Emerging opportunities in employee benefits.

Take a look at some win-win benefit opportunities that won't bust your budget.

With salary increase budgets hovering around 4 percent for the third year in a row, you may be finding it ever more difficult to recruit and retain outstanding performers. If you are looking for ways to sweeten the pot without overspending your budget, you might be interested in some of the emerging opportunities on the employee benefits side of the total compensation equation.

For example, you might consider adding medical spending accounts or a wellness program to your benefit options. Both can help employees retain (or regain) greater control over their own health care costs.

Or you might consider giving your employees greater freedom to tailor their benefit packages to suit their own interests by offering a variety of special-interest benefit plans, such as group legal services, personal financial planning services, and long-term care insurance. Although these plans may not appeal to all of your staff, they are bound to be appreciated by those who take advantage of them. And because the special-interest benefits are generally employee paid, they will not sabotage your bottom line.

Medical spending accounts

One positive result of the health care reform debate is the emergence of medical spending accounts as a health care cost management tool. Do not confuse medical spending accounts with Section 125 health care flexible spending accounts, which are designed to supplement group health coverage. Under Section 125 plans, employees have the option of setting aside dollars on a tax-exempt basis to cover expenses not covered by their health plan. Unused portions of employee contributions at the end of the plan year are lost to the employee.

Medical spending accounts are really designed as an alternative to managed care arrangements to control overall health care costs. While managed care organizations control costs by managing providers' delivery of health care, medical spending accounts provide economic incentives for participants to limit their own consumption of health services to those services that they really need. The trade-off is that participants have complete freedom to choose the providers of their health care.

Employers who offer medical spending accounts typically provide employees with a lower-cost catastrophic health insurance plan (one with a high deductible - frequently as much as $2,000 or more per person), then use their premium savings to fund medical spending accounts from which the employees reimburse their out-of-pocket costs. Unlike the familiar Section 125 flexible spending accounts, medical spending account funds that are unspent at year end can be taken by employees as taxable pay or carried forward into future periods.

In general, employers' costs to provide catastrophic coverage and fund medical spending accounts are about the same as their costs to provide traditional employee health plans, and most participants will benefit from the opportunity to use a medical spending account. The majority of employees who need health care infrequently will have money that was previously spent for health insurance to use for other purposes. The few employees who experience serious medical problems, however, will likely see an increase in their out-of-pocket expenses before the plan begins to pay benefits.

An important concern, if you offer medical spending accounts as an option, is adverse selection. This means that only the youngest and healthiest employees will choose the medical spending account option, leaving the older and sicker employees in managed care and other insurance plans. In this event, your overall costs may increase rather than stay the same or decrease.

Although a number of states have passed laws exempting employer contributions to these accounts from taxes, federal tax laws currently consider employer contributions to medical spending accounts as taxable income to employees. Both houses of Congress are considering bills that would set limits on these contributions and make them tax exempt under certain circumstances.

Wellness programs

As most of you recognize, costs for group medical plans account for only part of your total employee health-related costs. Your expenses also include direct costs for workers' compensation, disability benefits, and paid leave attributable to employee illness and injury, and indirect costs for recruiting and training replacement workers when ill or injured employees are absent for extended periods of time. While most benefits strategies focus on managing costs after illness or injury occurs, one strategy, promoting wellness, focuses on helping employees stay healthy and avoid injury.

Wellness programs are not new, but they certainly have changed since the "to your good health" handbooks and films, periodic health fairs, and health-assessment questionnaires popular in the past. The newest wellness programs are based on research that shows that at least one third of all medical expenses are for illnesses or injuries that could have been much less serious or prevented altogether. Preventable diseases and injuries are those caused by controllable factors that include tobacco use, high blood pressure and cholesterol levels, poor nutrition and obesity, stress, the lack of proper physical exercise, and failure to use seat belts. Because these health factors are directly related to lifestyle and behavioral choices employees and their families make, the risks they create can be reduced when people make basic changes in their health habits.

To the extent that employees can be convinced to modify their behavior and trade unhealthy habits for healthy ones, their risk of illness or injury can be reduced, as can absenteeism, work-related injuries, and the resulting direct and indirect costs. In addition, it does appear that healthy people enjoy a generally enhanced quality of life and are frequently more productive workers.

Today's wellness programs provide incentives (frequently in the form of credits toward health insurance contributions) for employees to develop and maintain healthy lifestyles. These programs include selected health-risk screenings that, in addition to qualifying participants for wellness credits, identify health risks. The benefits of early detection of, and intervention in, illnesses are clear: Many cancers are curable, if detected soon enough; controlled hypertension and cholesterol levels, smoking cessation, and weight control can avert possible heart attacks or strokes; and early intervention and treatment can prolong and enhance the quality of life for people with chronic diseases like heart disease or diabetes, and even AIDS.

Experts recommend that wellness programs be completely voluntary and designed not to discriminate against employees with disabilities. The program should, for example, reward employees who have a health problem but are following the treatment plan prescribed by their physicians, just as it does healthy employees.

Special-interest benefit options

From an employee relations perspective, benefit plans need not have broad appeal to have value. Three group benefit plans enjoying increasing popularity as enhancements to employee benefit programs are prepaid legal services, prepaid personal financial planning services, and long-term care insurance. All three are taxable to employees.

Prepaid legal services offer participants ready access to a network of law firms that will provide a wide range of common services for an affordable fixed annual fee. One well-known provider charges $85 per year for its basic legal services package, which covers, among other services, wills and living wills, deeds, affidavits, powers of attorney, uncontested adoptions, traffic defense (excluding driving under the influence), and small claims assistance. For $250 per year, the same provider offers supplemental coverage that includes; among other services, personal bankruptcy; tax audits; uncontested divorce; sale, purchase, or refinancing of a home; and juvenile court defense. Given the size of many attorneys' usual fees, these plans can be a real bargain, even for participants who use the service only once, and providers generally place no limits on how often participants can access the plan.

Personal financial planning assistance is another potentially valuable benefit option. The media regularly remind us how important it is for individuals to be responsible for their own financial security, yet selecting a qualified financial planner may be an insurmountable obstacle for many employees.

Fortunately, a growing number of companies offer a wide range of financial planning services for fixed annual fees. Typically these plans include a number of hours of toll-free telephone service, during which participants may talk with qualified consultants who answer general questions, analyze specific financial issues, or serve as a "sounding board" for participants' own ideas and plans. Most plans will also provide written financial plans, based on information submitted by participants on a confidential questionnaire, and detailed information about such common financial issues as college finances, leasing versus buying, income tax protection, investment allocation, life insurance, and retirement planning.

Long-term care insurance also may be of interest to a number of your employees. Although considerably more expensive than legal or financial planning services, group long-term care insurance is worthy of your consideration. Recent studies predict that 14 million Americans will need long-term care at some point in their lives and that 65 percent of them will need it after they retire. Statistics show that after age 65 a person has a 40 percent chance of spending at least one day, a 25 percent possibility of spending a year, and a 10 percent chance of spending five or more years in a nursing home.

Long-term care insurance is designed to pay for custodial care not covered by health insurance, Medicare, or Medicaid. Currently available plans generally offer a choice among a range of daily benefits and make the insurance available not only to the employee and his or her spouse, but also to his or her parents and parents-in-law. Unlike other health insurance, benefits are usually payable to the participant and can generally be used to pay costs associated with either nursing facility or home care.

Coverage under most plans is portable and guaranteed renewable, and may include nonforfeiture and/or return-of-premium provisions. Nonforfeiture provisions provide for continued coverage for some period after premium payments cease; return-of-premium provisions return all or a portion of premiums in the event the employee or spouse dies while paying premiums. Premiums, which are based on the participants' ages when they enter the plan and the daily benefit amounts they elect, can be fairly high. Although long-term care insurance may not appeal to everyone, some will find it quite valuable.

In recent years, the value employees place on their benefits has increased as they have come to understand the concept of total compensation. Emerging benefits options offer you and your employees a win-win opportunity: valuable new benefits for them, cost efficiency for you and your organization.

RELATED ARTICLE: HIGHLIGHTS

* Some emerging employee benefit options offer employers on tight budgets a way to reward hard-working staff.

* Wellness programs, medical spending accounts, and special-interest plans - such as group legal services and financial planning services - can sweeten your compensation pot.

* Cost-efficiency makes emerging benefit options a win-win opportunity for employers.

RELATED ARTICLE: Help With Your Package

Did you know that you can offer your employees and your members a variety of benefits through ASAE-endorsed programs with JZA, Inc., Alexandria, Virginia? Options include major medical insurance, disability income insurance, group term life insurance, dental insurance, group accidental death and dismemberment insurance, Section 125 plans, and retirement programs. For more information, call JZA, [phone].

RELATED ARTICLE: Benefit Issues to Watch in 1996

New rules for 401(k)s. Congress is considering pension simplification legislation that includes provisions that would once again allow associations and other nonprofit organizations to offer 401(k) retirement savings plans.

If your association already has a 401(k) plan, be aware that new regulations proposed by the Department of Labor stipulate that employees' elective deferrals be placed in trust according to the same schedule used for deposits of withheld FICA and income taxes. Although many employers now take up to 90 days to transfer the deferrals, under the proposed schedule, the maximum time frame permitted would be 30 days.

Twenty-four-hour coverage and workers' compensation preferred provider organizations. Because state laws frequently mandate first-dollar coverage and unrestricted choice of providers, workers' compensation has remained generally unaffected by the move to managed care. However, to the extent that state laws allow, some employers and insurers are piloting programs in 24-hour coverage, under which non-occupational health care and workers' compensation coverages are combined under a single managed care program, frequently using a preferred provider organization network.

As these programs become more widespread, experts predict states will modify their workers' compensation laws to permit 24-hour coverage. Florida has recently enacted such legislation, and Virginia's more liberal workers' compensation laws permit cost containment networks, negotiated maximum fees, and case management.

Sandy Grogan Dresser is a senior consultant at ADP Benefit Services/WTR Consulting Group, Washington, D.C.