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Make the Most of Flexible Benefits

Health care costs have doubled over the past decade. With employees encouraged to stay in the workforce longer, coupled with rising health care costs, employers are increasingly looking at flexible benefits as a way to provide greater cost certainty. Selecting the benefit coverage that meet the needs of your family is key to getting the most out of your flex benefits, otherwise you could end up paying more for less coverage over traditional plans.

Type of Flex Plans

Flexible benefits typically come in two flavours – core-plus and modular. Core-plus provide a minimum level of coverage where employees purchase additional coverage, as required.

Modular plans allow employees to choose the level of benefit coverage based on their family structure – single, couple or family. Modular plans are popular because they are ideal for meeting the needs of a diverse workforce. Employees are provided with flex credits, typically based on a percentage of their base salary, plus a flat dollar amount based on their family structure to allocate to benefits – medical, dental, life and disability insurance – and their health spending account (HSA).

Pros

  • Win-win situation for employers and employees. Employees select the benefits that matter most – this provides employers with greater cost certainty and eliminates the open-ended liability of traditional plans. Employees typically can allocate their excess flex credits to their HSA or receive taxable cash.
  • Employees can pay their healthcare expenses in a tax-efficient manner through the convenience of payroll deduction.
  • Employees can opt out or go with basic coverage if they are covered under their spouse’s benefits plan.
  • Employees can allocate flex credits to their HSA and pay for benefits not covered under basic coverage (i.e. orthodontic coverage beyond lifetime limit or health expenses not covered by provincial health care).
  • Perks like additional vacation days can sometimes be purchased with flex credits.
  • Enrollment is conducted conveniently online.
  • Eliminates the over-utilization of benefits since employees have a greater understanding of cost.

If you’re a young, healthy individual, flex benefits are a great way to select the benefits that meet your needs and receive the balance in cash. For example, a traditional benefit plan may only provide $3,000 lifetime orthodontic coverage, while with flex benefits, flex credits can be allocated to your HSA to cover the excess.

If you’re already covered under your spouse’s plan, you can opt out and use the flex benefits towards group life insurance, disability insurance or additional vacation days. Flex benefits are flexible – you can often use your current year’s HSA to cover expenses incurred in previous years.

Cons

  • Enrollment period: Once a year you must select your coverage for the following year. Choose wisely, as you’re locked-in for a year or longer. Usually you can only make changes if you have a qualifying life event i.e. marriage or the birth of a child.
  • Cost increases are passed onto employees – benefit coverage cost increases yearly, although flex credits may not increase at the same level.
  • Deductible may be higher. Employees may have to pay expenses previously covered under traditional plans.
  • Flex credits vary greatly from employer to employer.
  • Remaining balance in HSA may be forfeited if not used by the end of the calendar year.
  • Flex credits are based on base salary. Entry-level employees receive less flex credits than senior employees.

Flex benefits put the onus on employees to select their benefit coverage for the coming year. If you forget to enroll by the deadline or you’re on maternity leave, you may be locked into enhanced coverage and end up using all your flex credits on coverage you don’t need.

It’s important to find out about your flex credits – flex credits can vary from a paltry $400 to $3,000 or more per year. It’s crucial to plan your health benefits for the upcoming year.  If you allocate $500 to your HSA and only use $300, $200 may be forfeited at the end of the year. Also, if you suddenly become ill, you may have insufficient coverage if you selected only basic and have to pay the rest out of pocket.

Final Thoughts

Flex benefits are only as good as the coverage provided by your employer. If you have a no-frills benefit plan with low flex credits, you’ll need to choose your coverage wisely. Since employees have no control whether their employer offers flex or traditional benefits, it all comes down to choosing the benefits that matter most. Coverage differs greatly for flex benefits from employer to employer, so speak with your human resources department to find out more.

Has your employer recently switched to flex benefits? Do you prefer flex benefits over traditional benefits? Do you still have the same level of coverage?

About the AuthorSean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.

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About the author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.

{ 9 comments… add one }
  • saveddijon October 17, 2012, 12:13 pm

    I’m curious – why do many of these plans force you to gamble?

    You need to accurately predict your health spending for the year. Guess too low, and you lose tax efficiency. Guess too high, and you can forfeit contributions.

    Why can’t we just have a plan where, say, the employer offers you $1000/year for health, and anything more is pay-as-you-go, but on a pre-tax basis?

    PHSPs already allow the self-employed to pay 100% of their health costs pre-tax, so presumably this idea is not totally revolting to the tax man.

    Why the need to gamble?

  • Mike October 17, 2012, 1:06 pm

    Saveddijon: Every form of insurance is a gamble.

  • Subversive October 17, 2012, 4:14 pm

    I’d be interested to hear from self employed folks on the benefits of a PHSP vs my company buying a health plan for my family and I. I’m an IT contractor, and we run another small business as well. All our income is earned through a corporation. We currently pay out of pocket for medical/dental expenses, then run it through a PHSP to turn it into a write off for the business and non-taxable income for us. That said, sometimes I’ve thought it would be nice to just have a card to present at the dentist or pharmacist which covered at least some of my expense. We have 3 young kids as well, fwiw. I’ve priced out the ‘top’ benefit plan through the Costco members site, and it’s around $380 a month. Anyone have experience and/or thoughts on if we should just keep doing the PHSP, or if switching to (or, more accurately, just adding) a “real” benefit plan would be a better option?

  • saveddijon October 17, 2012, 5:13 pm

    Mike: yes, insurance is a gamble. But a health plan is really not “insurance”. Even if it’s with an insurer such as Great West Life, all they do is average your employees’ claims, mark up 30% and that’s next year’s premium.

    Insurance protects you against unpredictable events. However, I visit the dentist twice a year with absolute certainty. I do not want to pay anyone else much profit for that “risk”.

    If I spend X in a given year, I can claim my expenses with the CRA, and get about 20% back, and I can do that in arrears (after the fact). Through a plan that I must commit to in advance I can in theory get 46% back, but I must commit, and therefore gamble. Why?

    Subversive: See what I said about insurers: they mark up 30%. PHSP providers mark up 5-10%. If you own a small business then you can save quite a bit by going with the PHSP. You can control risk through the design of the plan (setting limits). In the long run, GWL will set your premiums to match your claims so they are not taking on risk in the same way as your home/auto/life insurer is, and therefore should not be entitled to significant premiums.

  • Subversive October 17, 2012, 5:39 pm

    saveddijon: With our PHSP, it’s strictly ‘on demand’ at 5%. No limits or anything like that, as it’s just my wife and I owning a 2 person corporation.

    Appreciate your thoughts, just to clarify, you’re saying that you believe sticking with the PHSP is definitely the best way to go from a tax/financial perspective?

  • Sean Cooper, Freelance Writer and Blogger October 17, 2012, 6:46 pm

    @saveddijon
    Flex Benefits is all about risk management and cost control for employers. It’s about passing down increased cost to employees. Last year when my employer introduced flex benefits it match the flex credit increase with the cost increase. I think this was more of a goodwill gesture to get everyone on board flex benefits. This years is a different story – costs have increased 6%, deductibles have increased, while my flex credits have only increased 2%. Similar to inflation, if this trend continues in 10 years the purchasing power of flex credits will have decreased substantially. Similar to the shift from Defined Benefit to Defined Contribution Pension plans, it seems employers no longer want to bear the risk and employees are forced to foot the bill.

  • I agree with saveddijon. I do not consider health plan as an insurance although getting a health plan is a gamble like an insurance because you cannot exactly predict how much you will be spending for your hospitalization and medicine during the year.

  • Ed Rempel October 19, 2012, 12:13 am

    Hi Subversive,

    Insurance is appropriate for things that are very unlikely but very costly. Think house insurance – a fire is unlikely, but very costly if it happens, so fire insurance is important and a reasonable cost.

    Health costs are mostly routine. Why pay a 30% markup for insurance on routine expenses like drugs, dental, glasses, etc.? Would you rather pay your dentist $200/year or an insurance company $260/year for routine dental?

    That is why PHSP is generally the way to go for routine medical.

    We combined our PHSP plan with a “stop loss”, or catastrophic medical insurance that only covers costs over $2,500 per employee. High cost, but unlikely coverage, so it is more appropriate for insurance and much cheaper than a standard medical insurance plan.

    The PHSP and stop loss together provide pretty good coverage at much lower cost and with tax advantages.

    Ed

  • Cherleen @ My Personal Finance Journey October 20, 2012, 5:44 am

    I believe that flex plans work best for families and individuals who have good medical history and rarely get sick. I would not mind re-enrolling annually because I can always choose which coverage I will get, depending mon my previous year’s medical history.

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