Employee Health Benefits Coverage Types Explained in 5 Minutes
By Paige Latimer
September 24, 2021
Whether you have been using benefits for years or are just getting started, the world of employee benefits can be daunting and at times overwhelming. We created a breakdown of the most common benefits so you can have a better understanding of what they are, and how they work.
Life Insurance is just that -- insurance money paid out to an employee’s beneficiary in the event of their death. Life Insurance can be a flat or graded amount. Most organizations that offer Life Insurance in their benefits plan will provide the equivalent of their employee’s annual salary in the event of their death. This is known as “Basic Life Insurance”, or generally just “Life Insurance” in the employee booklet.
Some companies offer “Optional Life Insurance” which allows employees to purchase additional insurance that pays out 3 or 4 times their annual earnings. This could require medical exams and medical history records before being able to enroll, and the employee generally would have to pay additional monthly premiums (dollars) out of their paycheck.
Beneficiary: A beneficiary is an individual(s) named on the employee’s benefits plan that will receive a payout and other benefits in the event of the employee’s death. This individual is normally a spouse or family member.
Flat Amount: This is a dollar amount that everyone enrolled in a certain class will receive (ex. $25,000)
Class: Classes are “benefit levels” designated to certain employees within an organization that offers different coverage amounts. This is generally used in organizations to stay competitive in the job market. An example would be assigning senior management to “Class A”, which would include more comprehensive benefits, and assigning entry-level employees to “Class B” which would include more basic coverage amounts.
Graded Amount: This is an amount paid out that’s based on the employee’s salary. For example, it can be 1x, 2x, or 3x the employee’s annual earnings.
Accidental Death & Dismemberment
This coverage is for accidents as unpleasant as you probably think it is. This benefit covers the cost of loss of limb, life, or any other severe injuries (loss of sight, speech, hearing, paralysis, coma, etc). Although we all hope we won’t ever need this coverage, it’s great for employees to have for unlikely occasions.
This benefit is normally sold as a Life Insurance policy rider (a.k.a package deal) and equals the same amount of the Life Insurance maximum (total coverage amount). When Accidental Death & Dismemberment (AD&D) is sold as a rider with Life Insurance, instead of separately, it will pay twice the amount of the original face value in the event of accidental death. Basically, if the employee’s death is an accident, their beneficiary will receive a payout for their Life Insurance maximum, and Accidental Death & Dismemberment maximum. Similar to Life Insurance, the amount that the beneficiary receives for both is generally either a flat amount or a graded amount.
Here is an example. If an employee’s Life Insurance covers $50,000 and Accidental Death & Dismemberment covers a matching amount of $50,000 then in the event of the employee’s accidental death (car accident, coma, etc) their beneficiary will receive $100,000. If the employee dies naturally (disease, heart attack, etc) then their beneficiary will only receive $50,000 from the employee’s Life Insurance policy, but not their AD&D.
AD&D also offers the employee financial support if they were to lose a limb (leg, arm, finger, hand, etc) or other body functions (eyesight, hearing, etc). The financial amount that they will receive for the loss of body function depends on what is lost, for example, an employee will receive more if they were to lose a leg vs a finger.
Maximum: A maximum is a total amount that an employee can spend on certain health benefits. For example, if an insurance plan offers a maximum of $1,000 for Massage Therapy then the employee can spend up to $1,000 on Massage Therapy annually.
Dental coverage is one of the most commonly used benefits, as most people get their bi-annual cleaning and check-up. Dental coverage is normally split into three categories; Basic, Major, and Orthodontics. Dental plans can assign individual maximums (coverage amounts) to Basic, Major, and Orthodontics, or commonly they combine Basic and Major so that the maximum is split between both.
An example would be if Basic and Major were combined for a reimbursement amount of 80% and a maximum of $1,000, the employee could use $1,000 a year on “Basic” and “Major” services. Meaning, they could use it all on “Basic” services like cleanings, or “Major” services like crowns if they’d like. If Basic and Major were not combined, the employee would get individual reimbursement amounts and individual maximums for both categories (for example, 80% reimbursement and a $500 maximum for Basic, and 50% reimbursement and a $500 maximum for Major).
Note: Most orthodontic work has a termination age of 18, and is mainly used for the employee’s children.
“Dependent Life” insurance is similar to “Basic Life Insurance”, except it provides coverage for the employee’s dependents in the event of their death. This could include a spouse, common-law partner, or child. Generally, the amount paid out is less than it would be for the employee and is meant to cover after-death expenses of their dependent such as funeral costs, etc.
Drugs are another well-known, and well-used health benefit. This benefit generally covers a certain percentage of the costs for prescriptions and dispensing fees. Most companies have a pre-approved list of drugs that can be reimbursed, and often there is a “mandatory generic substitute” requirement. Mandatory generic substitutes are when an organization requires employees to purchase generic versions of brand-name drugs.
Mandatory Generic: This is the generic version of a drug instead of the “brand” name version. It provides the same medication for a fraction of the cost.
Healthcare benefits cover a lot of supplemental health costs that are not included in the public health care plan covered in Canada. Healthcare is divided into subsections, normally including:
Major Health (Private Duty Nurse, Ambulance Services, Cardiac Rehabilitation, etc)
Travel/Out-of-Country (30, 60, 90 Day Coverage, Medical Referral, etc)
Normally, each one of the above Healthcare categories (Major Health, Paramedical, Vision, and Travel), are included and priced individually. Employees may have a health plan that only includes some of these categories (like Paramedicals and Vision for example).
Here is an example of how they are individually priced. An employee’s health plan may include “Paramedicals” with a reimbursement amount of 80% and a maximum of $1,000 for all services combined (Massage, Physiotherapy, etc), and it may also include “Vision” for a reimbursement amount of 100% and a maximum of $100 for eyeglasses.
Note: This is the most extensive benefit, so there are so many ways it can be arranged and priced for each “category”. If you have more questions, we’re here to help! Talk to one of our trained experts today.
Short Term Disability (STD)
Short Term Disability (STD) is offered to employees who are unable to work due to accident, injury, or illness. STD generally protects employees for 17 weeks (on average), and covers 60-70% of their salary. If an employee requires more time away from work and has maxed out their coverage for STD, then they may qualify for Long Term Disability (depending on their illness/injury).
Long Term Disability (LTD)
Long Term Disability (LTD) is offered to employees that face major health concerns and are unable to work due to accident, injury, or illness. LTD generally covers up to 60-70% of the employee’s original salary while they are on leave, and kicks in about 3-6 months after being on Short Term Disability, and can last for up to two years.
Note: LTD changes depending on plan type, and employee circumstances. For example, some plans will pay for disability if the employee can’t work in their current profession (sales, construction, healthcare, etc), where other plans will only pay if the employee can’t work in any profession (unable to work at all).
Critical Illness provides employees a lump sum payment if they get extremely sick (examples below). This coverage helps protect employees who have to pay additional or unexpected expenses caused by their illness. Employees can choose how they want to spend the lump sum payment.
Some example of critical illnesses are:
Employees are still entitled to their payment even if they make a full recovery. In order to make a claim, The employee will need proof of illness from a specialist and to survive for (on average) 30 days after diagnosis.
Note: Coverage may vary depending on how extreme the illness is and if an employee has a pre-existing condition. For example, if an employee has an illness that can be cured quickly with limited downtime, they may not qualify.
Spending Accounts have gotten extremely popular in recent years and can be divided into two types; Health Spending Accounts and Lifestyle Spending Accounts.
Health Spending Account (HSA): Employees can purchase anything health-related at full coverage. They’re given a dollar amount to use (generally between $1-2K annually), and can use it to purchase health services or top off an existing health claim that wasn’t 100% covered. Examples of what employees can use their HSA for include; top-offs (drugs, services), Massage, Dental, etc. HSAs are a non-taxable benefit, meaning employees will not be taxed for the amount spent, similar to their regular health benefits.
Note: If employees have an HSA along with a comprehensive health plan (Drugs, Dental, Healthcare) they need to submit their claim through their regular health plan first. They can only submit drugs/services through their HSA if they have reached their plan’s maximums, are using it to top-off a claim, or do not have any other coverage to submit their claim to first.
More and more organizations, especially small businesses, are turning to HSAs to keep costs low while offering their employees health coverage. Organizations only have to pay for what their employees use, so if they offer $1,000 annually and an employee only uses $300 of that amount, the organization only has to pay $300.
Lifestyle Spending Account (LSA): These accounts generally provide the employee with more freedom than an HSA. Employers can put parameters on what employees can purchase (if they chose to), or leave the LSA completely flexible. Depending on what their employer includes in this plan, employees can purchase transit passes, gym memberships, workout clothing, etc.
Similar to HSAs, employers only pay for what their employees use. The only downside to LSAs is that they are a taxable benefit, and are considered taxable income for employees.
Note: The key difference between a Health Spending Account and a Lifestyle Spending Account is that the HSA must be spent on health-related items, where the LSA can be spent on anything the employee wishes (within the employer’s parameters).
Fun Fact: Employers can also allow spending accounts to roll over to the next year (up to a certain amount of their choosing). This provides their employees with more freedom.
If this sounds like a great option for your business, then reach out to one of our experts and learn if a Spending Account is the right option for you.
Hopefully, you now know the basics of Employee Health Benefits coverage, whether you’re an employee or an employer. Not only do we offer all these benefits here at Simply Benefits in a customizable plan, but we provide them 100% digitally so employees and employers never need to fill out paperwork again.
If you have any questions, or would like to learn more about using Simply Benefits as your Employee Benefits provider, get in touch with us at firstname.lastname@example.org!
Disclaimer: Please note that the information provided, while authoritative, is not guaranteed for accuracy and legality. If you are a Simply Benefits plan member, you can look up more information on your specific plan coverage under the “Plan Coverage” section on your account, or speak to your administrator for more information.
Whether you've been in the industry for years or are just getting started, the world of Employee Benefits can seem overwhelming at times.