A flexible benefit plan refers to a program that offers employees various advantages, such as life or health insurance, retirement plans, child care, cash, vacations, etc. Though there can be a common core of benefits, the employee can choose how the remaining benefit dollars are used. It is also called the IRS 125 Plan or the Cafeteria Plan. Today we are going to look at different types of flexible benefit plans, as well as examples and pros and cons.
Chart with a flex plan bundling option. Image courtesy of SlideShare
Types of Flexible Benefit Plans
One thing you should know from the start is that all the flexible benefit plans rely on the pretax contributions made by employees. Besides this, they are further divided into different types. Often, separate plans are used together.
1. Premium Conversion Plan
Also called a premium-only plan, this is one of the simplest types. Here, employees contribute their portion of premiums for their health insurance, as well as other types of benefits.
2. Medical Opt-Out Plan
Known under the name of a medical-only plan, it is necessary when an employer gives a cash incentive that is taxable to the employees who opt out of their health benefits. Instead, they agree to get their health coverage in a different place, for example, the spouse’s insurance.
3. Health Savings Account (HSA) Contributions
Many employers use flexible benefits plans to make contributions to a health savings account. This is a tax-favored way of helping people with high-deductible health plans to pay the medical expenses. HSAs need to be connected to such a high-deductible plan. Moreover, they can take contributions from employers, employees, or both.
4. Cafeteria Plan
Also called a full flexible benefits plan or a credit-based plan, the cafeteria plan is the best type. Here, the employer offers their employees with a certain amount of dollars or ‘credits’. Each of the employees goes to the ‘cafeteria line’ and chooses from an array of benefits: health plans, different types of insurance, dental plans, etc. When they reach the end of the line, the employee pays with the dollars/credits. If the credits equal the value of the benefits, everything is fine. If the value outnumbers the credits, the employee can pay the difference with pretax funds.
There are also some other examples of such plans, whether they are combined or applied separately.
Typical Flexible Benefit Plan Configuration
Indeed, these types of plans differ from organization to organization. However, there are various similarities between them. A typical configuration looks like this:
- Childcare vouchers;
- Dental plan;
- Private medical cover;
- Critical illness cover;
- Spouse/partner critical illness;
- Long-term disability cover;
- Life assurance;
- Stakeholder pension.
All these are provided based on a flex allowance of 10% of salary. Various companies choose to include health screening, cars, etc. Most employees appreciate it much more if you choose to offer non-standard benefits.
Flexible Benefit Plans Pros and Cons
Naturally, there are various flexible benefit plans advantages and disadvantages. Let’s have a look at them and see if it’s a good idea to adopt these plans for your company or not.
Flexible Benefit Plans Advantages
1. Offering Employees More Flexibility and Choice
One of the main reasons why companies want to switch from a traditional to a flexible benefit plan is to offer their employees more freedom and choice. Just as we mentioned above, people get to choose what they can receive for their credits.
2. Employers Don’t Want to Use More Money and Resources for Their Program
More employers start to rethink their stance on the money and resources that they use for the current program. Sometimes, it’s better to opt for a flexible plan that can offer your employees what they need. Employees know better what their needs are and how to spend their credits.
3. No Additional Cost for Similar Coverage
Various employers declared that they chose to use a flexible benefit plan because they want the employees to have the same coverage. In this way, they will get the same advantages at a similar price, so they don’t have to pay anything else.
4. Recruitment and Retention
These are another two of the reasons for which people choose this way. It’s a method for the employers to attract new talent from their competitors. At the same time, they manage to retain the existing staff that proved they have the required skills and value. It can even be used as a bargaining method, since a financial investment account or medical insurance can matter a lot to the employees.
5. Healthier Staff
Everybody wants their employees to have top productivity. For this, they need to be healthy, and a medical insurance included in the flexible benefit plan can help them. Routine check-ups are more accessible, thus preventing serious illnesses and treating them faster.
Chart with the employers’ willingness to provide benefits by generation. Image courtesy of Paychex.
Flexible Benefit Plan Disadvantages
1. Significant Costs
By far, this is the most discouraging disadvantage of the flexible benefit plans. The Bureau of Labor Statistics showed that private companies pay $9.21/hour/employee with benefits, which equals to 30% of the cost of employee compensation.
Every time a company decides to change vision, medical, or dental plans, this decision comes together with a significant amount of paperwork. There may even be necessary some changes in the administrator, cost, or type of coverage. All these require even more documents and thus time.
Implementing a flex plan can take from 12 to 18 months, which is quite a long time. If you adopt a simpler flex plan in a smaller organization, it might take less, indeed. However, for a complex organization, it may take even more.
Big changes require an extra effort when it comes to communicating with the employees. This may mean extra costs invested in trainings, talks, explanations, etc.
To sum up, a flexible benefit plan offers more freedom both to the employer and the employee. Even though this may require a bigger investment of money and time, in the beginning, the results can be worth it. However, you need to make a simulation and see whether this would be a good option for your company or not.
Image source: depositphotos.com
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