Benefits plan that allows employees to select from a pool of choices, some or all of which may be tax-advantaged. Potential choices include cash, retirement plan contributions, vacation days, and insurance. It is also known as Cafeteria Plan (though there are other infamous names such as Modular Plans, Private Health Services Plans, Core Plus Option Plans).
Historically, employee benefit plans have been provided on a one-size-fits all basis, designed to meet the perceived needs of the assumed ‘typical employee and family.’
The diversity of employee needs and the advent of technology have contributed to a growing trend towards more flexible benefit arrangements. According to surveys, flexible benefit plans continue to grow in popularity and offer employees the opportunity to select those benefits they need, while helping the employer manages benefit plan costs. As a concept, flexible benefit plans have been around for about two decades. What is new, however, is that more employers seem to be using them. Benefits or options are paid for using the credits the employee has been assigned. Unused credits are commonly deposited into a health care spending account, cashed out, carried forward and etc. Employers determine how much they wish to contribute towards the plan, usually based on a flat dollar amount per employee or a percentage of each employee’s salary.
Flexible benefits are a natural choice for employers seeking to partner with employees in managing benefit plan costs.
For some organizations, a comprehensive flexible benefit plans with many benefits is the best solution. For others, a more practical approach might be to focus flexibility on three or four particular benefits. Others organizations may prefer to introduce flexibility one step at a time.
The best plan may not necessarily be the one that offers the greatest amount of employee choice while it is important that the plan design reflects the business reasons for introducing flexibility and the on-the-ground realities of the organization as well as employee demand.
In a tight employment market it can be very difficult to recruit and retain key employees. A 'flexible' approach to employee benefits can be very useful in achieving this goal.
Flexible benefit plans also allow the employer to pre-determine, control and fix their annual benefit contribution costs. Prior to the end of each year, the employer determines the amount of contributions for each employee for the next calendar year and the employer’s selected contribution amount remains fixed. The cost of the program is known and controlled by the plan sponsor.
Flexible benefits can help employees to utilize their benefits by increasing coverage in particular areas or by not duplicating coverage between spouses and it covers a wide range of non-taxable services.
Employees are looking for control over their health and well-being. Two of the top five attractors for Canadian employees according to a survey by Towers Perrin in 2002, were competitive health care benefits and recognition for work. At various points in their careers employees may require an assortment of benefits that cover diverse health strategies particular to their health or their family health needs. An employee with young children may have very different health coverage needs then someone who is approaching retirement. Flexible benefit plans adapt to these changing needs and can reduce the stress associated with these concerns. Flexible benefit plans can also be used as part of a workplace recognition program or as a reward for adapting healthy lifestyle choices that in turn save on future benefit plan usage.
Flexible benefit plans are more difficult to administer and may not be accessible to companies with fewer than 100 people. Unwise employee benefit selection may result when employees may not have the expertise to select the proper benefits from the alternatives offered. An unwise selection can result in inadequate employee protection and losses. Another disadvantage to these plans is that if you do not spend the whole amount by the end of the plan year, you forfeit the remaining dollars. This is called the "USE IT OR LOSE IT" provision.
Defining the Strategy
Before drawing up a flexible benefit plans, it is important to consider fully the reasons for adopting this approach. If, because of the nature of the organization only a limited amount of flexibility is possible, then it may be better to save the time and expense of introducing a fully flexible benefit plans, instead consider a more limited approach. This might include allowing cash alternatives to company cars, or giving employees the ability to buy or sell holiday. Alternatively, it may consider voluntary benefits or total reward benefit statements.
Any new plan should be considered within the context of the existing reward strategy and should assess the motivational as well as the financial value of both current and future benefits. Typically it will take at least 12 months to design, implement and communicate a flexible benefit plans.
Organizing the Plan
Most flexible benefit plans are initially based on the existing benefits provision which is used to construct a new package. Certain benefits, such as sick pay and maternity benefit, ought to remain outside the plan. Some employers also prefer to exclude pensions from flexible benefits.
The employee is given a benefit allowance and a list of available benefits. The value of these benefits is not usually uniform across the workforce. For example, it is more expensive to provide life assurance for older employees and this must be reflected in an increased benefit allowance that enables an older member of staff to buy the same level of benefit as a younger one. Employees are also advised of the current level of their benefits and 'cost' of buying or selling these to suit their individual needs. There is typically a limit set on how much of the salary can be used to buy extra benefits and equally there is a baseline of benefits that must be kept and therefore to the extra salary that can be obtained by selling benefits.
Cash or Points?
Some plans show each of the benefits with a cash value and the employee uses this as the basis for calculating the effect of changes. The advantage of showing a cash value is that it gives employees an idea of what the benefit is truly worth and the cost that the employer is bearing. The danger of a cash system is that it may encourage employees to feel that they are being forced to buy benefits out of their own salary. Other plans use a points plan, where each benefit has a points rating and the employee has an allowance of a certain number of points.
Regardless of whether a points or a cash value plan is used, all plans make a clear distinction between notional salary and the final value of salary that is actually paid in the year (regardless of whether this is higher or lower than the notional salary). The actual value of salary continues to be used as the basis for items such as pension calculations and salary reviews.
Deciding On the Amount of Flexibility
When plans are being introduced, it is important to estimate the likely take-up of specific benefits. This will enable employers to obtain the most accurate possible quotations for the provision of each benefit. One problem associated with the introduction of flexible benefit plans is that the process of making selections actually changes the profile of the group requiring a particular benefit.
All plans are costed on the basis of predicted selections; where employees make significantly different choices, these are regarded as 'adverse selections'. For the success of the plan, the relative values of the benefits should be set so as to avoid too many adverse selections. They should also be arranged such that employees are not encouraged to make imprudent selections that will jeopardize their own security provision. The inclusion of core benefits guarantees a minimum level of protection. There must be a compromise between excessive flexibility that encourages inappropriate choices and too narrow a choice that does not meet the employees' expectations.
Before implementing a flexible benefit plans, organizations may find it worthwhile to survey their employees as to the type of benefits they favour and value. This would also assist in maximizing the value of the package to both employer and employee.
Choosing and Changing Benefits
Once the plan has been agreed, the choice of benefits is presented to the employees. To ensure a positive reception, it is important that the choices (and the implications of those choices) are clear. If the options are too complicated, or the method of making the choices is perceived as being difficult, then employees will simply default to their existing benefits package and much of the time and money spent in introducing the plan will have been wasted.
Many of the computerized systems that are used for administering such plans include an option that allows employees to model their own choices. Various selections can be made until the employee is satisfied with the outcome.
Most plans allow for changes in benefit selection to be made by a fixed date, once a year. Prior to this date, employees are sent a personalized document reminding them of their current selection and benefit allowance for the forthcoming year, and giving them the opportunity to amend the selection. It is important that this document is simple to use with the costs of the options laid out clearly. If the document is not returned by the specified date, the benefit package will typically remain at the previous levels or default to a standard package. Organizations should consider how to deal with those employees who will be off work during the selection period, for example on maternity leave, on extended holiday or secondment.Plans may restrict the amount of change between one year and the next. Typically if there are several levels of available benefit, employees may only alter benefit by one level at each renewal. In addition, benefits (such as life assurance) for a spouse or partner may not exceed those for the employee.
Although reviews take place annually, most organizations will allow changes to be made to the selection outside the normal renewal dates in exceptional circumstances. These typically include:
- marriage or divorce
- birth or adoption of a child
- death of a dependant
- long-term sickness absence
Who Should Be Included In the Plans?
Early plans were often only for senior employees (because they received more benefits and also represented a small proportion of the workforce), but this tended to be divisive. Many companies who have flexible benefit plans now offer them to all permanent employees. If the wider workforce is to be included in the plan, it is important that any pilot should be based on a representative sample of the final spread.
Contents of Flexible Benefit Plans
Although there is no such thing as a typical flexible benefit plans, there are certain benefits that appear in most. Many plans differentiate between core benefits, some parts of which are financed by the employer, and voluntary benefits, which are paid for by the employee. The core benefits are those that a best-practice employer might be expected to provide and which, though the employee might adjust them, may not be entirely removed from the package.
Core Benefits In A Typical Plan
The contents of any plan depend on local circumstances, but core benefits that appear on many plans are:
- life assurance
- private medical insurance
- critical illness insurance/long-term disability insurance
- personal accident insurance
Other benefits may be included but the number (and type) of benefits in a plan is a compromise between offering employees a wide choice and keeping the administration manageable.
Communication and Education
The most important elements in ensuring the success of a flexible benefit plans are effective communication and education. If employees are made aware of the reasons for, and benefits of, introducing flexible benefits they are less likely to dismiss the plan as simply a means of reducing costs. In general new plans are more likely to succeed if they are introduced on a cost-neutral basis (e.g. no overall gain to either side).
Before setting up a new plan it is advisable to consult employees over what type of benefits they would like to be offered. All suggestions should be given fair consideration, but care should be taken not to encourage undue expectations that it will be impossible to meet. By incorporating the views of employees, the plan is more likely to receive a positive welcome. Once the plan is in place, good communication is still essential so that employees are able to understand fully the benefits offered, and make appropriate choices. For instance, pharmaceutical firm Astra Zeneca adopted a phased approach when it brought in its flexible benefit plans. They began with 'awareness' for six months, followed by 'engagement' for a further three months, and then 'enrolment' for another three months, with the full embedding of the policy by the end of a year.
Examples of Communication Methods
As many means as possible should be used to communicate the details of the new plan. Possible methods include:
- road shows and open days
- intranet, including bulletin boards
- videos, CD-ROMs
- meetings, Q&A sessions, focus groups
- demonstrations with computer modeling
- telephone and e-mail help-lines
- one-to-one consultations
Flexible benefits are a hot topic, fitting in well with the wider total reward debate and talk of the mass customization of reward. As a practice, flexible benefits are set to increase as new software becomes available and the cost of implementation decreases allowing more organizations to set it up. Flexible benefits are seen as an ideal way of addressing diversity in benefits, as reinforcement of cultural change, harmonization of reward practices, especially during merger and acquisition, and an effective means of cost management. But they are not a 'magic' solution and need to be managed as part of an integrated reward strategy with clear goals and excellent support processes.
In conclusion, the usage of flexible benefit plans is a growing trend in view of changes in complexity of the modern society such as lifestyle, work complexity, single parenthood, and the society at large.