How smaller companies are profiting from flexible-benefits plans.
Clo Ross seldom rejects an idea flat out, but when she first read a writeup on flexible benefits, she couldn't wait to get it off her desk. "An absolute nightmare," declared the administrative vice-president of Clairson International Corp., a 400-employee, $20-million manufacturer of closet shelving and storage systems based in Ocala, Fla. "Too expensive, too much trouble to administer -- we're just plain not big enough for this." Besides, Ross told chief executive officer Donald Sauey, these so-called cafeteria plans, in which employees design their own benefits packages from a menu of insurance policies and perquisites, were "bound to be a passing fad."
Sauey, however, thought the concept too innovative to be so quickly dismissed Give it more study, he told Ross, and "maybe we'll find we can make a go of it."
Study she did -- and the more Ross read and heard about flexible benefits, the less faddish they seemed. Group-benefits plans had been great, she realized, only so long as employees were predominantly 30-to-50-year-old males. Most of them sole breadwinners, these men wanted security -- health care for themselves and their dependents, disability coverage, and life insurance. So that was how the group plans that came into vogue in the 1950s were patterned. But society changed, and the numbers of workers who met this traditional description dwindled to just 15% of the labor force. The majority of the work force now and for the foreseeable future is a conglomeration of young singles, women, and partners in two-paycheck marriages. For many of them, group-benefits plans provide coverage that is at once too much, too little, and not of the right kind.
"Take me, for example," Ross says. "I'm married, and I have good medical insurance through my husband's employer. Yet, for the five years I've worked here, Clairson has been throwing money out the window for [group-medical] coverage that I don't use." Speaking as an employee, she would much rather have used that money "to get something else -- like a dental policy, better life insurance, or more vacation time." As a manager, she found it nonsensical not to allow such flexibility. "If you're going to spend money on benefits, you might as well be paying for something that people want." Especially these days, when the average annual claim for medical coverage alone is $1,158 per year and rising fast.
Nevertheless, for all her new-found enthusiasm, Ross remained ruefully convinced that a flexible-benefits plan was more than Clairson could afford. First there was the time and expense of shuffling -- or more likely, computerizing -- the paperwork. According to what Ross had read, that alone could run into the hundreds of thousands of dollars. Then there was the cost of selecting and pricing the additional insurance coverage. Ross didn't want to fix the premiums too high for employees, yet she didn't want to set them so low that Clairson would have to subsidize the program. But finding the right figures was a catch-22 situation. Ross's insurance agent said that he couldn't quote premiums until he knew which and how many of her employees intended to take what policies, and Ross replied that she couldn't provide that information until the program was actually installed. "How could I sign people up," Ross says, "if I couldn't tell them what the premiums would be?"
Ross was about ready to shelve the whole idea when she paid a visit to the Atlanta office of Hewitt Associates, a benefits-consulting firm based in Lincolnshire, Ill. Of the dozens of consulting firms, insurance companies, accounting firms, and financial-services organizations that claim some expertise in the area of flexible benefits, Hewitt -- with about 65% of the market -- is widely regarded as the leader. The purpose of Ross's visit was to pin down the cost of a cafeteria-style plan, but she soon found herself listening to an explanation of a new variation on the flexible-benefits theme, involving something called a reimbursement account.
It was the centerpiece, she was told, of a flexible-benefits plan that Hewitt had developed for its own employees in 1980 -- and it was so easy to administer that Hewitt was able to track plans for more than 400 employees on note cards (until 1983, when employment growth made it necessary to computerize the system). Ross was sold. Last January -- a year after her first visit to Hewitt, and nearly two years after she told Sauey it couldn't be done -- Ross presented a flexible-benefits plan to Clairson's employees.
A reimbursement account -- sometimes also called a "benefits bank," or a "flexible-spending account" -- operates like a checking account. Employees draw against an individual annual benefits allotment that is set aside by the company for reimbursement of certain eligible expenses that are not covered elsewhere in the benefits package. Clairson, for example, provides employees with a free-of-charge core package consisting of life insurance, short-term disability coverage, educational-assistance eligibility, and the usual time off for vacations, holidays, and illnesses -- much as it did when the company was still under the traditional groupbenefits plan. But thatis where the similarities end. Clairson now allots $500 per employee, plus I% of salary -- money that employees can use to buy such things as supplemental life insurance and/or long-term disability coverage. The one requirement is that those who cannot claim medical coverage elsewhere must purchase the company policy, which costs $486 per individual, or $850 per family.
Any money left over when the shopping is through goes into the reimbursement account, known in-house as the Clairson Care Account. These so-called flex-dollars can be used to reimburse expenses for dental work, child care, vision or hearing treatment, and miscellaneous medical expenses -- including the deductibles on the aforementioned insurance policies. Those who still find themselves with unspent money at the end of the year can roll it into the following year's reimbursement account or sock it away in a deferred compensation program. The sum can also be taken as cash -- but those who elect to do so must pay tax on it. On the other hand, those who find that their needs exceed their benefits allotment can boost their buying power by selling back some vacation time or by entering into a salary-reduction program whereby payroll deductions serve to reduce an employee's taxable income as they increase the size of his or her reimbursement account.
