compliance with the ACA’s employer shared responsibility provisions (Code Section 4980H). Under the employer shared responsibility rules, an applicable large employer (ALE) may be subject to penalties if it fails to offer affordable minimum-value coverage to certain newly hired full-time employees by the first day of the fourth full calendar month of employment.
An ALE that has a one-month orientation period may comply with the waiting period limits and avoid section 4980H penalties by offering coverage no later than the first day of the fourth full calendar month of employment. However, an applicable large employer plan may not be able to impose the full one-month orientation period and the full 90-day waiting period without potentially becoming subject to a Code Section 4980H penalty.
For example, if an employee is hired as a full-time employee on Jan. 6, a plan may offer coverage May 1 and comply with both provisions. However, if the employer is an ALE and starts coverage May 6, which is one month plus 90 days after date of hire, the employer may be subject to penalty under Code Section 4980H.
Source: Departments of the Treasury, Labor and Health and Human Services
How Does Your Business Measure up?
An attractive benefits program is vital for your recruiting and retention efforts, but it is also a significant expense. To ensure you are providing a package that is both competitive and economical, you need to know how your offerings compare to those of other employers in your industry. Benchmark data can provide valuable insight for evaluating your benefits package, helping you conform to or even set industry standards. Quality benchmarking allows you to search for best practices, innovative ideas and highly effective operating procedures that lead to superior performance.
Employer interest in benefits benchmark data has grown over the past decade, as the cost of providing health care benefits continues to skyrocket and companies look for new ways to manage expenses. Analyzing how other companies are structuring their plans and the strategies they are using to cut costs may make your own benefit plan decisions easier.
Benchmarking can show you:
- Where your weaknesses are
- Where your strengths are and how to maintain them
- Which areas you can improve
- Strategies for improvement
- New or different ways to do things
Everything Can Be Benchmarked
The first step to successful benchmarking is to identify different aspects of your benefits and choose which are most costly and which are most important to your business’s success. There is information available for almost any aspect of a benefits program, including:
- Total costs
- Cost-sharing measures
- Plan design
- Voluntary offerings
- Workers’ compensation
- Paid leave
Using claims analysis, employers can analyze their own health claims for the previous year to see where employees are spending more money or utilizing care above national norms. Once cost drivers are identified, employers can make changes to plan designs to influence employee wellness and spending habits.
Benchmarking can also be a powerful tool to measure your business against the competition. By benchmarking your plans against competitors’, employers can remain competitive in the market while implementing strategic changes—for instance, you may see that your deductible is much lower than other employers’ deductibles in your region or industry, so you may feel comfortable raising it.
Whether you are curious to know how your voluntary disability benefits stack up or are wondering if your paid leave program is comparable to competitors, there is likely benchmark data available.
Precisely Adjust for Impact of Health Care Reform
Interest in benefits benchmark data has grown since the introduction and implementation of health care reform.
The regulations and provisions of health care reform require significant changes to benefit plans and, in many cases, tough decisions for employers. How are you handling the expansion of dependent coverage for children or the impact of removing annual limits? How is your company planning to manage the increased costs associated with the auto-enrollment provision that will take effect? Will your company pay or play regarding the employer mandate?
Employers are responsible for implementing many new rules and absorbing the costs, which will likely mean cutting or shifting costs elsewhere. These decisions can make the difference between maintaining a competitive benefits package and seeing a decline in recruiting and retention of quality employees.
Knowing how other employers plan to address these benefits decisions can be incredibly advantageous for your company, allowing you to anticipate the shifting benefits landscape and evolve before your competition responds.
CIBC of Illinois, Inc. provides access to all this valuable benchmarking information and more. Contact us to find out more.
CIBC of Illinois, Inc.
187 S. Schuyler Avenue
Kankakee, IL 60901
P | 877-936-3580
F | 815-936-3583
We get a great deal of questions from our clients and their employees regarding how Flex Accounts and Health Savings Accounts function in the Reform Era. Some of the rules are quite difficult to apply to a particular clients’ benefit plan, even for an experienced firm like ours. It talkes careful analysis and keen insight into current and evolving regulations.
On March 28, 2014, the Internal Revenue Service (IRS) released an Office of Chief Counsel Memorandum to provide information on how health flexible spending account (FSA) carryovers affect eligibility for health savings accounts (HSAs). Although the IRS memorandum is not official guidance, it helps clarify the IRS’ position on health FSA carryovers and HSA eligibility.
In the memorandum, the IRS provides that an individual who carries over unused funds from a prior year to a current year under a general purpose health FSA will not be eligible for HSA contributions for the entire current plan year (even for months after the health FSA no longer has any amounts available to pay or reimburse medical expenses).
However, the memorandum offers some alternative approaches that allow health FSA carryovers while preserving HSA eligibility. These approaches include carrying over unused amounts to an HSA-compatible health FSA and allowing individuals participating in a general purpose FSA to decline or waive the carryover.
Health FSA Carryovers
In general, health FSAs are subject to a “use-or-lose” rule that requires any unused funds at the end of the plan year (plus any applicable grace period) to be forfeited.
On Oct. 31, 2013, the IRS released Notice 2013-71, which relaxed the use-or-lose rule. Under the relaxed rule, employers with health FSAs may allow participants to carry over up to $500 in unused funds into the next plan year. The carryover of up to $500 may be used to pay or reimburse medical expenses incurred during the entire plan year to which the health FSA is carried over.
This carryover provision is different than a health FSA’s run-out period, which is a period immediately after the end of the plan year when a participant may submit claims for expenses incurred during the plan year.
A health FSA may be amended to include the carryover feature only if the plan does not also incorporate the grace period rule. Also, a health FSA may specify a lower carryover amount than the $500 maximum, and has the option of not permitting carryovers at all. Any unused amount in excess of $500 (or a lower amount specified in the plan) remaining at the end of the run-out period for the plan year will be forfeited.
For ease of administration, a health FSA is permitted to treat reimbursements of all claims for expenses that are incurred in the current plan year as reimbursed first from unused amounts credited for the current plan year and, only after exhausting these current plan year amounts, as then reimbursed from unused amounts carried over from the prior plan year.
Only an eligible individual may establish an HSA and have HSA contributions made on his or her behalf. To be HSA-eligible, an individual must be covered under a high deductible health plan (HDHP) and generally may not be covered under a health plan that is not an HDHP.
An individual who is covered by a health FSA is eligible for HSA contributions only if the health FSA is HSA-compatible (that is, a limited purpose health FSA or a post-deductible health FSA). Thus, an individual who is covered by a health FSA that pays or reimburses all qualified medical expenses (that is, a general purpose health FSA) is not an eligible individual for purposes of HSA contributions. This disqualification extends to the entire plan year, even if the health FSA has paid or reimbursed all amounts prior to the end of the plan year.
FSA Carryovers and HSA Eligibility
The IRS memorandum addresses how the carryover of unused amounts under a health FSA from a prior plan year affects an individual’s HSA eligibility during the current plan year.
Carryovers to General Purpose Health FSAs
The IRS memorandum provides that an individual who has coverage under a general purpose health FSA solely as a result of a carryover of unused amounts from the prior year is not eligible for HSA contributions.
This rule applies regardless of the amount available from the health FSA for any month during the plan year. Thus, the individual’s ineligibility for HSA contributions continues for the entire health FSA plan year, even for months in the plan year after the health FSA no longer has any amounts available to pay or reimburse medical expenses.
A cafeteria plan may provide that if an individual participates in a general purpose health FSA that provides for a carryover of unused amounts, the individual may elect prior to the beginning of the following year to decline or waive the carryover for the following year. In that case, the individual who declines or waives the carryover under the terms of the cafeteria plan may contribute to an HSA during the following year (assuming he or she meets the other tax rules for HSA eligibility).
Carryovers to HSA-compatible Health FSAs
An individual who participates in a general purpose health FSA and elects for the following year to participate in an HSA-compatible health FSA may elect to have any unused amounts from the general purpose health FSA carried over to the HSA-compatible health FSA. This individual is eligible for HSA contributions during the following year (assuming he or she meets the other tax rules for HSA eligibility).
There is no requirement that the unused amounts in the general purpose health FSA only be carried over to a general purpose health FSA. However, the carryover amounts may not be carried over to a non-health FSA or another type of cafeteria plan benefit.
A cafeteria plan that offers both a general purpose health FSA and an HSA-compatible health FSA may automatically treat an individual who elects coverage in an HDHP for the following year as enrolled in the HSA-compatible health FSA and carry over any unused amounts from a general purpose health FSA to the HSA-compatible health FSA for the following year.
Administration During Run-out Period
If an individual elects to carry over unused amounts from a general purpose health FSA to an HSA-compatible health FSA, the uniform coverage rules may be applied during the run-out period of the general purpose health FSA as follows:
- The unused health FSA amounts may be used to reimburse any allowed medical expenses incurred prior to the end of the general purpose health FSA plan year.
- Any claims covered by the HSA-compatible health FSA must be reimbursed in a timely fashion up to the amount elected for the HSA-compatible health FSA plan year.
- Any claims in excess of the elected amount may be reimbursed after the run-out period when the amount of any carryover is determined.
Example: Employer offers a calendar-year general purpose health FSA and a calendar-year HSA-compatible health FSA. Both FSAs provide for a carryover of up to $500 of unused amounts and do not have a grace period. Employee has an unused amount of $600 in the general purpose health FSA on Dec. 31 of Year 1. Prior to Dec. 31 of Year 1, Employee elects $2,500 in the HSA-compatible health FSA for Year 2 and elects to have any carryover go to the HSA-compatible health FSA. Employee also elects coverage by an HDHP for Year 2.
In January of Year 2, Employee incurs and submits a claim for $2,700 in dental care covered by the HSA-compatible health FSA. The plan reimburses $2,500, the amount elected, in a timely fashion. In February of Year 2, Employee submits and is reimbursed from the general purpose health FSA for $300 in medical expenses incurred prior to Dec. 31 of Year 1. At the end of the run-out period, $300 in the general purpose health FSA is unused and carried over to the HSA-compatible health FSA. Employee is then reimbursed $200 for the excess of the January claim over the amount elected for the HSA-compatible health FSA. Employee has $100 remaining in the HSA-compatible health FSA to be used for expenses incurred in the year or carried over to the next year. Employee is allowed to contribute to an HSA as of Jan. 1 of Year 2.
Contact us and we will perform an analysis customized to your specific circumstances.
Part 2: Brother-Sister Groups and Constructive Ownership
By William Johnson- President and CEO
CIBC of Illinois, Inc.
In the first part of this series, we discussed how a parent-subsidiary controlled group was being defined by The Affordable Care Act and the IRS. Basically, this type of controlled group exists when a parent organization has a controlling interest in each of the chain organizations it owns. Also, it exists when a common parent organization holds controlling interest in at least one of the organizations in the chain or companies.
I have had business owners who hold multiple businesses and operate them independently come to me and ask if their collective number of employees from all businesses would put them into the pay or play processes of the Shared Responsibility part of the ACA. They wonder if putting the businesses in family member’s hands would help mitigate their exposure or if they will have to pay or play regardless of how they shift around their ownership. “Can I give my wife 20%, and my kids 5%, and then set up a trust to control x%.” Believe me, business owners are savvy and will look to control costs where necessary. Most would gladly provide benefits if it were within the scope of a sound business decision. For many, however, the profits margins are slim, especially considering the ‘affordability’ portion of the ACA.
So let’s l;ook at the Brother/Sister Controlled Group scenario, and how it is defined by the IRS.
Brother-Sister Controlled Group
A brother-sister controlled group exists when five or fewer individuals, estates or trusts own a controlling interest (80 percent or more) in each organization and have effective control. “Effective control” generally means more than 50 percent of the organization’s stock or profits, but only to the extent the ownership is identical with respect to each such organization.
Here’s an Example –
Family Corporation and Cousins Corporation are owned by four shareholders in the following percentages:
In this example, the four shareholders together own 80 percent or more of the stock of each corporation. However, under the second component, the shareholders do not own more than 50 percent of the stock of each corporation, taking into account only the identical ownership in each corporation as demonstrated below:
Identical Ownership in Both Corporations
So, as it is laid out in the graph above, there is no Brother-Sister controlled group scenario and the owner is NOT subject to the pay or play mandate (unless other ACA criterion apply).
Combined Controlled Group
A combined controlled group exists when:
- Each organization is a member of either a parent-subsidiary or brother-sister controlled group; and
- At least one organization is the common parent organization of a parent-subsidiary controlled group and is also a member of a brother-sister controlled group.
Joe Owner is an individual owning 80 percent of the profits in Parrott Co. and 90 percent of the stock in Sassy Corporation. Parrott Co. owns 85 percent of the stock of Stark Corporation.
It is important to note that Constructive ownership principles apply to the controlled group rules that treat an individual as owning an interest in an organization based on a family or business relationship.
For example, an individual will be considered to own an interest, owned directly or indirectly, by his or her children under age 21 or by his or her spouse, unless legally separated or divorced. An exception applies if there is no direct ownership, no participation in the organization (for example, as a director, officer or employee) and if no more than 50 percent of the organization’s gross income is from passive investments.
In addition, an interest owned by or for a partnership, corporation or trust is treated as owned by any individual having an interest of five percent or more in the organization, in proportion to the individual’s interest in the organization. For example, if an individual owns 60 percent of the stock of Hello Corporation, and Goodbye Corporation owns 50 shares of Hey Now Corporation, the individual is considered to own 30 shares of Hey Now Corporation (60 percent x 50).
Next week we will get into a common type of controlled group, the ASO (Affiliated Service Organization). Doctors, lawyers, accountants, and PEO’s should take special note of this area of the ACA.
This article is intended for informational purposes only and should not be construed as legal advice. Please consult with a legal professional for legal opinions.
To get more information on CIBC of Illinois, visit us at www.CIBCINC.Com or call toll free 877-936-3580.
By William Johnson,
President and CEO of CIBC of Illinois, Inc.
I have many friends in the business world who are what you might consider to be Type A personalities. Dedicated, focused, and driven, these people tend to be extremely analytical and very confident of their ability to make tough decisions in their business and personal lives. These abilities are some of the qualities that have made them successful in their chosen field.
It has always amazed me that when I start talking to them about self-funding group health insurance, I can see the anxiety and fear sweep across their faces. Many take the path of least resistance and say “I leave that up to my HR Director,” and others take the position that self-funding is only for the large companies, those with huge reserves of liquid capital. Then there are those who curl up into a ball and go to their “Happy Place.”
I get that. There is something inherently scary about the notion of paying for claims out of pocket. But for a lot of small businesses, it is just what the doctor ordered. The best way I can explain it is with an example.
Case Study: Acme Inc
Business has been good for Acme Inc. Their largest customer, Coyote Inc., has helped this small business of 25 employees grow to 100 employees by continually ordering Acme’s various avian control devices. The group health plan that used to fit 25 employees has now grown significantly in census population and also in premium dollars. Acme has a fully-insured health plan, which is the typical situation for most small businesses. You pay a premium, and in turn you get coverage for eligible expenses from a carrier. This type of plan offers broad access to doctors and hospitals, typically, and is a good ‘one size fits all’ type of plan funding mechanism. It’s easy to maintain, but all of this comes at a price.
As the census grows, the claims typically increase as do the premiums. When there is a ‘good year’ and there are lower claims, it is the carrier who benefits due to still charging the same premium. And when was the last time you got a rate reduction? Also, you will never really know when you have that elusive “good year” because in a fully-insured plan, you do not have access to claims data. Acme just got another premium increase, and now it has become unaffordable for all to continue on this path.
Sandy Acme, the fourth-generation President and CEO of Acme Inc., sits down with her HR Director and Comptroller to find a solution to their health insurance costs. The new rate increase put their premiums at roughly $1.4 million per year for 91 employees, and they have hired nine more full time employees (FTE’s). Sandy wants to know what their broker thinks the possible solutions are, and her HR Director says that the broker offered to look at the market to see if there were better rates. He also says that they tried that three times before with no positive result.
“It is what it is,” the HR Director says.
Unsatisfied, Sandy asks the Comptroller for her opinion.
“Well, at my old company we had a benefit consultant who helped us address this very
type of scenario.” she says.
“Get them on the phone,” Sandy interjects. “There has to be a better way.”
So the benefit consultant comes in and looks at the entire picture. He runs the numbers, looks at how Healthcare Reform applies to the situation, and comes back with a recommendation for Acme to become a self-insured group.
The Numbers Don’t Lie
Typically, deductibles on a fully-insured plan range from $500 to $5000. In the self-funded arena, however, there is a term called specific deductible. For Acme, the specific deductible in the re-insurance contract could possibly be $55,000.00, which means that for each employee on the plan, the first $55,000 in costs (minus any deductible, coinsurance, etc…) would be the shouldered by the employer. After the specific deductible is met, the re-insurance takes over.
Within the re-insurance contract there is a term called an aggregate attachment point, which means there are only so many $55,000 specific deductibles that need to be satisfied up to a maximum amount. In this case, the maximum plan exposure (what the employer is on the ‘hook’ for) is roughly $1.4 million, which is just about what the fully insured premiums would have been. If the expected plan exposure (fixed cost and utilization) is around $705,000, Acme would be adding $700,000 to their bottom line. All of the potential savings is lost on a fully-insured plan, and more importantly, you do not get claims data. There is no way to know what types of claims are costing the group dollars, and no way to address these issues with plan design and wellness initiatives.
Remember, self-funding does not automatically equal savings. The data and utilization of the plan is where true savings can be found, and this information will help structure the plan according to known patterns. Accurate data will give a basis of knowledge for working with employees in reaching wellness goals, treatment options, and also it provide resources to find these options. Quantifying Costs is where true savings is found.
It really all comes down to having the data so you can make the best decision for your business. CIBC of Illinois provides these solutions for employers. Solutions…That Work.
This article is intended for informational purposes only and should not be construed as legal advice. Please consult with a legal professional for legal opinions.
To get more information on CIBC of Illinois, visit us at www.CIBCINC.Com or call toll free 877-936-3580.