Economic Trends Facing The Employer

For many years, both public and private employers in the United States have faced multiple economic and financial challenges, during cycles of growth and recession within the economy. Powerful economic realities are forcing corporations to reduce operating costs and improve productivity in order to survive in an increasingly competitive global environment. Simultaneously, employers often face key labor shortages in positions that require new and specialized expertise critical to businesses' new growth and development. Plan sponsors are caught in the paradox of providing an attractive benefits package in order to attract and maintain a well trained, productive workforce while trying to manage health care benefit expenses within viable budgets. Creative and cost-effective solutions are needed so that plan sponsors can attract, retain, and motivate talented people who are vital to their success in today's economy. Some of the economic pressures facing employers are discussed below.

Federal Government Cost Shifting
Government-funded health care programs continue to experience escalating cost increases, particularly the Medicare and Medicaid programs. Attempts to contain federal health care expenditures have shifted costs both directly and indirectly to the state and local governments and to the private sector. Private health care plans bear a large share of the burden of federal cutbacks to Medicare providers. Squeezed by Medicare reimbursements that often are below their costs of operation, hospitals and physicians are forced to shift costs to other payers to make up for lost revenues.

Beginning with the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), federal legislation has shifted portions of Medicare costs directly to private employer plans. Federal law requires that active employees over age 65 select either Medicare or their employer's health plan as the primary source of medical coverage. Employers are prohibited from providing secondary or supplemental coverage to employees who select Medicare as their primary coverage. Because employer plans typically provide richer benefits and easier access to medical providers than Medicare, it is not surprising that many employees continue their primary coverage through their employer's plan. As a result, employers have been forced to accept greater responsibility for financing the medical care costs of an aging population.

Competitive Global Environment
U.S. companies also face increased economic pressure from new global competitors. In addition to dominant economic players in Western Europe and Japan, entrants from developing nations and former European communist bloc nations are playing a greater role in international production. Alliances among foreign capital markets, such as the European Economic Community pact of 1992, test the ability of U.S. companies to compete with the collective strength of nations linked by free-trade agreements.

Furthermore, much of workers' medical care in competing foreign companies is provided through governmental programs, such that the direct costs of health insurance are less directly identifiable as part of a company's costs of production.

Shrinking Workforce
Both private- and public-sector employers are operating today with a tightening supply of trained labor for critical new positions. Since the 1970s, most industrialized nations—including the United States—have faced flat or even negative net population growth. In addition, the baby boom generation (born between 1946 and 1964 inclusive) is now well into midlife and will retire in large numbers over the next 10 to 15 years. Confronting a shrinking workforce, employers have been forced to offer more competitive wages and benefits in order to attract qualified employees. Acute labor shortages are projected in the areas of science and technology, health care, and hospitality services. Thus, employers must maintain competitive compensation packages to attract and maintain a stable and highly qualified workforce. Doing so will require employers to offer an enticing and well-developed package of employee benefits.

National Resources Spent on Health Care
Total national health care expenditures exceeded $1.5 trillion in 2002, an increase of 115 percent over the $699 billion spent in 1990 and 507 percent over the $247 million spent in 1980. Annual growth rates in national healthcare expenditures averaged 10.6 percent in the 1960s, jumped to an average of 12.9 percent in the 1970s and slowed only slightly to 11.0 percent in the 1980s. While the average growth rate dropped to 6.5 percent in the 1990s, the rate was still more than double the general consumer price index (CPI).

While these total dollar expenditures seem staggering, perhaps more startling is the fact that health care costs, which accounted for about 5.2 percent of gross domestic product (GDP) in 1960, consumed more than 14.9 percent of GDP by 2002, according to Department of Labor statistics. While growth rates leveled during the mid-1990s and general economic growth kept pace with these levels, healthcare expenditures growth has catapulted ahead of economic growth since 2000 and, in 2003, healthcare expenditures grew 9.3 percent versus just 3.6 percent growth in GDP.

GROUP UNIVERSAL LIFE INSURANCE : Employee Options at Retirement and Termination, Enrollment and Administration, Taxation

Employee Options at Retirement and Termination
Several options are available to the retiring employee. First, the employee can continue the group insurance coverage as if an active employee. However, if premium payments are continued, the employee is billed by the insurance company, probably on a quarterly basis. Because of the direct billing, the employee may be subject to a higher monthly expense charge. Second, the employee can terminate the coverage and completely withdraw his or her accumulated cash value. Third, the employee can elect one of the policy settlement options for the liquidation of cash value in the form of annuity income. Finally, some insurers allow the retiring employee to decrease the amount of pure insurance so that the cash value is adequate to keep the policy in force without any more premium payments. In effect, the employee then has a paid-up policy.

The same options are generally available to an employee who terminates employment prior to retirement. In contrast to most other types of group insurance arrangements, the continuation of coverage does not involve a conversion and the accompanying conversion charge; rather, the employee usually remains in the same group. This ability to continue group coverage after termination of employment is commonly referred to as portability. If former employees who continue coverage have higher mortality rates, this is reflected in the mortality charge for the entire group. However, at least one insurer places terminated employees into a separate group consisting of terminated employees from all plans. These persons are subject to a mortality charge based solely on the experience of this group. Thus, any higher mortality due to adverse selection is not shared by the actively working employees.

If the employer terminates the group insurance arrangement, some insurance companies keep the group coverage in force on a direct-bill basis, even if the coverage has been replaced with another insurer. Other insurance companies continue the group coverage only if the employer has not replaced the plan. If replacement occurs, the insurance company terminates the pure insurance amount and either gives the cash value to participants or transfers it to the trustee of the new plan.

Enrollment and Administration
Variations exist in the method by which employees are enrolled in group universal life insurance plans. Some early plans used agents who were compensated in the form of commissions or fees, but several insurance companies have dropped this practice. The actual enrollment is typically done by the employer with materials the insurance company provides. However, salaried or commissioned representatives of the insurer usually meet with the employees in group meetings to explain the plan.

The employer's main administrative function is to process the payroll deductions associated with a plan. As previously mentioned, employee flexibility may be somewhat limited to minimize the costs of numerous changes in payroll deductions.

The insurance company or a third-party administrator performs other administrative functions, including providing employees with annual statements about their transactions and cash-value accumulation under the plan. Toll-free telephone lines are often maintained to provide information and advice to employees.

Taxation
Group universal life insurance products are not designed to be policies of insurance under Section 79. In addition, each employee pays the full cost of his or her coverage. Therefore, the tax treatment is the same to employees as if they had purchased a universal life insurance policy in the individual insurance marketplace.

Group Life Insurance—Lifetime Coverage (Employee Benefits)

OBJECTIVES

Group term life insurance plans were traditionally designed to provide employees with preretirement life insurance coverage. At retirement, an employee was faced with the decision of whether to let coverage terminate or to convert to an individual policy at an extremely high premium rate. In recent years, however, an increasing number of group life insurance plans have been designed to provide postretirement as well as preretirement life insurance coverage. In some cases, this has been accomplished by continuing group term insurance coverage, often at a reduced amount, after retirement. In other cases, this has been achieved by means of life insurance that provides permanent benefits funded during employees' working years.

The popularity of various approaches for providing postretirement life insurance coverage has changed over time, primarily because of changes in tax laws. Older and once popular products such as group paid-up insurance and group ordinary insurance are no longer written. Newer products like group universal life insurance and group variable universal life insurance have come on the scene and grown in popularity. Four approaches that are currently used:

- Continuation of group term insurance

- Group universal life insurance

- Group variable universal life insurance

- Group term carve-outs

WHAT ARE THE EMPLOYER'S OBJECTIVES?

No benefit plan is properly designed unless it meets the employer's objectives. Unfortunately, these objectives may be unclear or nonexistent, particularly in small firms. However, most large corporations have—and all firms should have—specific written objectives that have been approved by the board of directors or by the owners of the firm. These objectives will vary for each individual organization, depending upon such factors as size, location, industry, the results of collective bargaining, and the philosophy of the employer. Without such objectives, it is difficult for the agent, broker, benefit consultant, or third-party administrator to make recommendations or for the firms's in-house benefit staff (often part of the human resources department) to make decisions.

Types of Objectives
Objectives for benefit plans can be general and part of a firm's overall compensation objective, that is, cash and employee benefits in the aggregate. This may be done to achieve a compensation package that is competitive within the firm's geographic area or industry. Such an average objective usually means that the firm wants both its wages and salaries and its employee benefits to be similar to what the competition is offering its employees. There is usually some, but not much, room for creativity in the design of a group benefit plan, unless the plans of the competition are quite diverse.

Some firms have separate objectives for cash compensation and employee benefits. For example, a growing firm may want its cash compensation to be competitive, but it may want its overall employee benefit plan to be above average in order to attract new employees. A difficulty with this type of objective for the plan designer is determining whether the firm wants all aspects of the employee benefit plan to be better than average or whether it would be willing to accept, for example, an average program of group insurance benefits but a better-than-average pension plan and more vacation time for its employees. Note that most objectives, even when they are very detailed, tend to apply to all employee benefits rather than to specific types.

It has become increasingly common for firms, particularly large firms, to maintain a lengthy and often detailed list of objectives for their employee benefit programs. The following are the objectives of one such firm:

- To establish and maintain an employee benefit program that is based primarily on the employees' needs for leisure time and on protection against the risks of old age, loss of health, and loss of life

- To establish and maintain an employee benefit program that complements the efforts of employees on their own behalf

- To evaluate the employee benefit plan annually for its effect on employee morale and productivity, giving consideration to turnover, unfilled positions, attendance, employees' complaints, and employees' opinions

- To compare the employee benefit plan annually with that of other leading companies in the same field and to maintain a benefit plan with an overall level of benefits based on cost per employee that falls within the second quintile of these companies

- To maintain a level of benefits for nonunion employees that represents the same level of expenditures per employee as for union employees

- To determine annually the cost of new, changed, and existing programs as a percentage of salaries and wages and to maintain this percentage as much as possible

- To self-fund benefits to the extent that a long-run cost savings can be expected for the firm and catastrophic losses can be avoided

- To coordinate all benefits with social insurance programs to which the company makes payments

- To provide benefits on a noncontributory basis, except benefits for dependent coverage for which employees should pay a portion of the cost

- To maintain continual communications with all employees concerning benefit programs

Most lists of objectives contain few, if any, specific details regarding what provisions or what types of benefits should be contained in an employee benefit plan. Rather, they establish guidelines—instead of specific performance goals—within which management must operate. For example, the objectives listed above indicate this firm wants a plan that is understood and appreciated by employees and that is designed with employee opinion in mind. No mention, however, is made of how this is to be done. There may be alternative ways for this firm to achieve its objectives. Similarly, the objectives establish guidelines for the cost of providing benefits. Although the firm wants to have a better-than-average plan, it does not want to be a leader. There is a very specific statement about what the relationship between the cost of benefits for union and nonunion employees should be. However, nothing is mentioned to indicate that the benefits for the two groups must also be identical. If the two groups have different needs, different types and levels of benefits may be desired.

Three additional points about employer objectives should be made. First, as times change, benefit objectives may need revision.

Second, the frequent lack of specific guidelines in benefit objectives gives the in-house benefit staff great latitude to be creative, to come up with innovative solutions to benefit problems, and to respond to the changing benefit environment. Such creativity can often lead to success and financial reward. However, a greater degree of freedom to be creative is also often accompanied by being the scapegoat when benefit decisions do not lead to the desired results.

Third, a firm's primary (and possibly only) objective may be to establish an overall employee benefit plan that channels as large a portion of the benefits as possible to the owner or owners. Although this is a poor objective for an overall plan, it is a reality that must be recognized, most commonly in small firms or in firms that have few owners. Large, publicly held corporations sometimes wish to provide better benefits for their executives than for other employees. These extra benefits are likely to be provided under separate executive compensation plans rather than under the benefit plan that applies to all employees.

Who Should Receive Benefits?
As part of establishing its objectives, an employer must determine its responsibilities to various categories of persons who might be eligible for coverage under the firm's overall benefit program. The list is much longer than one might initially think. It includes the following:

- Active full-time employees

- Dependents of active full-time employees

- Retired employees

- Dependents of retired employees

- Part-time employees

- Dependents of part-time employees

- Disabled employees

- Dependents of disabled employees

- Survivors of deceased employees

- Employees who have terminated employment

- Dependents of employees who have terminated employment

- Employees who are temporarily separated from employment (for example, employees on family leave)

- Dependents of employees who are temporarily separated from em-ployment

Obviously, most benefits are given to employees, and some benefits are given to their dependents, such as medical expense coverage. Whether other groups on the list receive any benefits depends on several factors. These include the attitude of the employer and the degree to which protection is available under other programs, such as Social Security. In addition, federal and state laws play a role. For example, some benefits must be continued because of family leave legislation. In addition, medical expense coverage must be continued in many cases as a result of COBRA.