Corporate Wellness for Your Employees During a Recession

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					Restoring Security
in Challenging Times




2010 Corporate Benefits Brief


                                Benefits
                                P a r t n e r s
    In today’s economic and corporate environment, business
    and HR managers at companies of all sizes are being
    asked to do more when it comes to employee benefits.
    You must find a way to provide benefits programs that
    create greater value for employees and employers alike —
    now, and into the future. The good news? With an NFP
    Benefits Partners firm by your side, you can do just that.


    nfp Benefits partners gives Companies
    the power to Be greater.

    Together with NFP Benefits Partners, we can help you be more — with greater
    insight, greater support and greater benefits solutions that meet the unique needs
    of your continually evolving workforce during these changing times.


    This corporate benefits brief is just one of the tools we provide to help you develop
    a greater understanding of the trends and challenges that are shaping the industry
    today. Throughout this brief, you will find the leading-edge thinking and industry
    insight that keeps companies ahead of the curve.




2
eXeCUtive
sUmmarY
nearly three-quarters of americans were touched by unemployment in some way over the last year.
in January 2010, 14.8 million people were unemployed, according to the U.s. Department of Labor. that
number increases significantly when you include those involuntarily working part-time.1 in the wake of
the worst economic upheaval since the great Depression, there is no question that many americans
and employers are hurting.

the economic crisis was a loud wake-up call for consumers across generations. economic concerns
that came to the forefront in 2007, such as savings, job security and retirement shortfalls, expanded
dramatically over the past 12 months; cracks in the foundation of the “american dream” worsened
considerably. the weak health of the american economy, inadequate personal safety nets and the
erosion of corporate and social safety nets left major portions of the american public – across all
social and economic demographics – exposed to financial hardship on a scale not seen in most
americans’ lifetimes.2

economic recovery in the United states will clearly take some time, and helping employees remain
on course in this difficult environment is one of an employer’s greatest challenges. with employees
viewing the workplace as the foundation of their financial safety nets, employers are facing the burden
of controlling costs while continuing to offer benefit packages that allow them to attract and retain
top talent.

nfp Benefits partners’ 2010 corporate benefits brief provides you with an explanation of the health care,
retirement and economic challenges that many companies are facing, the changes that may occur in
response to these challenges, and how you can help your employees understand and cope with these
changes. By better understanding the obstacles and opportunities ahead, your company, with the help
of trusted advisors, can successfully navigate a new era of employee benefits.




                                                                                                            3
    heaLth Care:
    The Evolving Landscape


    The anticipation of health care reform and the growth of health spending
    amid a deflated general economy present employers with unique challenges
    for their 2010 health care benefits strategies.
    The “2010 Segal Health Plan Cost Trend Survey” indicates medical plan cost trends in 2010 will remain similar to
    those found in 2009, ranging from 10.2 percent to 10.8 percent.3 These trends will be more then four times greater
    than the annual increase in average hourly earnings and will be in contrast with a relatively flat consumer price
    index. High deductible health plans (HDHPs) costs are projected to increase by just over one percentage point to
    11.9 percent. While projected plan cost trends can be significantly different from increases in the actual costs to
    plan sponsors (which reflect changes in plan design, demographics and participant contributions), plan sponsors
    are anxious for health reform measures that promise to reverse or slow these trends.

    According to PricewaterhouseCoopers’ “Behind the Numbers: Medical Cost Trends for 2010,” here are some of the
    trends employers can expect to see:4

    s The recession and the prospect of health reform will help temper medical costs, affecting the pricing,
      utilization and behavior of industry participants and consumers alike.

    s As the recession pounded corporate profits in early 2009, employers surveyed said they were ready to
      push more of the health insurance costs to their workers in 2010, while expecting workers to take more
      responsibility for managing their personal health.
      o More than two-thirds of employers are expecting to expand wellness and disease
        management programs. The focus will be on putting more meaningful financial
        rewards and penalties around individual member results to foster greater personal
        responsibilities for improving health status.3
      o 42 percent of employers surveyed said they would increase employee contributions,
        up from 38 percent in 2008.
      o 41 percent of employers said they expect to increase medical cost sharing though
        plan design changes.

    s Increased cost sharing could cause the affordability gap to grow even larger, squeezing workers, many of whom
      took wage cuts in 2009 because of the recession. In fact, according to the Kaiser Family Foundation’s annual
      survey of employer-sponsored health plans, health insurance premiums outpaced both workers’ earnings and
      inflation for the 10th straight year.5




4
                                                    140%                                                                                                  131%

                                                    120%

                                                    100%

                                                     80%

                          CUmULative Changes in heaLth insUranCe premiUms,
                                      60%

                             infLation, anD workers’ earnings, 1999-2009
                                      40%
                                                                                                                                                          38%


                                                     20%                                                                                                  28%
           140%                                                                                          131%
                                                      0%
           120%
                                                            1999   2000   2001       2002       2003     2004      2005     2006       2007        2008   2009
           100%
                                                                                                                                   Health Insurance Premiums
            80%
                                                                                                                                   Workers' Earnings
            60%                                                                                                                    Overall Inflation
                                                                                                         38%
            40%

            20%                                                                                          28%

             0%
                   1999    2000   2001     2002      2003   2004   2005   2006       2007        2008    2009

  Note: Due to a change in methods, the cumulative changes in the average family premium are somewhat different from those reported
                                                                           Health Insurance Premiums
  in previous versions of the Kaiser/HRET “Survey of Employer-Sponsored Health Benefits.” See the Survey Design and Methods Section
                                                                           Workers' Earnings
  at www.kff.org/insurance/7936/index.cfm for more information.
                                                                                 Overall Inflation
  Source: Kaiser/HRET. “Survey of Employer-Sponsored Health Benefits.” 1999-2009. Bureau of Labor Statistics, Consumer Price Index, U.S. City
  Average of Annual Inflation (April to April), 1999-2009. Bureau of Labor Statistics, Seasonally Adjusted Data from the “Current Employment
  Statistics Survey,” 1999-2009 (April to April).



s The economy is creating both positive and negative pressures on medical costs.
   o An unprecedented number of workers are in HDHPs, which are expected to see lower
     utilization among cash-strapped workers who lack the resources to pay for medical procedures.
     This trend is expected to slow the rate of medical cost increases.
   o Workers who have retained their jobs, but are fearful of losing them, may be using more services
     while they still have health insurance.

                                            pUtting off Care BeCaUse of Cost
        In the past 12 months, have you or another family member living in your household … because of the COST, or not?

  Relied on home remedies or over the counter drugs instead of seeing a doctor                                            34%

                                                        Skipped dental care or checkups                                   34%

                              Put off or postponed getting health care you needed                                     30%

                                                  Not filled a prescription for a medicine                         26%

                                  Skipped recommended medical test or treatment                                 22%

                                         Cut pills in half or skipped doses of medicine                      17%

                                             Had problems getting mental health care                    6%

                                                                   Did ANY of the above                                                   53%

  Source: Kaiser/HRET. “Survey of Employer-Sponsored Health Benefits.” 1999-2009. Bureau of Labor Statistics, Consumer Price Index, U.S. City
  Average of Annual Inflation (April to April), 1999-2009. Bureau of Labor Statistics, Seasonally Adjusted Data from the “Current Employment
  Statistics Survey,” 1999-2009 (April to April).

                                                                                                                                                                 5
    heaLth Care:
    The Evolving Landscape


    The Ongoing Road to Health Reform
    Kaiser’s January 2010 Health Tracking Poll found the American public divided evenly between support and opposition
    to the health care proposals being discussed in Congress, pessimistic about the possible impact on the budget deficit
    and increasingly concerned about the potential effect on their own families.6 At the same time, the poll found that most
    Americans would react positively to the bulk of the provisions in the health reform proposals, even as awareness of
    some of the key selling points remains limited. Of the 27 legislative elements tested, 17 moved a majority to feel more
    positively about the bills, including the creation of insurance exchanges, requirements that insurance companies cover
    people with pre-existing conditions, and the expansion of Medicaid. Two elements, however, moved a majority to feel
    more negatively, including the individual mandate and the projected health reform price tag.

                                  heaLth Care reform … is now the right time?
                Which comes closer to describing your own views? Given the serious economic problems facing the country …
         100%


          80%
                     62%          61%         62%                       61%
                                                           59%                                   It is more important than ever to
          60%                                                                                    take on health care reform now

                                                                                                 We cannot afford to take on
          40%                                                                                    health care reform right now

                                  37%                      37%
                     34%                      34%                       35%
          20%


          0%                                                                           Source: Kaiser Family Foundation. Kaiser Health
                    Oct-08      Dec-08       Feb-09      Apr-09       Jun-09           Tracking Poll. January 2010. www.kff.org.



    The health reform debate in the United States is divided along the lines of whether one believes there is a fundamental
    right to health care, how health care should be paid for and whether any plan is sustainable given the rising level of
    health care costs. Total U.S. health care spending is estimated to have been $2.5 trillion in 2009, up 5.7 percent from
    the year before, according to the Centers for Medicare and Medicaid Office of the Actuary.7 And health care spending
    is projected to outpace growth in the gross domestic product by about 1.7 percentage points annually. With that type
    of growth, many believe health care reform is critical for long-term economic recovery of our nation.

    Unfortunately, what started out as a comprehensive health reform effort by Congress shifted to an effort to reform
    only the insurance industry, ignoring the changes necessary in health care delivery. Further, the debate shifted from
    a bipartisan effort to Democrat-controlled closed door sessions in which sweetheart deals were made. The result
    was that the people of Massachusetts issued Congress a referendum that was felt nationwide when Republican
    state Sen. Scott Brown was elected to the Senate seat formerly occupied by Sen. Ted Kennedy; a seat that was
    almost guaranteed to go to a Democrat. The impact this election outcome had on health reform cannot be overstated.
    With the loss of a supermajority, the House and Senate health reform bills stalled. President Obama signaled a desire
    to get the ball rolling again by scheduling a bipartisan health care summit in late February 2010.

    As we watch the health reform debate unfold, we may see numerous bite-sized bills rather than a comprehensive
    bill. But we can be certain that when and if the health reform proposals become law, employers, employees,
    insurers and providers will face a new environment. Thus, we should keep our eye on the ball(s) and remain
    engaged in the health reform debate to ensure we have a clear understanding of the potential impact of specific
    health reform measures. We are likely to see some of the health reform provisions in the current House and
    Senate bills continue to garner discussion.


6
Below we highlight certain provisions proposed by the Democrats and the Republicans, with an explanation of how
these issues may impact you as an employer:

National Health Insurance Exchange
The Democrats proposed an Exchange that is either national in scope and run by a new federal agency, the Health
Choices Administration, with the Health Choices commissioner, or state-run. The Exchange would be a mechanism
whereby individuals and small employers purchase insurance and receive information about various products
offered. Carriers must be approved to offer insurance products through the Exchange and would be allowed to
offer only certain benefit packages through the Exchange.

Critics are concerned with the increase in federal bureaucracy a national Exchange creates and the oversight by the
federal government of the Exchange, which creates a dual layer of regulation. States already perform the oversight
function and can provide greater flexibility and interaction than the federal government can provide. The Exchange
is detrimental to employers if individual subsidies are only delivered through the Exchange and are unavailable to
individuals who want to remain in employer-sponsored coverage outside of the Exchange.

Individual Mandate
An individual mandate is important to balance the effects of the insurance market reforms, namely a prohibition
on pre-existing conditions, underwriting limitations and guaranteed renewals. The individual mandate increases
the number of healthy individuals covered by insurers, thereby spreading the risk of individuals with greater
health issues. Republicans argue that mandating all U.S. residents purchase health insurance or pay a penalty is
unconstitutional. We have also seen individual members of at least 30 state legislatures use the legislative process
to oppose federal action requiring individuals to purchase insurance.

For employers, the impact may be felt in additional premium costs as the employers will pay their share of the
premiums for a larger number of employees. Further, employers may have greater administrative expenses as they
will be required to submit reports to the IRS that provide information on employees and their dependents, including
whether they are covered under the employer-sponsored plan.




   the heaLth reform DeBate in the UniteD states is
   DiviDeD aLong the Lines of whether one BeLieves
   there is a fUnDamentaL right to heaLth Care,
   how heaLth Care shoULD Be paiD for anD whether
   anY pLan is sUstainaBLe given the rising LeveL of
   heaLth Care Costs.


                                                                                                                       7
      heaLth Care:
      The Evolving Landscape

                   Legislation passed; requires statewide vote in future year                      Legislation filed for 2009 or 2010 # Legislation did not pass in 2009



                                                                             WA                                             ND#
                                                                                                       MT
                                                                                                                                              MN#
                                                                                                                                                                                                                         ME
                                                  AK
                                                                                                                            SD                             WI                                             VT
                                                                             OR
                                                                                            ID                                                                                                              NH
                                                                                                            WY#                                                            MI#                       NY
                                                                                                                                                                                                           MA
                                                                                                                                                IA
                                                                                                                                NE                                                                                  RI
                                                                                                                                                                                                PA             CT
                                                                                                                                                              IL        IN#      OH                       NJ
                                                                                     NV
                                                                                                  UT              CO
                                                                                                                                     KS              MO                                               DE
                                                                                                                                                                                     WV#
                                                                                                                                                                           KY               VA       MD
                                                                                CA
                                                                                                                                                                      TN                   NC
                                                                                                                                         OK
                                                                       AZ                                                                            AR
      as part of state-based responses to federal                                                              NM#
                                                                                                                                                                                      SC
      health reform legislation, individual members of at                                                                                                  MS        AL         GA
                                                                                                                                                     LA
      least 30 state legislatures are using the legislative process                                                              TX

      to seek to limit state or federal actions regarding single-payer
      provisions and mandates that would require purchase of insurance.                                                                                                               FL




    State       2009/2010 Activity/Legislation                Year   State           2009/2010 Activity/Legislation             Year          State                2009/2010 Activity/Legislation               Year
    Alabama     HB 42 proposes a constitutional               2010   Michigan     SJR K; HJR CC; HJR Z of 2009 proposes         2010          Pennsylvania         HB 2053 proposes statute prohibiting
                amendment to prohibit employer or                                 a state constitutional amendment “to affirm                                      individual mandate. No floor vote in 2009;
                individual mandates                                               the right to independent health care.”                                           carried over to 2010.
    Alaska      HJR 35 proposes a state                       2010   Minnesota    HF 171; S 325; S 1282 proposes an             2010          South                HJR 4181; SJR 980; SJR 1010 joint            2012
                constitutional amendment to prohibit                              amendment to the Minnesota Constitution                     Carolina             resolution for a constitutional amendment
                individual mandate.                                               to prohibit laws that restrict a person’s                                        to prohibit individual and employer
    Arizona     Resolution HCR 2014 proposes an               2010                freedom of choice of private health care                                         mandate.
                amendment to the State Constitution                               systems or right to pay directly medical                    Tennessee            SB 2490; HB 2622 would amend state           2010
                to prevent individual and employer                                services or require a person to obtain                                           law by adding a “Tennessee Freedom of
                mandates.                                                         health care coverage.                                                            Choice in Health Care Act.”
    Arkansas    ISP 2009-204 adds a state statute to          2010   Mississippi  HCR 17 Resolution would propose a             2010          Utah                 H 67 would require any agency of the         2010
                prevent individual and employer mandates.                         constitutional amendment to prohibit                                             state not to implement any part of federal
    Florida     HJR 37; SJR 72 Joint resolutions              2010                laws instituting individual and employer                                         health care reform passed by the US
                propose a State Constitutional                                    mandates.                                                                        Congress after March 1, 2010, unless
                amendment to prohibit individual and                 Missouri     HJR 48; HJR 50; HJR 57; SJR 25 Joint          2010                               the department or agency reports to the
                employer mandates.                                                resolutions propose a constitutional                                             Legislature and the Legislature passes
    Georgia     Resolution HR 1086 proposes an                2010                amendment to prohibit individual and                                             legislation “specifically authorizing the
                amendment to the Constitution prohibiting                         employer mandates.                                                               state’s compliance or participation in,
                individual and employer mandates.                    Nebraska     LR 289CA proposes constitutional              2010                               federal health care reform.”
    Idaho       HB 391 would amend and add to                 2010                amendment to prevent individual                             Virginia             HJ 7 resolution proposes                     2012
                existing law to establish the Idaho Health                        mandates.                                                                        constitutional amendment to prevent
                Freedom Act.                                         New          SB 417 would amend state law to prohibit      2010                               individual mandate.
    Indiana     SJR 14; HR 6; also non binding resolution     2012   Hampshire    the expansion of the Medicaid program                       Virginia             SB 283; SB311; SB 417; HB 10 would           2010
                SCR 10 proposes a state constitutional                            if Congress passes a national health                                             amend state law to prevent individual
                amendment to prohibit individual and                              insurance plan unless the expansion is                                           mandate.
                employer mandates.                                                approved by the NH Legislature or is paid                   Washington           HB 2669 would amend state law to             2010
    Iowa        HJR 2007 proposes a state                     2012                for by the federal government.                                                   prevent individual and employer mandate.
                constitutional amendment prohibiting                 New Mexico SJR 1; HJR 10 proposes constitutional                         West Virginia        H 3002 to prevent any law implementing
                individual mandates.                                              amendment to prevent individual                                                  individual mandate. Failed to pass by end
    Kentucky    HB 307 would prohibit any other law           2010                mandates. Failed to pass by end of ’09                                           of ’09 session; cannot carry over to 2010.
                from instituting an individual or employer                        session; no carryover to 2010.                              Wyoming              SJR 3 proposes constitutional
                mandate. Also would prohibit the state               North Dakota HCR 3010 proposes constitutional              Future                             amendment to prevent individual and
                executive branch from “participating in or                        amendment to prohibit individual              year                               employer mandate. Filed 1/20/09; died in
                complying with any federal law, regulation,                       mandates. Failed to pass House by end         ballot                             Senate committee 3/3/09; no carryover.
                or policy that would compromise the                               of ‘09 session; no regular session in 2010.
                freedom of choice in the health care.”               Ohio         SJR 2; SJR 7; HJR 3 Joint resolutions for     2010
    Louisiana   SB by Sen. Crowe would prohibit               2010                a constitutional amendment to prohibit
                individual and employer mandates.                                 individual mandate.
    Maryland    SB 397 proposes a state constitutional        2010   Oklahoma     HJR 1054 proposes constitutional              2010
                amendment prohibiting a law from                                  amendment to prevent individual and
                instituting an individual mandate.                                employer mandate.

    Source: National Conference of State Legislature. ”State Legislation Opposing Certain Health Reforms, 2009-2010.” Feb. 22, 2010. www.ncsl.org.
8
Individual Financial Assistance
To have an individual mandate, there must be a mechanism to provide financial assistance for premiums and
cost sharing for low-income individuals and families. The Democrats propose financial assistance in the form of
affordability credits that apply only to Exchange-participating plans. However, it makes economic sense to provide
financial assistant outside of the Exchange to take advantage of employer contributions by allowing lower-income
employees to apply subsidies to employer-sponsored plans. This also helps employers meet participation
requirements that are necessary to maintain the balance of risk in a group plan. Otherwise, low-income
employees will likely opt out of an employer-based plan to purchase insurance within the Exchange,
affecting the viability and affordability of employer group coverage.

Employer Mandate
Republicans oppose employer mandates. Democrats would require employers to pay-or-play, pay-and-pay or
offer-and-pay; employers who do and do not offer health insurance would be affected by their legislation. The
proposed legislation states that an employer must offer “qualified” individual and family coverage, and pay a
certain minimum contribution of the premium. If an employee declines employer coverage and enters the Exchange
via the affordability test, the employer must pay a payroll tax equal to 8 percent of the average salary for the
employer. There is a small employer exception for those employers with annual payrolls at or below $500,000.

In sum, the employer mandate would require employers to (1) provide insurance to certain employees (including
part-time employees), (2) contribute a specified amount to that coverage and (3) purchase a certain level of coverage.
The payroll tax would apply no matter how profitable or unprofitable a business might be. This is seen by many as a
tax on labor, resulting in an elimination of jobs or a suppression of wages. In addition, the mandate does not address
the issue of unsustainable cost that many businesses face.

Small Business Tax Credit
To balance the employer mandate, there must be a mechanism for businesses that cannot afford to meet this
requirement. The Democrats would provide a tax credit for small employers equal to 50 percent of the amount paid
by a small employer for employee health coverage. This tax credit is seen by small businesses as inadequate in
that the credit is available only for two years and is limited to businesses with 25 or fewer employees. U.S. Census
data notes that the average wage of full-time employees at businesses with fewer than 10 employees is more than
$30,000, meaning that, in many cases, the value of the credit is further limited.8

Tax on Cadillac Plans
A controversial issue between the House and Senate Democrats is how to finance health reform. In the Senate, the
Democrats want to place a tax on high-cost “Cadillac” health insurance plans to the tune of a 40 percent excise tax
on plans with more than $23,000 in premiums per year for a family of four. Supporters of this measure claim that it
will restore some equity in the tax system, a system that exempts employer-provided health benefits while requiring
individuals with non-employer-provided health benefits to pay for coverage with after-tax dollars.

Proponents also argue that Cadillac plans with low deductibles and rich benefits encourage overuse of medical care.
The hope is that many employers and employees will shift to less generous plans that require patients to be more
informed about the cost of their care. Others argue that the tax on high-cost health plans affects not only Cadillac
plans, but also those who pay higher premiums due to age or gender, or because they are small businesses.

The Congressional Budget Office (CBO) estimates that 19 percent of employees, or 30.2 million workers, would be
affected by this excise tax by 2016.9 Employees will thus be forced to enroll in plans that: cover fewer services, pay a
smaller share of covered health care costs or manage benefits more tightly.

                                                                                                                           9
     heaLth Care:
     The Evolving Landscape


     Insurance Reforms
     Many believe that insurance market reforms are likely to pass even if no other health reform measures do.

         pre-existing Conditions – Both parties appear to support the protection of individuals with pre-existing
         conditions by prohibiting carriers from rating based on health status or pre-existing conditions.

         modified Community rating – Democrats propose limitations on various aspects of underwriting, including
         limiting age rating to 2:1 and allowing variation based on geographic area and family size as determined by
         state insurance commissioners.

         no Lifetime Limits – Both parties support a prohibition on annual or lifetime limits on medical spending.
         These reforms may be applied to the entire market (inside and outside the Exchange).

         Dependent Coverage – Both parties support a requirement that insurers allow an individual through age
         25 (Republicans) or age 26 (Democrats) to remain on their parents’ health insurance, at the parents’ option,
         if the individuals are not otherwise covered.

         guaranteed renewal – Both parties support some form of guarantee that insurers will not cancel policies or
         non-renew arbitrarily or at all. Republicans propose an independent appeals panel to prevent carriers from
         fraudulently canceling policies.10

     Medical underwriting is necessary to prevent the uninsured from waiting to purchase insurance until they are sick
     or in need of medical care. Waiting to obtain health insurance until one needs coverage creates a pool of insureds
     who have high utilization, increasing the premiums insurance companies must charge to pay for claims incurred.
     The resulting increase in premiums would further discourage healthy people from obtaining coverage. Excluding
     coverage for a pre-existing condition or charging higher premiums based on health status serve as incentives for
     individuals to purchase insurance while they are healthy. These steps also serve as deterrents for delaying the
     purchase until an individual is sick and in need of medical care.

     The removal of medical underwriting requires strong incentives or penalties to ensure continuous participation by
     low-risk individuals and groups. For guaranteed coverage to remain available and affordable, risk must be shared
     broadly across the population. Elimination of medical underwriting also means high-risk individuals are eligible
     for coverage, making it critical for health plans to enroll the low-risk population to maintain the viability of the
     insurance pool. If the individual mandate is insufficient and unable to reduce adverse selection, insurers would be
     forced to boost premiums to cover the risk.

     The CBO and certain studies estimate that the Senate bill could increase insurance premiums by 1 percent to
     3 percent for 25 million people in the small group market.11

     Flexible Spending Account (FSA) Limitations
     The Democrats limit salary reduction contributions to health FSAs to $2,500 (indexed to the consumer price index).
     The decrease of non-taxable benefits results in higher payroll amounts, which increases an employer’s FICA match.

     Health Savings Account (HSA) Penalties
     Democrats want to increase the penalty on distributions from HSAs that are not used to pay for health-related
     expenditures from 10 percent to 20 percent. Republicans want to enhance HSAs by providing tax credits to low- and
     moderate-income individuals for some contributions and allow taxpayers to use HSA funds to pay premiums.



10
Revenue
Even the House and Senate Democrats differ on how to fund health reform. The House Democrats want to establish
a 5.4 percent tax on modified adjusted gross income in excess of $1 million in the case of a joint return ($500,000
in the case of an individual return). According to the National Federation of Business, 75 percent of small businesses
are structured as pass-through entities and pay their business taxes at the individual level.12 More than one-third of
small businesses employing 20 to 250 employees could face the proposed 5.4 percent surtax. Many also fear the tax
on medical device manufacturers will be passed on to consumers, resulting in increased health care costs. The
Senate Democrats want to tax the Cadillac plans. So, who should pay? The rich or the richly insured?

Hidden Administrative Costs
The CBO estimates the Senate bill would increase administrative costs, such as recordkeeping and reporting, for
the private sector by $139 million per year.13 For example, administrative costs will be tied to the information that
is required for: the individual affordability credits and small business credits; the auto-enrollment procedures and
opt-out requirements; the employer notice requirement; the reporting of employer health insurance coverage; various
grievance and appeal procedures, and transparency and disclosure requirements; and providing proof of insurance
coverage for the individual mandate.

Impact on Self-insured Plans
Employers will need to decide whether self-insuring is a good option in light of health reform. There are some
positive aspects of the current bills for self-insured plans, include exemption from the rating rules and exclusion from
the mandated minimum requirements posed on health insurers in the Exchange. However, there are many areas that
may impact companies that choose to self-insure. Neither bill contains a provision that would prohibit employees
with access to employer-sponsored coverage from leaving the employer’s plan and opting for the Exchange, which
could destroy the viability of self-insured plans due to the reduced number of employees in the employer’s risk pool.
Tax subsidies for low-income workers are available only for use in the Exchange and cannot be used to purchase
employer-sponsored coverage.

The annual tax on self-insured plans, which would be assessed on a per-capita basis, will be an additional burden
on such plans. Further, the market reform measures (e.g., guarantee-issue, extension of dependent adults, no lifetime
or annual limits) apply to self-insured plans, which could drive up the cost of self-funded insurance.

Republican Proposals
Other conservative measures include a limit on medical malpractice liability in the form of caps on non-economic
and punitive damages, and a restriction on attorney fees. Republicans also propose a change in laws that prohibit
consumers from purchasing insurance policies across state lines. Insurance is currently regulated at the state level,
with consumers unable to purchase from firms that do not sell plans in their state.




                                                                                                                           11
     retirement:
     Restoring Retirement Security


     Whether you are a plan sponsor for a for-profit company or a nonprofit organization, you are undoubtedly concerned
     about the challenging economic and financial environment our country is in. We have recently experienced some of
     the most difficult conditions in decades – severe market downturn, economic and credit crisis, the Madoff scandal,
     uncertain regulatory and legislative environment – and they have threatened the future financial security of most
     employees. Many near-retirees are now postponing retirement, or facing the prospect of a lowered standard of living
     during retirement.14
     In fact, total assets in defined contribution plans declined by over $1 trillion in 2008.14
     Today’s environment has left most plan sponsors unsure about how to proceed. There are a multitude of questions
     collectively going through the minds of many plan sponsors right now: “What will the consequences of all of the
     negative events be?” “How will our plan participants recover and get back on track to meet their retirement goals?”
     “Should these events change our company’s strategic view of the plan, or the way we manage the day-to-day
     activities of the plan?”

     The Ultimate Responsibility
     As you try to make sense of the last 12 months, keep in mind that the ultimate responsibility of all plan sponsors –
     and a fiduciary duty as stated by the Employee Retirement Income Security Act (ERISA) – is to manage the plan
     for the “exclusive benefit” of the plan participants and their plan beneficiaries (ERISA Section 404(a)(1)(a): The
     Exclusive Benefit Rule).

     Almost one-half of all plan participants do not have any personal savings outside their company’s retirement
     account.15 With so many employees relying on their company’s plan for their retirement savings, it is imperative
     to create a plan that will afford them the opportunity to reach their retirement goals.

     Total Fiduciary Management
     Getting employees back on track requires plan sponsors to take a global perspective and properly manage all aspects
     of the plan. Often, employers spend the bulk of their time overseeing their plan’s investment options because they
     think that is the extent of their fiduciary obligation. While investment management is critically important, it constitutes
     only a portion of a fiduciary’s responsibilities. There are many operational and administrative responsibilities as
     well; plan design, vendor and fee benchmarking, and participant outcomes, for example, are vitally important
     fiduciary functions.

     Plan Design
     As you look to restore the confidence of your employees, understand that plan design can play a key role in getting
     employees in a better position for a more secure retirement. Proper plan design can remove obstacles and become
     an effective way to help employees help themselves.

     Given that no two companies are exactly alike, each plan sponsor must consider its own needs and objectives when
     designing a plan. Important steps to take during the design process are:

     1. identify plan goals and objectives – Is your goal to recruit and retain/reward your employees? Or, is it to
       maximize your company’s tax deductions? Both? Or something else altogether?

     2. review your company’s demographics – Do you have mostly full-time or part-time employees? Does your
       company experience much turnover? If so, does it usually happen in the first 90 days? 120 days? This information
       helps determine appropriate eligibility requirements.

12
3. analyze your budget – Does the company have the resources to make any sort of company contribution (e.g.,
  company match or profit sharing contribution)?

4. review the current metrics of your plan (e.g., participation rates, deferral rates, outstanding loan balances) –
  Compare those plan metrics against an industry benchmark. (Discussed on Page 15)

5. Design your plan based on the results of the previous four steps – For example, if your participation rates are
  low, you might consider automatic enrollment. (Discussed on Page 15).

Vendor and Fee Benchmarking
It is important to align your plan with a provider who can accommodate your plan design features, as well as satisfy
your company’s specific needs, objectives and demographics. Not all plans are alike, and neither are all providers.

Generally, the most effective method for determining an appropriate fit for your plan is the request for proposal (RFP)
process, which includes the following steps:

1. analyze the services you are receiving from your current plan provider.
2. Determine any and all fees you are paying for those services.
3. Benchmark those services and fees against several other providers to determine where you stand on a
   relative basis.
However, the RFP process often focuses on features rather than results. While features can be attractive, they are not
meaningful unless they actually produce results. So the most forthright question for any vendor is: “Do the services
you provide result in plan participants having the ability to comfortably retire?”

Evaluate a provider just as you would evaluate your plan’s metrics. Ask them:
s What is the replacement ratio of the plans that you recordkeep? In other words, what is the percent of income that
  participants in your plans replace? 60 percent? 80 percent?
s What is the average participation rate of the plans that you recordkeep?
s What is the average deferral rate of the participants who are deferring into plans that you recordkeep?

These questions focus on results – not features – and provide insight as to whether a provider can be effective for
your plan.

Analyzing Fees
When evaluating your plan’s fees, consider the value (services) you receive relative to the fees you are paying. It
should not just be a cost comparison; it should be a value comparison. Even the courts weighed in on that very point.
The Court of Appeals for the 7th Circuit in the Hecker v. Deere case recognized that the “reasonableness” of costs
borne by a plan is dependent, to a substantial degree, if not entirely, on the services being offered to the plan.

Unfortunately, there is no standardization of retirement plan pricing. Each vendor charges fees in a different way
and, unless you know where to find the information and how to analyze it, it is difficult to truly compare vendors.
But a lack of information or a lack of knowledge is no defense for not understanding your true plan costs. ERISA
Section 404(a)(1)(a) requires that sponsors know that their plan fees are “reasonable” (although it does not provide
a clear definition of reasonable).


                                                                                                                          13
     retirement:
     Restoring Retirement Security


     To improve the provider selection process for plan sponsors, it is expected that the Department of Labor (DOL) will
     release fee disclosure guidance later in 2010. Phyllis Borzi, the assistant secretary of Labor, recently emphasized
     that “it is important that fees are transparent.” She further noted that the DOL’s goal is to provide more robust
     regulations that “ensure that fiduciaries have all the information they need,” and that the final product should
     permit an “apples-to-apples” comparison.16 However, with health reform still at the forefront for Washington, any
     new retirement legislation could be delayed.

     In the meantime, make your best effort to:

     1. obtain your plan’s total current fees.
     2. Benchmark those fees (i.e., obtain costs for similar plans and compare).
     3. engage an expert if you need assistance with step 1 and step 2.

     Investment Oversight
     Since fall 2008, the stock market has experienced a volatile ride. First a dramatic decline, then some up and
     down activity followed by a relatively more stable market in the last quarter of 2009. Overall, 2009 saw a notable
     improvement, but most experts are still a bit cautious about 2010.

     Universally, many plan sponsors wonder whether they had the proper oversight of their plans’ investment options
     during this turbulent time. “Could we have done anything differently to avoid the impact?” is a common question,
     followed by, “What can we do in the future to mitigate our risk?”

     As for the recent market fall, there might not be much you could have done differently. The markets took a tumble
     across the board; every sector was affected. Because markets cannot be predicted – even by the experts – ERISA
     demands that plan sponsors have a thorough and well-documented investment process in place (ERISA Section
     404(a)(1)(B)).

     To mitigate your risk, remember that the best defense is a strong offense. At the very least, make sure to:
     s Create an Investment Policy Statement (IPS)
     s “[Select investments] with the care, skill, prudence, and diligence under the circumstances then prevailing that a
       prudent man acting in a like capacity and familiar with such matters would use …” (ERISA Section 404(a)(1)(B))
     s Hold consistent meetings (e.g., quarterly, semiannually or annually) to ensure the plan’s adherence to the IPS
     s Document meeting minutes
     s Make changes to the plan as dictated by the IPS
     s Communicate changes to participants

     Make sure all of these steps are part of your written, formal process.

     Participant Outcomes
     All of the major decisions a plan sponsor must make – plan design features, finding the right provider, selecting
     quality investments, etc. – boils down to one fundamental question: Will your employees have enough money to
     comfortably retire? That really is the bottom line.




14
Having a positive participant outcome is the ultimate goal of any company’s retirement plan. The current market
instability and the shaky economic environment certainly make it a challenge to meet that goal. And, prior to the
market downturn, it is no secret that there were existing problems in the defined contribution system. Many plan
sponsors would agree that before the market collapse:

s Too many employees still did not participate in their company plans.
s For those who did participate, many were not setting aside enough dollars to comfortably retire.
s Many participants did not have well-diversified portfolios.
s Loan balances were high, which means participants might not have been using the plan for a retirement vehicle,
  but for current expenses instead.
So how do plan sponsors deal with all of these hurdles and still create positive outcomes for their employees? And
how do they do it in a way that is cost-effective and does not create too much administrative burden?

Real Solutions
In addition to the steps outlined in previous sections, here are a few practical solutions to more effectively manage
your retirement plan:

Run a Plan Diagnostic
Before you can create positive outcomes, you must assess the current state of your plan. Measuring participant
outcomes is no easy task, however. What do you even look for? How do you measure?

Start by measuring certain metrics of your plan (e.g., participation rates, deferral rates and outstanding loan
balances) and then compare those metrics to an industry benchmark. The results will be the best indicator of
your plan’s current condition.



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    nfp’s proprietarY pLan DiagnostiC. after Determining YoUr pLan’s DiagnostiC
    resULts, YoUr aDvisor wiLL Create a pLan for sUCCess that oUtLines speCifiC
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Implement an Autopilot Plan
If your plan diagnostic results indicate that your participation rates and deferral rates are below industry averages,
then you might consider implementing an autopilot plan. These plans enable plan sponsors to:

s Automatically enroll employees into the plan (unless they opt out of the plan)
s Routinely increase participants’ deferral amounts over time
s Default participants into certain investment vehicles, such as target-date funds or managed accounts




                                                                                                                         15
     retirement:
     Restoring Retirement Security


     Advantages of an autopilot plan:
     s Offers participants a pre-defined path that is designed to maximize retirement outcomes, which mitigates
       fiduciary risk
     s Reduces direct recordkeeping costs and administrative overhead; no customized offering for each participant
     s Streamlines plan operations and simplifies decision-making for the employer because it is mostly automated
     s Reduces the amount of time that a sponsor needs to periodically redesign the plan and educate participants

     Consider Target-date Funds
     Take the autopilot plan one step further by defaulting participants into an already diversified portfolio. This can be a
     huge help to employees, particularly for those who struggle with how to invest their contributions. Target-date funds
     offer participants diversification with the convenience of “one-stop shopping,” automatic rebalancing and access to
     some degree of customized risk management. They represent a “point-and-click” solution, incorporating many of the
     best practices in long-term investing.



     a target-date fund is a “fund of funds” that allows participants to link their investment portfolios to a particular
     time horizon, typically an expected retirement date. in fact, a target-date fund characteristically has a date in
     its name, such as a 2015 fund or a 2030 fund. a target fund aiming at a date in the somewhat distant future
     tends to have a fairly aggressive asset allocation, with a focus on growth. as the target date approaches, the
     fund is designed to become more conservative to preserve the assets that have accumulated and eventually
     to provide income. each fund company formulates its own approach to risk, so that the allocation of one
     2025 fund may be noticeably different from the allocation of a 2025 fund from a different company.


     However, not all target-date funds are created equally, so make sure you closely evaluate and carefully choose
     the target-date funds for your plan. The market downturn produced some extreme investment losses in some
     target-date funds, particularly the 2010 funds, which means participants who were close to retirement were
     the most adversely affected.

     These losses have drawn the attention of both the politicians and the regulators. Although these funds should
     continue to enjoy the status of a qualified default investment alternative (QDIA) and be structured in much the same
     way, there will be a much greater focus on them.

     What does that mean for plan fiduciaries? That you should ask your provider, at the very least, these two questions:

     s Are our plan’s target-date funds aggressive or conservative when compared to the universe of target-date funds?
     s Are our target-date funds designed for the glide path to end at retirement or does the glide path continue for years
       beyond that?

     Equipped with that information, plan sponsors need to decide whether the design of the target-date fund is
     appropriate for their participants.



16
Engage an Expert
Without a doubt, your plan fiduciary responsibilities are quite extraordinary. Running a retirement plan in today’s
world is very challenging; in fact, even the most practical solutions might sound too daunting to implement on
your own.

The best opportunity you have to meet all of your plan obligations is to work with an expert advisor — a
professional who can help manage and mitigate your fiduciary risk. Someone who knows what your obligations are,
who understands your challenges and can create real solutions. Just as you would hire an attorney to address your
legal concerns, you should hire a professional to address your plan responsibilities.

Impact on Executive Compensation
Many employers want to hang on to key employees who helped them survive challenging times. However, there
continues to be intense scrutiny regarding executive compensation packages. Compensation committees and boards
of directors have been forced to justify each pay and bonus decision to alleviate excess compensation concerns by
shareholders and the public. As a result, many companies are not updating existing executive compensation plans
or implementing new plans. With such a strong focus on this area, it is important to thoroughly re-evaluate your
approach to an existing plan, or to carefully evaluate whether you want to implement such a plan. As you closely
look at the situation, keep in mind what is happening in Washington:

s Lobbying groups and industry players have had success in helping legislators understand that deferred
  compensation is not necessarily excessive compensation. An executive who defers pay for some time in
  the future could lose that money if the company goes bankrupt. Since executives who defer pay put their
  own money at risk, the arrangement actually aligns their interests with that of shareholders.
s Continued uncertainty about health reform, particularly how it will be paid for, will likely impact
  how companies finance executive compensation plans in the future.
s As Congress seeks additional revenue sources, it may look to deferred compensation plans as a new
  source, potentially diminishing some of the current tax advantages.

Seeking consultation from an expert advisor on the sensitive topic of executive compensation is probably the best
approach for employers to take. The good news is that new solutions that can help employers achieve their goals
while addressing current challenges do exist.




                                                                                                                      17
     the path
     forwarD
     the current economic environment is challenging employers and employees alike. the need to do more
     with less is greater than ever. the need for employers to maintain strong benefit programs is important
     if they are to maintain their ability to attract and retain the best workers, maintain health and productivity
     levels, increase morale and provide employees with the peace of mind that comes with knowing their
     retirement plans are on track and their families are protected.

     health reform continues to be a priority for the current administration and, if passed, will only serve to
     make the current health care environment more complex. employers need advisors who understand
     both their retirement and insurance needs, and can assist them in navigating the complex benefits
     landscape. employers who do this will find themselves well-positioned today, and will be able
     to provide a competitive advantage long after the economy has swung back to recovery.

     we remain CommitteD to staYing aBreast of the Latest tooLs, resoUrCes, trenDs anD
     LegisLative DeveLopments so we Can empower YoU anD YoUr empLoYees to make the
     Best DeCisions regarDing YoUr retirement anD heaLth Care neeDs.




18
soUrCes
1.  U.S. Department of Labor’s Bureau of Labor Statistics. www.bls.gov/news.release/empsit.nr0.htm.
2.  Metropolitan Life Insurance. “The 2009 MetLife Study of the American Dream.” 2009. Pages 2-3.
3.  The Segal Group, Inc. “2010 Segal Health Plan Cost Trend Survey.” 2010. www.segalco.com.
4.  PricewaterhouseCoopers’ Health Research Institute. “Behind the Numbers – Medical Cost Trends for 2010.” 2010.
    www.pwc.com.
5. Kaiser Family Foundation. “Kaiser Health Tracking Poll.” Nov. 5-12, 2009. www.kff.org.
6. Kaiser Family Foundation. “Kaiser Health Tracking Poll.” January 2010. www.kff.org.
7. The Office of the Actuary in the Centers for Medicare & Medicaid Services. “National Health Expenditure Predictions
    2009-2019.” www.cms.hhs.gov.
8. U.S. Census Bureau Center for Economic Studies. www.ces.census.gov.
9. Congressional Budget Office. “An Analysis of Health Insurance Premiums Under the Patient Protection and Affordable Care
    Act.” Nov. 30, 2009. www.cbo.gov.
10. Republican Members of the House Ways and Means Committee. “The Common Sense Health Care Reform and Accountability
    Act.” http://republicans.waysandmeans.house.gov.
11. Congressional Budget Office. Letter to Sen. Evan Bayh. Nov. 30, 2009; and Oliver Wyman, “Insurance Reforms Must Include
    a Strong Individual Mandate and Other Key Provisions to Ensure Affordability.” Oct. 14, 2009.
12. National Federation of Business. “Summary: America’s Affordable Health Choices Act of 2009 (H.R. 3200).” www.nfib.com.
13. Congressional Budget Office. Letter to Senator Harry Reid. Nov. 18, 2009. Page 18.
14. Investment Company Institute. “2009 Investment Company Fact Book.” 2009. Page 91.
15. Employee Benefit Research Institute. “The 2008 Retirement Confidence Survey.” April 2008. Page 12.
16. ASPPA. “DOL Speaks: The 2009 Employee Benefit Conference in Washington, D.C. ” Sept. 15, 2009. www.asppa.org.
    This material was created by National Financial Partners Corp. (NFP), its subsidiaries, or affiliates for distribution by their Registered Representatives,
    Investment Adviser Representatives, and/or Agents. This material was created to provide accurate and reliable information on the subjects covered. It
    is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your
    individual situation.
    NFP and its subsidiaries are not associated nor endorsed by the Social Security Administration, the Department of Health and Human Services or the
    Department of Labor.
    The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established pension
    and health plans in private industry to provide protection for individuals in these plans. NFP Benefits Partners, a division of NFP Insurance Services,
    Inc., which is a subsidiary of National Financial Partners Corp. (NFP), the parent company of NFP Securities, Inc. NFP and its subsidiaries are not
    affiliated with any additional entity using this material.
    Please note that a Target Date Fund’s principal value is not guaranteed at any time, including at the target date. Fund objectives may change over time,
    becoming more conservative as the target date approaches.




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