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What do organizations need to focus on in benefits in 1997?
As usual, there is a fair amount of legal compliance work to be done in 1997. A flurry of legislation passed in late 1996 will take effect in 1997 and at various dates through the year 2000.
Therefore, benefit managers will need to check their follow-up files to ensure they don't miss any effective dates.
Outside of legal compliance, we need to anticipate the future as much as possible, think strategically and function as members of our management teams.
The 1996 legislation includes:
Small Business Job Protection Act.
Health Insurance Portability and Accountability Act.
Newborns' and Mothers' Health Protection Act.
Mental Health Parity Act.
Because there is not adequate space to discuss all the legislation, I will discuss only the main points.
The major provisions of the Small Business Job Protection Act include:
New definition of highly compensated employee for benefit plan non-discrimination testing purposes. Effective in 1997, highly compensated employees are defined as essentially those earning more than $80,000 per year or owning at least 5% of a company.
Section 415 definition of compensation. Effective in 1998, definition includes elective deferrals to 401(k), 403(b) and 457 plans and salary reduction under Section 125 plans.
Definition of compensation for disabled employees. Effective in 1997.
Minimum required pension plan distributions. Effective in 1997, this will no longer be required for active employees who continue to work after age 701/2.
Educational assistance programs. The tax-favored status of employer-provided educational assistance benefits was extended through May 31, 1997. However, employer reimbursement for graduate-level courses only will receive favorable tax status through June 30, 1996.
Adoption assistance programs. Effective in 1997, this provision allows employers to reimburse their employees for up to $5,000 in adoption-related expenses without the reimbursement being added to employees' taxable income.
I addressed the provisions of the Health Insurance Portability and Accountability Act in a prior column (BI, Nov. 25, 1996). In addition to assisting in health care portability, this act provides tax advantages for accelerated death benefits and employer-provided long-term care benefits.
The Newborns' and Mothers' Health Protection Act is effective in 1998 and requires health plans to offer inpatient coverage for mothers and their newborns for at least 48 hours after a normal vaginal delivery and 96 hours for Caesarean section delivery. The Mental Health Parity Act also is effective in 1998 and requires employers to offer the same lifetime or annual limits for mental illnesses as for physical ailments. Separate copayments and deductibles are allowed, however.
Also, don't forget about Department of Labor Advisory Opinion 96-14A, which requires group health plans to give participants and beneficiaries, upon request, copies of the schedule of "reasonable and customary" fees. This will create an additional administrative burden for plan administrators. Benefit managers should ensure that their plan administrators are prepared to respond to employees' requests for this information. The Labor Department's reasoning regarding reasonable and customary schedules may apply to other items, such as utilization review guidelines and treatment protocols. Stay tuned on this.
These legislative changes cover a wide range of issues. Take these changes into consideration when planning future changes in your benefit program.
Health care benefits still present many challenges. Although costs have moderated over the past few years, I don't think the cost moderation will last much longer. Once concessions on price start impacting profits, price concessions will stop. Recently, it was reported that the percentage of profitable HMOs dropped to 61% in 1995 from 88%. Also, as mergers and acquisitions continue, the larger players likely will be less sensitive to price.
This softening of health care costs has given us an opportunity to focus on quality. Ultimately, the best quality translates into the best cost as our employees receive the best preventive care and treatment. The improved reporting on quality by health care plans will help us assess quality.
Keep an eye on the anti-managed care legislation. More than 30 states passed such legislation in 1996. Some of this legislation is useful, such as requiring doctors in managed care plans to share information about their financial arrangements. There is increasing concern that doctors in managed care are focusing more on their financials than on their patients' health. Recently, members of the Illinois legislature proposed legislation requiring minimum hospital stays for mastectomies.
Voicing concern about managed care, one state legislator promised to legislate by body part to ensure proper health care is being delivered. In response to the public's increased concern about proper medical treatment, the American Assn. of Health Plans introduced an initiative aimed at improving patient/physician relations and requiring the disclosure of more information to patients.
Financial planning education
Employers are doing an increasingly good job of educating employees regarding investing, and to some degree, financial planning. Initially, the 404(c) regulations drove employers to both widen their selection of investment choices and increase employee education efforts regarding investments. It appears that the baby boomers have realized the need to save and have generally increased their savings in employer-sponsored defined contribution plans.
Also spurring increased savings has been the stock market. The Standard & Poor's 500 Index returned 37.5% in 1995 and about 23% in 1996. With rates of return at such high levels, employees have been more apt to invest in stocks. As I expressed in a previous column on this topic (BI, Feb. 26, 1996), I am concerned how employees may react if there is a significant market correction. Employees need to be ready for a market correction, and I hope they respond in a prudent manner.
Employees should be ready for the fact that the recent high returns will not continue. I have seen recent projections of the average stock market return over the next three to five years to be 5% to 6%. If these projections are accurate, employees may become very impatient with such relatively low returns. Employees may reduce their savings levels or move into high-risk investments if such options are available.
While most companies generally have focused on investment education, some employers have expanded this to financial planning education. This education provides employees with a broader picture of their personal financial situations. An example of a company that provides such financial planning education is Schaumburg, Ill.-based Motorola Inc., which provides employees a menu of choices subsidized by the employer, including financial education.
As our employee population ages, the need for long-term care becomes more of a reality. Educating employees about long-term care would be useful. This could be made part of a financial planning program.
The recent Health Insurance Portability and Accountability Act allows employers to pay employees LTC premiums without the employers' contributions being added to employees' taxable income. Also, premiums for individual coverage are deductible, subject to certain conditions, by the employee. These changes in tax law should make long-term care more attractive to employees.
Employers probably should be exploring the Internet and Intranet for possible employee benefit uses.
Some employers are starting to use this technology for plan enrollment and employee communications. We also will see the capability of accessing our 401(k) accounts and making transactions.
Using this technology will give us the opportunity to improve benefit delivery and potentially to lower costs.
Intertwined in all that we do in benefits is the need to clearly and effectively communicate our plans to employees. We spend a great deal of our total payroll costs for benefits, about 35%. Our employees need to understand our plans and appreciate them. The annual benefit statement, which many employers use, is very helpful in communicating the value of our plans.
Ultimately, plans must attract and retain those employees necessary to our organizations.
Whatever we can do to communicate the value of our benefit program to recruits and employees will be positive for the organization. Such communication cannot be a one-time event. We need to regularly get out the message.
As more of our employees shift to managed care plans-in some cases, we have forced this to happen-they need to understand how to use these plans effectively. Whatever we can do to smooth the transition to managed care will pay big dividends. Communicating more clearly how managed care works will make these plans more effective for our employees. If employees understand how to use the plans, they will maximize the benefits of managed care.
Finally, don't forget to think strategically. All too often, benefit managers get distracted by the legal compliance and administrative elements of our profession. While legal compliance and administration are important, we have a more significant contribution to make to our organizations.
We need to add value to our organizations by ensuring whatever we do helps our organizations meet stated objectives.
Material in this article does not constitute accounting, tax, investment, legal or business advice. Employers should review their situations with professional advisers.