How Behavioral Health Benefits Work Together

An effective behavioral health program should include an integrated mental health/chemical dependency benefit that includes inpatient and outpatient services as well as an EAP. This combination of relatively low-cost benefits provides a "safety net" for the wide range of behavioral disorders suffered by a worker population and its dependents. But a behavioral program's effectiveness relies on (1) employee and employer awareness of the program's services and value, (2) appropriate use of the benefits, and (3) how well the behavioral vendor and its network providers prevent and manage costly disorders.

Even when people access their behavioral benefits by calling for a referral, the "presenting symptom"—such as the need for divorce counseling—is often the tip of the iceberg.

A typical example is "Jim"—recently divorced, he is having excessive difficulty adjusting to the situation. Jim calls his MBHO and is asked a series of questions to ensure he receives a referral to appropriate services. Jim is referred to a specialist in marriage and family therapy (MFT). After an initial assessment the therapist determines that his patient is experiencing adjustment disorder with depressed mood. As therapy progresses, additional factors come to light. The therapist finds out that the primary reason for the marital breakup was financial—apparently Jim had been—and still is—abusing cocaine and depleting the couple's bank account to support his habit. The therapist calls the MBHO, and the licensed professional who takes the call refers Jim into a chemical dependency intensive outpatient treatment program. The MBHO case manager also recommends Jim use his EAP benefit for financial counseling. Fortunately Jim had access to a full behavioral program, because each one of his behavioral benefits was essential to a successful recovery.

Even seemingly obvious EAP situations, such as a need for referral to childcare, can turn into a need for more extensive mental health benefits. Often individuals will begin EAP counseling for this type of situation only to run out of visits. Take a look at how this can occur:

"Mary," a production worker in a large manufacturing plant, is divorced and the mother of two children, ages three and six. She is living paycheck to paycheck and works from 7:30 a.m. to 4:30 p.m. Monday through Friday. She has her childcare down to a "science." Before work she drops off her three-year-old at a day care facility near her house, then swings by school to drop off her six-year-old. Mary enjoys a reputation as a loyal, dependable and productive worker. Suddenly Mary begins coming into work late, is frequently absent and the quality of her work slips. When her supervisor confronts her, she breaks down in tears, confessing that her three-year-old has a recurring illness and the day care center will not watch her. She's been relying on the goodwill of neighbors, which is often sporadic. The supervisor recommends that Mary contact her EAP for a referral to a childcare facility that takes sick children, which she does. But her childcare issues are only the tip of the iceberg. Because Mary's an hourly employee and has missed work, her income has fallen and she is behind on her rent and other bills. In addition, the new childcare facility is expensive and adds to her financial problems, compounding her stress. She contacts her EAP, receives a referral to consumer credit counseling and also makes an appointment for emotional counseling because she is deeply concerned about both her daughter and her job. She forges a bond with her counselor and begins making progress.

Behavioral Healthcare Benefit Plans

Typical Plan Features

According to the Substance Abuse Mental Health Services Administration (SAMHSA), the vast majority of employer-sponsored plans cover inpatient and outpatient mental health treatment services. Roughly half of all employers cover intermediate mental health treatment services such as residential treatment and partial (or day) hospitalization. Approximately 60 percent cover intensive outpatient services, which can include psychosocial rehabilitation, case management, and wraparound services for children (developing treatment plans for children that involve their families). Many plans also include a parity benefit—often called a "severe mental illness" benefit—that specifies which disorders are covered under their state parity law. A well-designed benefit package should cover a wide range of clinically effective services and treatments while incorporating financial incentives to substitute lower cost alternatives for higher cost alternatives when it is clinically appropriate to do so.

Benefit Plan Variables

As previously discussed, mental health and substance abuse coverage has long been characterized by limits that do not apply to healthcare coverage in general. The typical employee healthcare benefit plan offers 30 annual inpatient mental health treatment days and 20 annual outpatient mental health visits. Industry studies show that approximately 80 percent of employees have less generous limits, copayments, and coinsurance deductibles for inpatient mental health treatment than for medical treatment. Although nearly 20 percent of all employer-sponsored health plans have no day or visit limits on inpatient and outpatient health care, more than 50 percent of the plans covered just 20 outpatient mental health treatment visits, and nearly 60 percent covered just 30 or fewer inpatient days. While approximately 80 percent of all covered employees have copayments for medical treatment of less than $20 per visit, only 40 percent have copayments of less than $20 for outpatient mental health treatment visits.

ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) regulates the majority of private pension and welfare group benefit plans in the United States. The provisions of ERISA prevent states from regulating multistate employers on the provisions of their health benefits. Most notably, this affects the 9.5 million federal employees enrolled in the Federal Employee Health Benefit Plan (FEHBP). It also affects many large, self-insured employers and union trust groups.

HIPAA

HIPAA applies to all health insurance plans, including MBHOs. HIPAA allows employees to continue their health insurance coverage from one group to another. HIPAA's nondiscrimination provisions prohibit a group health plan or insurance company from denying an individual eligibility for benefits or from charging an individual a higher premium based on a health factor, including health status, medical condition (both physical and mental illnesses), claims experience, receipt of health care, medical history, genetic information, evidence of insurability, and disability. HIPAA also may serve to reduce health care fraud and abuse and protect privacy and is projected to significantly reduce the 29 cents of every health care dollar spent today on administration. The HIPAA Administration Simplification component consists of three areas:

• Data Standards. Enforce standards for the electronic transmission of health care information.
• Security. Protects confidential and private information through sound and uniform security practices.
• Privacy. Maintains confidentiality of member information.

Because behavioral stigma still prevails, HIPAA plays a particularly important part in protecting sensitive patient information gathered during behavioral treatment.

The Concept of the "Customized" Pharmacy Benefit

One challenge employers face with tiered benefits is that they are often based upon the drug cost and may penalize some members with the most serious needs. For example, consider the situation of a patient with osteoarthritis. For 85 percent of patients, generic NSAIDs will provide adequate and appropriate therapeutic outcomes. Those members can secure such drugs under the average pharmacy benefit plan at a first or second tier copay level—typically $10 to $25 per prescription.

The challenge is with patients who have drug sensitivities, and who may be at risk for upper gastrointestinal (GI) bleed. Such patients are clinically suited for COX II (cyclooxygenase) inhibitors, an enzyme associated with pain and inflammation. If Cox IIs are the highest tier, they could cost patients $100/month; a price those on fixed incomes cannot afford. A far better approach is to have certain categories of drugs available at an affordable tier price through prior authorization, a formal process instituted by some PBMs to ensure appropriate utilization. Another reason to consider prior authorization for COX IIs is that these drugs have the potential to cause heart disease, kidney and liver failure as well as other serious illnesses. In late 2004, a popular COX II was voluntarily removed from the market by its manufacturer due to concerns over increased risk for cardiovascular events, such as heart attack and stroke.

The challenges of balancing costs and access are best addressed by recognizing that the goal of an effective pharmacy benefit program must be to encourage appropriate utilization, not to limit access to necessary prescription medications. By incorporating a customized approach to their pharmacy program, plan sponsors can develop a benefit focused on achieving the best outcomes at the most affordable costs.

An effective customized approach to pharmacy benefits includes:

• Careful analysis of pharmacy and medical claims data;
• A strong therapeutic formulary;
• Programs to promote prior authorization for restricted and non-formulary drugs; and
• Targeted disease interventions.

Claims Analysis.  By analyzing medical and laboratory data, PBMs can help to identify utilization rates, average length of therapy, physician prescribing patterns, and other information that can provide a more complete picture of the organization's overall utilization patterns. Once this information is gathered and analyzed, it will be easier to identify areas of need as well as potential problems. From this information, the PBM can develop a "customized" approach to the pharmacy benefit. This approach also helps to ensure that pharmacy benefits do not operate in a silo. Medical and pharmacy benefits are closely intertwined. To secure optimal clinical and financial results, medical, pharmacy, lab and other available claims data should be integrated, compared and adjusted based on each benefit's impact on the other.

Formularies.  Formularies have become an important benefit design feature for many employers today. The need for some type of approach to manage utilization among plan members today is clear. Consumers (e.g., employees and plan members) are encouraged to request high-cost newer drugs through pharmaceutical marketing tactics. One study showed that more than 39 percent of the time, physicians will prescribe medications patients see advertised. Employers want to offer their employees a competitive drug benefit in an effort to attract and retain valuable employees. However, offering, an "anything you want" strategy may have a negative financial impact on the plan sponsor.

In addition, a key issue with many employers' current formulary program is that they are often driven by a quest to secure the most rebate dollars. There are two fundamental flaws with this approach: (1) as the number of available generics increases, rebates will decrease; and (2) formularies not based on safety and efficacy can put the plan sponsor at risk for higher costs in terms of increased visits to physicians and the ER, as well as higher utilization of other prescription products.

The key to an effective managed care approach to pharmacy benefits is to align employer and employee incentives. Experienced PBMs can use pharmacy data to identify popular drug therapies and with that data, they can negotiate lower purchasing rates and rebates with pharmaceutical manufacturers for the most therapeutically appropriate and popular medications, and ensure those medications are on formulary.

The same claims analysis can also highlight the overall value a drug therapy choice may have for the plan sponsor. For example, a prescription drug may be more costly, but analysis might show that members will be more compliant, have fewer side effects and be more satisfied with the benefit if it is a formulary option.

A strong clinically focused Pharmacy and Therapeutic (P&T) Committee is a key component of an effective formulary program. P&T decisions must be based on recognized clinical literature, research and the latest outcomes data. When intensive review is combined with strong education of physicians and plan members, it can better highlight the optimal clinical value of the formulary. Strong and frequent education of physicians and employees is also important to ensure ongoing support and acceptance of the formulary.

Prior Authorization.  The use of a formulary and P&T committee can also help to build a strong and effective prior authorization program. As noted, prior authorization is the process used by PBMs to approve formulary and nonformulary prescription drug choices where the plan needs to exert control or restrictions on the drug in question. Formulary programs should be developed, and their rationale communicated to physicians and plan members in an effort to ensure that while available, prior authorization is rarely needed. When it is necessary, it must be highly responsive—physicians should be able to speak immediately with pharmacists if needed and their request must be promptly answered—preferably while on the phone with the pharmacist. In the event a request for a drug is denied, specific clinical and outcomes data should be available to support the plan's decision and access to a plan medical director provided to the physician whose request is being denied.

Targeted Disease Interventions

While formularies and prior authorization are the cornerstones of a customized pharmacy benefit, the next step for employers is to take that foundation and use it to develop more targeted disease interventions (TDIs). TDIs use an integration of pharmacy and medical claims data to identify areas within the pharmacy benefit that involve high cost, highly utilized drugs. TDIs provide value to plan sponsors as they can help to improve outcomes and manage costs. In addition, a targeted approach to disease management can help large self-funded plans better meet requirements for Health Plan Employer Data and Information Set (HEDIS^®) standards and Medication Therapy Management Programs as required under the Medicare Modernization Act. For example, the financial impact of migraines on American business is close to $18 billion a year in lost wages and decreased productivity. Yet, less than one-half of the 35 million Americans afflicted with migraines are treated. Recognizing the need to address the impact of migraines, a West Coast PBM developed a Migraine Prophylaxis Management program. The TDI focused on three key areas:

1. Helping physicians recognize patients that needed migraine medications, and providing information on available pharmacologic treatment options for those patients;
2. Educating plan members through their physicians on the causes and symptoms of migraines; and
3. The utilization of first-line over-the-counter therapy, which has been clinically proven to provide effective pain relief for many migraine sufferers.

The plan sponsor reported significant results from the program, including:

• Increasing the targeted number of patients on prophylactic migraine medications from 31 percent to 69 percent;
• Achieving a $16.57 PMPM savings in medical costs (migraine related) among members targeted for the intervention.
• Decreasing migraine-related ER/hospital visits and physician visits by 63 percent and 29 percent respectively in members targeted for the intervention.

Most significantly for the plan sponsor, while appropriate utilization of medications increased, overall medical costs (migraine related) decreased from $42 to $25 PMPM. Another high-cost, high-impact drug utilization category for employers is antidepressants. The financial cost of depression to society in missed days at work and school, medical expenses and premature death are more than $43 billion annually. Close to 20 million people each year develop depression, yet it remains one of the most under-diagnosed and treated diseases in the nation. A depression TDI for a Midwest health plan helped to increase medication compliance and persistence by 8 percent and 14 percent respectively for the acute phase of therapy, and by 12 percent and 16 percent, respectively, for the continuation phase of therapy. The health plan viewed this as a highly successful and worthwhile program. In addition, this TDI also resulted in improvement of the health plan's HEDIS scores.

Traditional Pharmacy Benefit Cost Management Practices

While many plan sponsors are exploring alternative benefit designs, it is also important to recognize that existing cost management strategies may continue to play a role, either in support of an alternative plan or as an ongoing component of the benefit program. Plans and PBMs may wish to refocus their vision to use traditional benefit designs in more tailored, aggressive and innovative ways, thus achieving their goals without the need to move to more radical alternatives. Poorly managed traditional benefit designs are often to blame for runaway cost trends.

Generics

Generic drugs now make up more than 50 percent of all prescriptions filled but represent only a fifth of dollars spent. By 2010, patents will expire for 15 blockbuster drugs (those with sales exceeding $1 billion annually), including the hyper-cholesterol drug Zocor^®, the antidepressant Zoloft^®, and the "mega-blockbuster" ulcer medication Prevacid^®, a prescription drug with current sales of $3 billion.

Generic drugs save consumers an estimated $8–10 billion dollars annually at retail pharmacies. However, plans sponsors should not simply automatically switch from branded to generic drugs. Any savings from generics should be balanced against the clinical value of the branded drug, as well as the potential cost implications (e.g., loss of rebate revenue, which may make the net cost difference negligible).

Another factor to consider is the effect of the initial six-month exclusivity period on generic drug pricing. While brand-name drugs typically receive between nine and 12 years of market protection after the Food and Drug Administration (FDA) approval, the period of exclusivity granted to the first company to file and receive FDA approval for a generic drug is only six months. To capitalize on their exclusivity, many generic drug manufacturers will actually set the price of the generic to within 15–20 percent of the brand-name price. Thereafter, prices may drop more dramatically, as other manufacturers are free to enter the market.

When deciding what, if any, changes should be made to their current generic drug programs, plan sponsors should take the following steps:

• Conduct a thorough analysis of current pharmacy claims data;
• Determine the current utilization rate for brand name drugs that have generic alternatives; and
• Conduct a prospective analysis using current utilization rates compared to branded drugs scheduled to become generics to help predict costs in the short- and long-term.

The last step is to determine the impact of moving to generics on the branded drug rebates and other cost factors. In some cases, lack of generic competition keeps the generic prices near that of the brand they are competing against. In some cases brand rebates will allow for parity with the generic price. Be sure to fully understand the net cost analysis before deciding on a generic strategy.

Copays

One of most common PBM cost management strategies is a copay model. Such programs are simple to implement and understand. However, challenges include its propensity to insulate plan members from actual costs and the inability to drive members to preferred drugs that may be less expensive and perhaps more effective.

Tiered Benefits.  Tiered benefits provide another way for plan sponsors to offer coverage for popular, high-cost drugs, while promoting cost-sharing for the most expensive medications, or those not on the formulary. Tiered benefits have grown considerably over the past five years. While in the past most plans offered one or two tiers, today some plans offer up to five tiers on their benefit plan. While tiered benefits are growing in popularity, often plan sponsors do not recognize that they can be combined with managed care techniques such as prior authorization—allowing the plan sponsor to secure even greater savings and further ensuring patients can access appropriate medications when needed. Toward that end, some plan sponsors are developing closed benefits in conjunction with their tiered programs. Such a strategy works well as defined therapeutic classes, including ACE Inhibitors for the treatment of hypertension, NSAIDs for allergies, and Selective Serotonin Reuptake Inhibitors (SSRIs) for depression, often require prior authorization.

Copays for tiered benefits have increased steadily over the past few years. According to the 2003 edition of A Guide to Drug Cost Management Strategies, between 2000 to 2003, copays increased from $7.51 to $8.14 for first tier drugs (often generics) to $31.30 from $25.71 for third tier drugs (typically the highest cost medications).

RULES FOR COMMUNICATION | Communicating the Benefits

In the 1985 IDS/IPM publication 'The Merit Factor - Rewarding Individual Performance', 12 rules for internal communications were reproduced. As background to any communication plans we believe they have enduring value and list them below:

1. There is no such thing as a stone-cold certainty in business decisions and it is important everyone in a business realizes this.
2. If a board cannot or will not clearly spell out its business strategy, employees are entitled to assume it does not have one.
3. Assume that in an information vacuum, people will believe the worst.
4. Never take it for granted that people know what you are talking about.
5. Always take it for granted that people doing a job know more about it than you do.
6. Telling people something once is not much better than not telling them at all.
7. Never assume that people will tell you anything that reflects unfavourably upon themselves.
8. Remember that employees read newspapers, magazines and books, listen to the radio, watch television, and surf the Internet.
9. Do not be afraid to admit you were wrong; it gives people confidence that you know what you are doing.
10. Asking for help, taking advice, consulting and listening to others are signs of great strength.
11. Communicating good news is easy but even this is not often done by management; bad news is all too often left to rumours and the grapevine.
12. Changing attitudes in order to change behaviour takes years - changing behaviour changes attitudes in weeks.

HOW TO COMMUNICATE - INDIVIDUAL INFORMATION

Individual members of staff will, of course, receive letters of appointment, which should tell them their grade and refer them to a staff handbook and/or site on the intranet which gives details of the grading and performance schemes. Whenever they are upgraded or promoted they should receive another letter congratulating them on the event and providing encouragement for the future. Considerable attention should be given to the wording of these letters to ensure that they come over as warm and sincere rather than cold and bureaucratic or, worse, patronizing. They should always be handed over personally by the manager to ensure that the opportunity to get needed messages across is taken.

Face to Face

The best way to communicate personal information is face to face. Employees should be seen regularly by their manager for discussions and coaching on their performance. Personal explanations should be given to them of the reasons for the employee's rate of salary progression or most recent increase. These meetings should focus on recognition and coaching as well as discuss what actions the employee has to take to progress faster or to get more next time.

Potential for promotion, lateral moves and salary progression in the longer term should also be discussed at these meetings. Ideally, employees should be given the opportunity to talk to their immediate supervisor's manager in order to get a broader view. People with strong potential should also meet a career planning adviser who can act as a mentor in discussing future career steps, the further training or experience they need and the glittering prizes that await them if they do really well.

WHY COMMUNICATE? | Communicating the Benefits

One of the prime objectives of the reward system should be to motivate people and so ensure their commitment. Hence the theme of paying for performance and contribution which has run throughout this book. But how can the system motivate if left to its own devices - if people are unsure why the system was developed, suspect that it is unfair, or are unsure about how their pay will be linked to performance, or what their future rewards are going to be as they take on greater responsibility? And how can the organization get any mileage out of its logical, equitable, competitive and even creative reward system, its high level of rewards or its generous employee benefits package if it does not tell its employees all about them?

Payment systems can sometimes demotivate even more effectively than they motivate, even if introduced with the best intentions. This is because they often seem to be unfair. Pay is perceived as being either inequitable or not commensurate with performance. Elliott Jacques called this the felt-fair principle. He suggested on the basis of extensive research that people feel their pay ought to be fair in relation to their personal contribution, to what other people are being paid within the organization, and to what is being paid by other organizations for similar jobs. If management wants to motivate its employees, these expectations must be satisfied. It is worth remembering that the most respected theory of motivation - the expectancy theory - states that it is what people expect to get, if it is worth having, which will motivate them most effectively, rather than what they have already got.

So it is important to motivate people by telling them that what they have got is worth having - if that is the case - and even more important to tell them what they can expect. This starts with the recruitment process and ends with the way in which retirement or indeed severance is handled. If they have been rewarded for doing well, that has to be communicated to them. If they are going to get higher rewards for doing even better in the future, that must also be communicated, but more clearly and attractively.

LESS COMMON BENEFITS ASSOCIATED WITH EXPATRIATE ASSIGNMENTS

Servants

Although the employment of servants may sound like a relic of a bygone century, there are still many countries in the world where it represents affluence, power and status. In such locations, expatriates - and the companies that they represent - are expected by the local populace to conform to best market practice and it is probably not unreasonable to infer that the esteem in which they are held will increase in proportion to the number of servants they employ. They will also, in many cases, be providing much-needed employment and so be contributing to the wealth of the community.

In addition, there are locations, notably parts of Africa and Central America, where security poses a real threat to anyone whose affluence is notable. In such places, merely being foreign might be enough to trigger thoughts of theft, kidnap or brutality in the minds of the local criminal fraternity. It therefore goes without saying that security guards are an essential part of these remuneration packages.

Club Subscription

Club membership fees and subscriptions are usually paid for by an expatriate's employer if there is a good business case. The social environment is seen as an important part of the settling-in process as well as a useful source of business contacts, particularly in developing countries.

Sports clubs are the commonest form of benefit and, in some areas, it may be necessary to provide access to more than one club - for instance where a golf club does not have separate facilities for squash and swimming. This benefit is not to be underestimated since, in many expatriate communities, the waiting list for club membership is long and the cost of joining correspondingly high.

Rest and Recuperation

'R&R' is usually a feature of a remuneration package for an expatriate in a high-hardship territory. The intention of the employer is to fly the expatriate (plus family if appropriate) to the nearest non-hardship location where decent meals, temperate climate and good communications may be enjoyed. R&R visits rarely exceed one week and are often no more than long weekends. The advantages to the employer are twofold: the trip is relatively cheap and the employee returns to work refreshed, with minimum disruption to the work schedule. R&R leave also often doubles as a shopping trip to allow the expatriate to stock up on essential items.

SPECIAL BENEFITS | Tax Considerations

Company Cars

If a car is made available to a director or employee who is paid more than £8,500 a year, the employee will be liable to tax based on the value of the benefit. This value is calculated by reference to the list price of the car and the level of CO₂ (carbon dioxide) emissions. Until 6 April 2002 the car benefit was calculated on the list price of the car, with deductions available for the amount of business mileage and the age of the car. There are now no discounts available for higher levels of business mileage or for older cars. Furthermore, the emissions criteria become stricter over the initial three-year period. Cars that are made available to employees or to their families are considered to be derived from employment and taxed as employment income accordingly.

The cash equivalent for the car benefit is reduced for any periods of 30 days or more when the car is unavailable. This also applies to the provision of fuel benefit. If the employee is required to contribute to the cost of the car, the cash equivalent is reduced accordingly.

If employees use their own car for business purposes, they can claim a deduction for a business proportion of their running costs, eg insurance, road tax, petrol, etc. Mileage allowances paid are taxable if they exceed the tax-free allowance. These limits vary with the kind of vehicle.

Fuel Benefit

From 6 April 2003, the new car fuel benefit regime is linked to the level of the car's CO₂ emissions. The CO₂ emissions' percentages that apply to determine the company car benefit are also used in the car fuel calculation. However, instead of applying the percentage to the list price of the car, the percentage is applied to a specified amount. For the 2004/05 tax year, the specified amount is £14,400. However, the Treasury do have the power to change the defined specified amount.

The benefit of fuel has been eroded over the past few years due to the increase in the scale charges. It is necessary for an employee to cover significant private mileage in a year to realize the value of fuel benefit.

Living Accommodation

Generally, if living accommodation is provided for employees that is not wholly, exclusively and necessarily provided for them to perform their job, this is treated as earnings assessable under ITEPA 2003. Tax is charged on the cost of providing the benefit. The charge to tax arises if living accommodation is provided for 1) the employee, or 2) a member of his or her family or household.

The method for calculating the amount of earnings depends on the cost of providing the accommodation. Briefly, where the cost is less than £75,000 the cash equivalent is the rental value of the accommodation less any sum made good by the employee. Where the cost exceeds £75,000 the cash equivalent increases to include a notional interest charge on the excess. The charge for living accommodation applies to higher and lower-paid employees.

Loans

Generally if an employee or his relative is provided with a cheap loan the employee is taxable on the cash equivalent of the loan. A cheap loan is one that carries a low rate of interest or is interest-free. In this case the amount of earnings is calculated by reference to the Inland Revenue's official rate of interest less any amount of interest actually paid by the employee on the loan. The official rate of interest is set by the Inland Revenue and generally moves in line with bank rates, although has been set at 5 per cent since January 2002.

Share Schemes for Directors and Employees

Organizations introduce share schemes for a number of reasons such as:

§  to provide an incentive for key members of the management team based on performance; and

§  to encourage employees generally by giving them a stake in the company.

The Inland Revenue has specific provisions for a number of tax-efficient share schemes. There are the approved Save As You Earn (SAYE) share option scheme and the Share Incentive Plan (SIP), both of which are allemployee plans, which are regarded by employers and employees as important ways in which to achieve loyalty and commitment. In addition there are Company Share Option Plans and Enterprise Management Incentives.

Inland Revenue Approved Plans

§  SIP: This is an all-employee scheme. Employees participate by purchasing shares out of their pre-tax salary (partnership shares), which may be matched with free shares. In addition, employees can simply be awarded free shares. These shares, once purchased or awarded, are held on behalf of participants. The employee can receive the shares after five years tax free.

§  SAYE Plan: This is an all-employee plan that enables employees to save between £5 and £250 a month under an approved contract. Individuals are granted options to buy shares in the company, which they can exercise after a period of three, five or seven years. These savings and also a tax-free bonus can be used to exercise their options. Under this plan, a discount of up to 20 per cent can be set on the option price. When the option is exercised there is generally no charge to income tax. On sale of the shares, any rise in value is subject to capital gains tax.

§  Company Share Option Plan: This is a discretionary share scheme so the company is able to decide which of its directors/employees should participate. Under this plan, the maximum market value of the shares at the time of grant is subject to a limit of £30,000. There is no tax payable at the time of grant. At exercise, there is generally no income tax payable. When the individual sells the shares, the growth in value from exercise to sale is subject to capital gains tax.

§  Enterprise Management Incentive (EMI): The EMI was introduced in 2000 and is specifically aimed at smaller companies. The EMI is very flexible and allows an employer to grant options to the value of £100,000 to each employee. There are a number of qualifying conditions that companies and employees have to fulfil. Provided the conditions are not breached when the employee exercises the option, no income tax or National Insurance liability arises. On the eventual sale of the shares, capital gains tax is payable on the difference between the sales proceeds and the option exercise price. The employee can claim the relief from the date the option was granted.

Generally, a corporation tax deduction is available for an employing company in respect of the opportunity cost of providing shares to employees. This will broadly be based on the market value of the shares when they are acquired. The tax relief will be calculated based on the difference between the market value of the shares when they are acquired and any amounts payable for the share, ie the 'profit' to the employee. The corporation tax deduction is not available until the employee becomes taxable on the receipt of the shares. This change was introduced in the Finance Act 2003.

Set-up and administration costs relating to approved share schemes will continue to be tax deductible.

MAIN BENEFITS ASSOCIATED WITH EXPATRIATE ASSIGNMENTS

Housing

Housing allowances, where paid, are sometimes built into the balance sheet method of remuneration but it is more common for them to be treated as separate items. Although there are some employers who provide free accommodation for expatriates up to a certain ceiling, there is now an increase in those who require the employee to make a contribution to housing costs in the form of a 'housing norm deduction'. The level of contribution varies, but is usually around 10-15 per cent of gross notional salary. As this obliges the employee to rent out the home property, the company will usually meet the cost of a property management company to handle home-base rental formalities. The majority of employers strongly recommend that the expatriate retain the home property rather than sell, thus avoiding the risk of re-entering the property market during a boom period. Letting property, of course, is not without risk but this seems to be the preferred practice of a growing number of companies.

Utilities

The cost of utilities can be exorbitant in certain overseas locations - particularly in hot climates where the electricity bill is distorted by the constant use of air-conditioning. Most companies accept that it is their responsibility to make bottled gas, water, electricity and telephones available to their employees abroad but some exact a contribution from the expatriate - usually no more than 20 per cent - to discourage them from wasting power or making too many extravagant international telephone calls. Other companies put a ceiling on the total cost of reimbursing rental and utility costs.

Pensions

Many organizations aim - for as long as legally possible - to retain their expatriates in the home country pension scheme, often based on a notional salary, with the rationale that the expatriate is likely to spend his or her retirement in the home country. Once the maximum period of 'temporary absence' is exceeded, organizations typically operate offshore umbrella schemes or provide an overall guarantee of target benefits. Not only is this approach potentially expensive, but it is also based on traditional pension provision in the shape of defined benefit pension schemes and little scope of cross-border transferability of pensions.

Both these premises are no longer fully applicable in the current environment where defined contribution pension provision is becoming the norm, where - at least within the EU - cross-border pension transferability is eased and where the concept of lifetime employment and the resulting implication of adequate pension provision being the responsibility of a caring employer has largely disappeared. In addition, limitations of tax-approved and therefore tax-favourable pension provision by employees in many countries means that the previous cost advantage for companies to deliver a large part of remunerations as pension is no longer as significant. A model for the future, which should be considered, is therefore to decide on a competitive overall level of remuneration (including the value of pensions) but to deliver this value in a different mix, for example through shorter-term savings vehicles or stock-based reward.

Car

Cars are a common prerequisite for expatriate staff of all grades. In many countries, for status or security reasons, a chauffeur/guard is provided by the company in addition to the car. In certain European locations, however, the company car is not as tax-efficient as a benefit as it is in the UK and it is not, therefore, local custom to provide any but the most senior employees with a car - or those whose job demands it, such as salespeople. Sensible multinational companies fall in line with market practice in such territories. Likewise, although expatriates may be entitled to a car in, for instance, Hong Kong or Tokyo, they may elect to waive the benefit on the grounds that driving in such over-populated cities is more difficult and more frustrating than using the public transport system.

Educational Expenses

Most companies will pay for the children of expatriates to be educated in the host country. The cost is rarely as high as subsidizing home country (boarding) school fees. In many overseas territories, there may be a limited choice of foreign language schools. Where the method of instruction is, for instance, American, it may be appropriate for the children of UK expatriates to attend only for primary education, owing to UK university entrance requirements.

Many companies will take the view that it is unreasonable to expect students following one syllabus, such as GCSE, to be interrupted by a transfer to the US curriculum and will assist with UK school fees. The level of assistance varies but is commonly a percentage (such as 75 per cent) of basic boarding and tuition expenses up to a set annual maximum. It is most uncommon for companies to finance 'extras' such as fencing, tap dancing or scuba diving!

Some companies place a financial ceiling on their school fee assistance, while others apply age or year minima and maxima. A few make provisions for kindergarten in the host country. In general, it is fair to say that global policies are a thing of the past. Cost-conscious multinationals are now careful not to pay for UK boarding school fees unnecessarily but aim to take a flexible country-by-country approach, simultaneously assessing the individual requirements of each expatriate family.

Health Insurance

It is essential that all overseas personnel are adequately covered for private treatment by health insurance; few countries have national health services as sophisticated or generous as that of the UK. The cost of private medical care in the United States, for instance, is exorbitant and the national provisions are almost non-existent. The major UK schemes such as BUPA and PPP have international plans for which the premium rates will vary, depending on the country assignment and the cost of medical treatment there.

Holidays

Annual Leave

Holiday entitlement is usually in line with or slightly above home country practice, 25 or 30 working days being the norm. Comparatively ungenerous host country practice - such as the standard fortnight in the USA - tends to be overridden. Particularly high hardship regions may encourage companies to allow for holidays in excess of 30 working days.

Public Holidays

Host country practice is usually followed with respect to public holidays although, in non-Christian countries, certain UK public holidays such as Christmas Day and Easter Day may be allowed in addition to the local festivals.

Home Leave

If a norm had to be quoted, it would probably be a fair generalization to suggest that companies will pay for expatriates and their families to fly back to their home country once per year. However, the variations on this practice are too numerous to mention and are increasing all the time as the issue of home leave becomes more emotive and a matter of as much heated negotiation as the annual pay review.

Location affects the frequency of home leave; areas of extreme hardship often merit a second home trip, while areas of low hardship, separated from the home country by a prohibitive air fare, such as Australia, might not even qualify for an annual return trip. Indeed, it is quite common for one home trip per tour (usually three years) to be provided from the Antipodes.

Marital status, however, has the most profound effect upon the regularity of home trips. Employees on married accompanied status, particularly those with children, will, as a rule, be provided with the minimum (ie, one return trip per annum). Not surprisingly, single status or married unaccompanied personnel fare rather better. Where companies distinguish between those two latter categories, the single-status staff tend to be provided with one extra trip per year on the grounds that it is cheaper for the employer to pay for two single fares than one family trip. In a company where this distinction is understood by the staff, it acts as an incentive for single-status employees to volunteer themselves for expatriate posts. Married unaccompanied personnel, by contrast, would be likely to benefit from three return trips per annum in an effort, on the part of the employer, to minimize their separation from their families. In addition, employers would typically be very flexible over how travel is arranged, up to the same cost as the agreed package. So the expatriate might be able to exchange one home trip using business class for economy-class tickets for his or her partner/family to visit the host country. In some organizations a maximum travel budget for family visits either way is agreed.