"Finding out about the reimbursement account was the key for us, and I think it's going to be the key for a lot of smaller companies that didn't think they could go flex," says Ross. "We're maximizing our benefits expenditures, we're giving our employees access to more benefits than they've ever had before, and we're doing it all in a way that's more tax-effective than ever [thanks to the salary-reduction and deferred-compensation options]." Ross has also found the package to be as easy to administer as Hewitt had predicted -- although she prefers to use the office minicomputer instead of a card file.
Best of all, says Ross, aside from the onetime expense of about $10,000 in consulting fees and other start-up costs, "we're not spending any more on 1984 benefits than we did in '83." She had expected a 25% hike in the cost of the old group plan.
The arrival of the reimbursement account represents the third generation of a flexible-benefits evolution that began 10 years ago. Recognizing a growing diversity in the work force, the pioneers of flexible-benefits plans sought to expand benefits in a way that would allow employees to become more involved in determining the shape and scope of their packages. Most of these first-generation plans did little more than offer employees a choice between the additional insurance and cash. The growth of these plans stalled, however, when a small section of the Employee Retirement Income Security Act of 1974 put a hold on them until Congress could study the tax implications.
But these tax difficulties were apparently resolved with the passage of the Revenue Act of 1978, which has been construed to permit employees to take the unused portion of a benefits allotment as either cash (taxable) or deferred compensation (nontaxable until distribution). A second generation of flexible-benefits plans was thus ushered in, and they became known as cafeteria plans. It was soon recognized that not only were these plans more responsive to employees' needs than the old group plans, but they often worked to meet the employer's need for benefits cost-containment as well.
No longer did the company simply absorb premium increases; under cafeteria plans, the employees themselves were now seeing the prices, making the economic judgments on how much and what kind of coverage they needed, and deciding how much of their benefits allotment they were willing to pay for it. It was the solution to a lot of previously insoluble problems -- but only for those who had the sophisticated computer capabilities to handle the administrative intricacies of the plan. And, in the mid-to-late-'70s, that meant only such giants as American Can Co. and TRW Inc.
But now virtually all companies have computers that facilitate administration of these plans. That is one reason why flexible-benefits plans are gradually filtering down into smaller businesses. The other, more important reason hinges on the latest development in this evolution -- the introduction of the reimbursement account. Because so many employee-benefits needs can be satisfied from a single, budgeted fund, the need for an extensive menu of benefits options is gone. The reimbursement account, like a short-order cook, provides more flexibility and has simpler administrative requirements than the cafeteria line ever could.
Not only does the reimbursement-account structure provide more categories of benefits than were available under group plans, but it actually provides more benefit to the employee than do the cafeteria-style plans. When employees present receipts for reimbursement of benefits-related expenses instead of filing insurance claims, they get dollar-for-dollar coverage -- not the typical 80-20 or 50-50 split that insurance companies offer. And those companies that choose the reimbursement account over the cafeteria structure effectively do an end-run around a technical problem that makes cafeteria plans more difficult to design. That technical problem is something the insurance industry refers to as "adverse selection."
Actually, it could be as easily called intelligent selection, because adverse selection refers to an employee's natural tendency to select the benefits that will do him or her the most good. The trouble is, in the already-small groups served by each policy within a cafeteria-style plan, this predilection sorely hampers an underwriter's ability to spread risk and set premiums. The response of some insurance carriers has been to require companies embarking on cafeteria plans to team policies that attract different constituencies -- dental with medical, for example. This grouped approach is not a bad benefits plan; it is just a less-flexible version of a flexible-benefits plan.
Clairson's employees know little or nothing of how their reimbursement account compares with the cafeteria plans that larger companies have installed, but they can tell you plenty about how it stacks up against their old group plan. "What I've got now is a big improvement," says set-up operator Eleanor Poole. She had planned to buy an additional life-insurance policy "on the street" until she found she could get it more tax-effectively through Clairson's salary-reduction option. "This company is 100% for its people," she declares. "I never [imagined] that they would have come to us with this. Everybody's talking nothing else -- just what a good deal it is."
Jim and Sherry Hillebrandt are equally enthusiastic. "As a married couple, both working at Clairson, we have a much broader benefits package now," says Jim, the company's director of manufacturing. The pair has been able to develop something of a joint benefits package, now that they no longer carry duplicate coverage. Jim uses his allotment -- augmented with salary-reduction money, plus the proceeds from selling back some vacation time -- to buy the medical policy for himself and his family. Sherry -- an administrative assistant -- puts all of her money into the reimbursement account, where it can be used to pay the medical-policy deductible, plus dental and child-care expenses.
