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Human Resources: The Benefits of Offering Flexible Benefits Plans

While this method of providing benefits is easier for the employer to administer, it is unproductive. Employees may not want certain benefits their employer offers, and they may want other, more desired benefits that aren’t available through their employer.

Recent developments in laws and practices have opened up an entirely new approach to offering benefits to employees called “flexible benefits.”

Also known as cafeteria benefits plans, flexible spending accounts and Section 125 plans, the essential idea behind flexible benefits plans is to give employees some degree of control over the benefits they receive.

Flexible Benefits Plans Help Attract and Retain Committed Employees

Flexible benefits plans do require some additional time and administrative effort from the employer. However, other than start-up costs, the overall annual costs of providing benefits need not cost more than what you are currently paying. In fact, in some cases, you may be able to cut expenses.

Also, because flexible benefit plans can be tailored to an individual employee’s needs, here are additional benefits of instituting these plans:

• You attract and retain more satisfied and committed employees because they can obtain the kinds of benefits they want and need.

• You get more productivity out of the benefits dollars you spend. This occurs because you acquire more employee loyalty from the same basic level of expenditure.

Legal or Regulatory Basis

Laws and regulations dealing with how employee compensation can be handled also govern flexible benefits programs. These laws and regulations dictate the way the Internal Revenue Code is applied. For example, there are definite stipulations about how pre-tax dollars must be processed to avoid penalties.

Likewise, there are other benefits laws and regulations, particularly the Employee Retirement Income Security Act (ERISA), which must be observed and honored.

Get Professional Assistance

The preceding section on legal issues is offered as both a caution and introduction to flexible benefit plans.

Given the complexity and requirements of flexible benefits plans, it is almost impossible for someone not trained in this area to install a program easily and effectively. If you are considering a flexible benefits plan, you should seek professional assistance. Here are several options that may help:

• Contact your current benefits insurer to see what support they can offer you or refer you to.

• Check with any major suppliers or customers to see if they can refer you to assistance.

• Check in the Yellow Pages or on the Internet under benefits, insurance, personnel, human resources or management consultants.

Simple plans can often be installed using “boilerplate” documents and procedures that keep costs down. If you do use such documents, seek competent advice to ensure the boilerplate language and procedures are applicable in your state.

In spite of the apparent difficulties and requirements for setting up a flexible benefits plan, the eventual value of such a plan to both you and your employees can easily justify the time and expense.

Types of Flexible Benefits Plans

There are three basic kinds of flexible benefits plan options:

• Premium conversion plans — If you provide health insurance and require some level of employee contribution, it is possible to create a situation that allows the employee to pay for his or her contribution with “pre-tax” dollars.

What happens under this plan is that the payment for the contribution is withheld and paid before payroll taxes are computed. In turn, this reduces the taxable compensation level of the employee. Consider an employee making $30,000 per year and paying $2,000 per year for health insurance: Under a premium conversion plan, the employee’s W-2 compensation at year end is reported at $28,000 (not $30,000).

• Flexible spending accounts (FSAs) — FSAs operate in essentially the same way a premium conversion plan does. The employee elects to have some portion of his or her compensation withheld on a pre-tax basis, in this case to pay for either medical and/or child care expenses. All the tax effects of salary reduction described above still apply. With an FSA, the money withheld is credited to an “account” in the employee’s name.

FSAs are different, however, in several ways. First, there are limits and restrictions on how much can be set aside and for how those dollars can be used. For example, there has been a $5,000 limit for dependent care expenses. Second, the employee must claim a reimbursement for expenses incurred — and payment is not automatic.

This last point leads to a third matter. FSA dollars in the employee’s account exist on a use or lose basis. At year’s end, dollars not otherwise claimed are lost and cannot be paid to the employee.

• Cafeteria plans — The most flexible — and involved — type of flexible benefit plan is the cafeteria plan. Under this option, each employee is given the choice of how to spend his or her benefit dollars by shopping for the exact kind of benefits desired.

Say you spend an average of $5,000 per employee for all of the benefits you offer, which for this example includes health insurance, dental coverage, life insurance, vacation leave, disability insurance and life insurance. Under a cafeteria plan, each employee would decide how to spend that $5,000. An employee might decide to buy a life insurance benefit with a premium value of two times salary while buying medical insurance coverage with a low deductible. The remaining amount could be spent in similar ways for the other benefits.

In order to have a cafeteria plan, you must be able to offer levels of benefits with different prices for each. For life insurance, for example, you could offer plans with premium values set at one time, two times and three times the employee’s annual compensation. There would be different costs for each benefit level.

Planning Issues

There are several important issues to consider when planning and implementing a flexible benefits program:

• Is management committed to providing a flexible benefits plan? A flexible benefits plan requires time, effort and expense. Further, in the start-up process, employees may be confused and get frustrated. Management must be willing to ride out these waves and be ready to spend the necessary resources to make the program work.
  
  

• What level of a flexible benefit should be offered? Relatively speaking, premium options plans and FSAs are easier to install than the cafeteria plans. The first two options can be offered at the same time or singularly. To decide the level of benefit, ask yourself , “What benefits do I wish to have covered?”
  
  

• Do you have the administrative capability to manage the plan? You will need to be able to provide an ongoing administration of the flexible benefits plan. This may be done in-house or may be contracted out. Either way, planning for program administration is essential.
  
  

• Can you provide appropriate employee communications and training? For both legal and implementation reasons, employees must be educated about the flexible benefits program and be provided on-going information about it. In some cases, you may obtain training through consulting services. Regardless of the sources, communications are essential.

The material in this article is excerpted from "Managing Your Employees: Human Resources Guide for Builders", available at BuilderBooks.com. The publication contains a model personnel policies and employee handbook you can customize for your company, a section on legal and regulatory authorities that affect personnel policies and suggested systems and processes for managing your workforce. It also contains a CD of forms and checklists for managing human resources policies and programs. View or purchase "Managing Your Employees" online, or call 800-223-2665.

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