Benefit Plans For Small Companies

Thinking outside the proverbial box

Small companies have limited human resources people – perhaps one person, or more often, simply someone in administration wearing “multiple hats.” This is where a good Agent of Record comes into play. Not only can he/she help you find an insurance plan, she/he can help you design an economical plan. The IRMI website, which is an index of defined risk management and insurance terms, has this description in their glossary of insurance terms for such a person:

The individual or company authorized to represent an insured in the purchase, servicing, and maintenance of insurance coverage with a designated insurer. Most insurance companies will not disclose any information or discuss an insured's account with any agent other than the agent of record. An insured wishing to change insurance agents must submit a revised agent of record letter to the insurer authorizing them to release the insured's information and to discuss the insured's coverage with the new agent.

Essentially this person is someone who will go to bat for you to find a health and dental insurance company, similar to a mortgage broker finding a financial institution for your home mortgage. As such, your company does not pay his/her fee – the insurance company pays her/him a commission for the new business. In keeping with the analogy of a mortgage broker, your agent of record needs to have liaisons with more than one institute for insurance. Otherwise, the agent is leashed, and cannot truly shop for what works best for you – this is important when you are operating with a small budget.

When you look for an agent of record, the process should be treated much like when you recruit for a new employee. Networking for word of mouth referrals can be a good way to begin.  Meet with more than one candidate, and have questions prepared as you would in any interview. Get quotes as though you are shopping for a contractor to work on your home. Finally, you want references, especially if you did not find the candidate through a networking referral.

Long gone are the days where ‘Cadillac’ health and dental insurance plans might have been possible for budget-weary companies – almost every year, these plans escalate in cost. However, this does not mean you cannot develop something still appealing for your employees, as well as feasible for the company. Consider either just a Healthcare Spending Account (HSA) alone, or an elemental traditional plan that is topped up with an HSA.

One major advantage to including a traditional plan is the free (yet not to be underestimated in value) Employee Assistance Program (EAP) that is generally included. An EAP is beneficial to both employees and to management. Most EAP plans have one contact number for employees, and one for management. When management runs into any tricky or touchy staff scenarios, management can call for advice.

Traditional plans increase in cost if you use a higher percentage of dollars than is expected by the insurance company, which is outlined for you in your contract. This target loss ratio (TLR) is considered the break-even ratio for the insurance company to earn a profit. To illustrate, consider the following example:

An insurance company might establish in your annual contract a 75% TLR for dental expenses. Say that the contract provides $1000 annually for each employee’s dental expenses.  However, at year-end it’s found that your employees’ dental expenses average out to actually 80% of that maximum: $800 annual usage instead of $750. The insurance company doesn’t reject the employees’ claims that year, but they will probably want to increase the TLR for the following year. Generally, the higher break-even ratio leads to higher insurance premiums. So most likely the insurance company will want to charge higher premiums in the following year. This is how benefits costs can escalate beyond a small company’s budget.

When designing an elemental traditional plan, examine the expenses that are easily overused and under-controlled. Look into a low annual dental maximum; perhaps exclude paramedics and vision-wear, but include eye exams. These exclusions are where the HSA comes into play.

An HSA has an established amount of dollars in a ‘reserved fund’ for your employee to decide how to best spend it. Canada Revenue Agency (CRA) has guidelines as to what can be claimed. In general, it boils down to medical expenses that are not deemed cosmetic in nature. This allows employees to determine what health issue is most important to them. The cost doesn’t increase like a traditional insurance plan, because there is no TLR to be concerned with. CRA requires a third party trustee to administer an HSA. Some (not all) insurance companies have the Administration to do this. Beware of Quebec HSA nuances: the third party trustee must have experience administrating Quebec HSA. This is because only Quebec considers an HSA as a taxable benefit, whereas the rest of Canada does not.

Your company determines what the HSA annual fund is to be per employee.  Your company also determines if the fund is cleared annually, or if some type of rollover is allowed. Two types of rollover exist: allow unpaid balances of receipts to rollover into next year’s funds, or allow funds of one year to rollover into next year’s funds. It’s always one or the other, never both. You can even tier HSA amounts: one for singles, another for families. Your company can also consider tiered amounts linked to years of service, as an employment retention incentive.

For example, once probation is completed, an employee is enrolled for the elemental traditional plan. Next, when an employee reaches two years service, he or she begins receiving the HSA on top of the traditional plan. Then perhaps after five years of service, the employee receives an increased amount for the HSA. Here again, a good agent of record can advise and help design this with you.

Although, employer pension plans are provided by many large companies, the complexities are usually beyond the small business owners. However, don’t give up: consider a group RRSP with a bank where they handle the complexities. Once again, you will need to do some shopping. When investigating, always keep the guidelines of Capital Accumulation Plan (CAP) in mind.

You must ask about administrative fees for mutual funds and management expenses. Also ask the bank if they’ll do free presentations at your office for the employees (e.g. “lunch and learn” meetings). CAP requires the employer to maintain the employees’ best interests for any investment plan and its administration fees, as well as to keep the employees up to date about the plan. Therefore, you should meet annually with your bank representatives to maintain your due diligence. The following website is useful for understanding CAP guidelines:

Here again, your company may consider tiers to encourage employment retention. For example:                        
1^st = employee can start contributing anytime                                                    
2^nd = employer starts contributing after X # of years of service: perhaps unmatched, perhaps matched by employee or a percentage thereof, by employee                                                                                  
3^rd = employer contributions increase after X # of years of service

So there you have it. Health and pension benefit possibilities do exist for smaller companies. More importantly, these programs can be designed to minimize costs while encouraging employee retention. We just have to think outside the proverbial box