There’s a lot that goes into designing and creating an Employee Benefits plan. From coverage levels to spending accounts, there are many different options to pick from. In the insurance world, we call these options Plan Designs and Funding Platforms and deciding which ones to use are among the first steps to designing an employee benefits plan. If you don’t know what those things are, don’t worry. In this blog, we’ll describe the different kinds of plan designs and funding platforms that Simply Benefits offers so you can decide which fits your company the best.
The first step of a group benefits plan is the plan design itself. A plan design is the outline of everything that will be included in a benefits package. From health insurance to long term disability, they outline all of the nitty-gritty details. Designing a plan is not a simple task, but you typically do it alongside an insurance broker or insurance advisor who will manage creating and pricing the details. Simply Benefits offers three common types of plan designs: traditional, modular flex, and cafeteria flex.
This type of plan design gets its name from being the simplest and most commonly used plan design, with 72% of employees having a traditional plan in 2020. In this case, the employer picks and chooses the benefits that they want to include in the benefits plan. This benefits plan is then applied to all employees without any variation between employees, or any choice.
Here’s an example. Let’s say an employer wants a plan that provides 80% coverage for dental, vision, paramedical, and prescription drugs. Each employee will receive the same coverage without any variation depending on their class. This means that employers can have a “Traditional” plan design with their desired classes, and each class offers different coverage amounts but employees do not have a say in which class they are in, or what benefits are included in their plan.
Note: Classes are created within a plan design to offer different coverage levels for certain employees (ex. C-Suite, Management, Employees, etc).
Pros & Cons
This plan design is less popular these days because it’s lacking in flexibility. Employees aren’t as excited about mandatory pre-designed plans, and 67% of them reported that they would prefer a flex plan. However, this style of benefits is easy to administer and keep track of, since all plans are the same, and monthly premiums remain consistent (employer pays the same amount for health benefits each month). This style of plan is great for smaller businesses that don’t have as much administrative power or time, but still want to provide benefits to their employees.
2. Modular Flex
This plan design has slightly more flexibility. With modular flex, employees can select between plans with different tiers of benefits (usually 3). Each plan will have different levels or amounts of coverage that are typically aimed at a specific demographic, like singles, families, or older individuals. Traditional health benefits like drugs, paramedical services, dental, and vision are offered and the employee can select the level of coverage based on the plan levels.
Here’s an example. Let’s say an employer at a company creates three different plans with different levels of coverage for health benefits. One plan offers basic level of coverage and it is labelled “Bronze”, one offers more coverage compared to the bronze level and it is labelled “Silver”, and the most comprehensive in coverage is labelled “Gold”. An employee working at this company who is single and has no dependents will likely choose the basic option (Bronze) because they don’t need the extra coverage, and then they would receive more towards their Health Spending Account (HSA). A newly married employee however may want more coverage for themselves and their spouse, so they would select “Silver” and have a small remaining HSA amount. An older employee with a family may choose the Gold plan with the highest level of coverage, and then have no HSA.
Pros & Cons
As much as modular flex plans are flexible, they fall short in some areas. After employees choose their plan, they usually can’t change it until the next year. Modular flex is also slightly more complicated to administer than traditional plans. However, if you can overlook that, modular flex can be a great option because of its flexibility and attractiveness to employees. This is a good option for employers that have administrative abilities that also want to offer flexibility.
3. Cafeteria Flex
This type of plan design offers the most flexibility. With cafeteria plans, employees receive a dollar amount and get to select which benefits they’d like to include in their own personalized plan. Employees can select the benefits and the level of coverage with their flex credits. Once the credits are all used up, employees can either purchase additional coverage or pay out of pocket.
Here’s an example. Let’s say an employee is given a $2000 dollar amount in flex credits. This employee decides to allocate their flex credits towards the basic dental, drug, and vision coverage which uses up all of their flex credits. If this employee also wants paramedical coverage, they have to purchase that coverage themselves.
Pros & Cons
This type of plan is the most difficult to administer because of the customized employee plans. However, cafeteria flex provides employees with the most flexibility and can work with organizations of all sizes. On top of that, if employees get to choose their own benefits, they’re more likely to get use out of them. Cafeteria flex plans are a good option for employers who want to give their employees flexibility. These plans also work well for small businesses that want to provide benefits to their employees in a cost-effective way.
Funding platforms are the method that the employee benefits plans are administered. This is essentially how the benefits will be paid for and how the insurance will be provided. With this, there are a couple of options for how much risk a company will take on, and how much a company will pay for certain benefits. Simply Benefits offers three types of funding platforms: fully insured, refund accounting, and administrative services only.
1. Fully Insured
Fully insured is probably the easiest platform to understand and administer. With this funding platform, the insurer takes on all the risk and the employer pays a set monthly premium per employee no matter how much is used. The monthly premium comes from how much the benefits plan typically costs to administer. The average usage of the benefits that employers want to target is about 80% of the total premium, meaning for every $1 they pay in premium, they want their employees to use $0.80 on health services.
Here’s an example. A company pays a monthly premium of $5,000 every month no matter how much or how little their employees use their benefits. If one of this company’s employees gets sick and has large medical bills, they are protected and usually don’t have to pay more than their premium. This means that even if their employees spend $300, or $10,000 each month on health benefits, employers will still always pay $5,000 a month in premium. Based on annual usage, the employer’s monthly premiums will increase or decrease the following year.
Premium: The monthly amount (cost) that insurers charge for a chosen group benefits plan.
Pros & Cons
Fully insured is the most expensive platform type because you’re paying the same amount per month no matter the amount of benefits that are used. However, the biggest advantage of these platforms is that it’s the least risky because you don’t pay an overuse fee. Fully insured is a good option for small to medium-sized companies, because of the low-risk factor, or new companies that aren’t yet sure how much benefits their employees will be using.
2. Refund Accounting
With refund accounting, the employer is responsible for estimating the number of claims that will be used throughout the year. This can be done by looking at demographics and trends, or just having a good understanding of the amount of benefits that employees will use. Normally, this is a good option for businesses that have been using employee benefits for a few years. The employer then pays a set monthly price based on their estimate. At the end of each year, the final bill is calculated based on if that organization went over or under their monthly premium, and employers have to pay the variance.
Here is an example. A company sets its monthly premium at $5,000. By the end of that calendar year, the company ended up paying $500 more dollars every month. Because the company went over their monthly premium, they are going to have to pay a deficit through a premium increase. If the company was under target, they would receive a reimbursement amount.
Pros & Cons
If you underestimate how much benefits your employees use, you have to pay. This makes refund accounting slightly riskier than fully insured. However, if your estimate is good then this ends up being very cost-effective because you only pay for what you actually use. This is a good option for employers that have been in the benefits space for a long time and understand and know their employees benefit spending habits very well.
3. Administrative Services Only
Also known as ASO, this plan centers around the fact that the employer is responsible for funding claim costs. A third party (like Simply Benefits) is chosen to administer the plan and charges fees for its services. This is typically in the form of monthly payments for claims adjudication. The company pays an administration fee for each claim that is submitted.
Here is an example. At a company, they pay for each claim submitted by the employee in full. Meaning that for every claim submitted, the employer is responsible for paying for the entire bill. They are also charged a small administrative fee for paying the claim, storing, etc. If their employees submit a total of $500 in claims in March, then the employer would only pay $500 plus the administrative fees. If their employees submit a total of $2,000 in claims in April, then the employer will pay the $2,000 plus the administrative fees.
Pros and Cons
Since ASO plans are based on actual paid claims rather than anticipated claims, employers are responsible for paying if the actual claims exceed the budget. This means that ASOs are the riskiest platform as the insurer itself doesn’t take on any risk. However, ASOs can offer employers greater control over their benefits plan design and how much is purchased through the plan. This platform would work best for companies that are comfortable with taking on the risk and understand their employee’s benefits and spending habits.
Behind every good employee benefits plan, there is a plan design and funding platform. There are pros and cons to each type of these, but a common trend is that flex plans are becoming more popular among employees. Below is a summary chart that you can reference when you are creating your employee benefits plan.
Hopefully this guide helped you understand which one would fit your company best. If you have more any questions, reach out to one of us at email@example.com.
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.