Day: November 25, 2009

Cafeteria Plans: Role of Administrator Versus Enroller

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Currently, the City of XXXXXXXXXX has a Cafeteria Plan through Seciton 125 of the Internal Revenue Code. It is my understanding that the Plan Administrator performs certain services at no charge to the City in lieu of selling insurance policies to the employees. Therefore, the role of the administrator and vendor of insurance products are combined.

Senate Bill 273 addresses concerns regarding the role of the administrator and vendor of products. While this bill refers to Texas public school districts, I believe it may well apply to any employer group in Texas that offers a Cafeteria Plan. Section 9, subsections 4,5.6 address the issues in question.

In my discussions with the Texas Department of Insurance, it is apparent that the acts of “enroller” versus “marketer” must be separate and distinct. An enroller who is working for the administrator who has contracted with the employer, has the advantage of promoting his products at the time of enrollment since he has the enrollee in a captive environment. Additionally, the “enroller” by virture of the function he is contracted to perform, has privileged information about the enrollee, (such as amounts and types of policies or contributions the enrollee has made, W2 information, salary and hourly information), that gives the enroller an unfair advantage.

The functions of the administrator are separate from the acts of an agent. These lines begin to fade during this process to the unsuspecting consumer. In my opinion, administrators must separate the functions of the “enroller” from those of the “marketer.”

It is my understanding that when a court does interpret a statute, Seciton 321.005, Government Code, it requires it to ascertain the legislature’s intent. Further, it is my understanding that when construing a statutory term, Section 312.002, Government Code, requires words to be “given ordinary meaning.” The ordinary meaning of the work “benefit” includes “advantage” and “useful aid.” The free or reduced cost of Cafeteria Plan administration, I believe, provides a financial advantage and useful assistance to the City of XXXXXXXXXX, and therefore a “benefit.”

It is my opinion that to accept a free or reduced fee cost plan for Cafeteria Plan administration give the appearance or endorsement for the insurance products that are required to be offered (sold) to participants of the plan, thus giving one company preferential treatment over another. The offer of a free administration in return for the soliciatation of insurance policies may be a form of rebating as defined by the Texas Insurance Code.

Since the City of XXXXXXXXX is currently requesting bids for their health insurance, I believe that it would be constructive to review and bid our the Cafeteria Plan Administration contract to incorporate some of the issues and concerns expressed herein. I believe that it would be beneficiall to the City of XXXXXXXXXXXX to align the employee health insurance program concurrent with the Cafeteria Plan Fiscal Year. There are distinct advantages to doing so and could be accomplished by bidding out administration now.

In conjunction with bidding out the Cafeteria Plan Administration, I recommend that the City of XXXXXXXXXXX also bid out the insurance products to be offered through the Plan. This would mark a clear delineation between the enroller and the marketer. This would also give the City of XXXXXXXXXXX the advantage of competitively bidding out the insurance products, rather than be limited to the products offered and sold by the Plan Administrator. The end result may be better coverage at lower costs to the employee and eligible dependents.

I hope this opinion and recommendation answers your questions. If I can be of any further assistance, or provide additional information as needed, please do not hesitate to call me.

Editor’s Note: This letter was completely ignored by our client. They continued their “free” Cafeteria Plan Administration with a local insurance agent. This group of approximately 800 employees generates approximately $125,000 in annual insurance commissions on products sold through the city’s Cafeteria Plan.

Reality Check – Employer Forwarned

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The Senate version of the proposed health care overhall bill being pushed by the Democrats is slightly less obnoxious than the House Bill which passed recently. So, we decided to look at this bill to determine the financial impact it will have on XXXXXXXX XXXXXXXXXX  should it pass.
 
If you decide to continue offering employees a health plan, you will be limited to four plans mandated by Uncle Sam:
– 60% plan
– 70% plan
– 80% plan
– 90% plan
No more mini-med plan. No lifetime maximum benefit. Pre-existing conditions must be covered for new hires. Preventative care, including dental and vision, must be covered with no co-pay.
 
You can have a waiting period for new hires, however if the waiting period is 30-60 days, XXXXXXX XXXXX will be punished by paying $400 for each new hire. So, if your turnover is high, and you have a 30 day waiting period for example, you would be punished by paying $400 X number of new hires in a year = $ ?. If your waiting period is 60 -90 days, the punishment is increased to $600.
 
Rates have to be actuarialy set utilizing a two tier rating system. What this means is that the cost differential between an employee age 20 and an employee age 60 cannot be more than 2 to 1. Since your group’s average age is 24, your rates would be increased approximately 70% to abide by the 2 to 1 rule. 
 
Any employee who elects not to enroll in your group plan and is eligible for a health tax credit, XXXXXXX XXXXX will be punished by having to pay $3000 for each employee eligible for a tax credit, or $750 for all +3000 employees, whichever is less.
 
These are just some of the “surprises” you will find in this Senate Bill. What would be interesting, and I think would be necessary, is to drill down on the final House/Senate Bill (which will surely pass in some form) to determine the financial impact on your business. Then you will be in a position to determine how to pass that cost on to your customers. Example; suppose current health cost to XXXXXXX XXXXX is 6% of payroll. Assuming a +70% increase in rates, that would increase to 10.2% of payroll. The difference is +4.2% increase in cost.
 
Lastly, should Congress pass anything close to what we see now, there will be little need for insurance agents or insurance consultants. Benefits will be mandated, you will have little or no leeway to build a plan that fits your corporate philosophy. You will be at the mercy of government bureaucrats.
 
Several states are exploring the possiblity of opting out of the Obama plan. There may be an opt out provision, but what we see is a limited opt-out provision. The thinking here is that if states are required to participate, one of them may file a lawsuit with the Supreme Court – unconstitutional to require citizens to purchase a car, a home, a health insurance policy, etc. The fear of the Obamanites, as some think, is that such a lawsuit may prevail, and if that happens their plan to take over 1/6 of the economy may unravel. We are not too certain if this argument has legs.
 
We are going to keep on top of this. Once the bill passes, which we feel strongly one will in some form or fashion, we will attempt to quantify the financial impact on your business. You will then be able to adjust your pricing appropriately.