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Tuesday, Sep 26, 2023

Two Solutions: Dental Insurance and Cafeteria Plans – Employers Find Creative Ways to Provide Benefits

In real estate, it’s location, location, location. In employment, it’s benefits, benefits, benefits. Employers grappling with the question, “What do employees want?” quickly realize the answer today is benefits.

That leaves employers wondering what to do in the benefits area that will attract and retain good employees without breaking the bank.

The answer lies in forging creative approaches to extra, or “add-on” benefits with a savvy benefits broker. As an employer, you can have it both ways.

We hear a lot today about employee interest in 401(k) plans and other retirement plans. The wild stock market ride of the past year or two has fueled that interest. But smaller companies find 401(k) plans expensive, given the $1,000 to $1,500 annual administrative costs.

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Typically, smaller companies offer basic health insurance with a small amount of life insurance. The companies offering no benefits whatsoever are fast becoming dinosaurs.

But basic health and life are not enough for employees anymore. They want to ride the stock market to a lucrative retirement.

So how do employers redirect employee demand for a 401(k) as a supplemental benefit? In the case of larger employers, they pull out all the stops. Onsite day care is not unheard of, even in San Diego. The creativity that goes into creating supplemental benefits is impressive, but still beyond the reach of smaller companies.

Two things that are not beyond smaller companies are dental insurance (the topic of the San Diego Business Journal’s List this week) and the section 125 “cafeteria plan.”

– Dental Insurance

As A Benefit Option

An employer opting to provide dental insurance in lieu of, for example, a 401(k) plan definitely has something to say about doing more to keep the employee happy. But which of the two traditional routes should you take?

A fee-for-service arrangement, structured like a health maintenance organization (HMO), pays certain amounts provided the employee goes to selected dentists on its panel. The problems with this type of plan can make the employee somewhat unhappy , long waits to get in, except for emergency care, and a limited selection of dentists from which to choose.

Another option is a dental plan that lets the employee go to any dentist he or she chooses. The problem here makes employers unhappy , it costs three times as much as the other type of plan.

But there is a solution that blends the two plans and is affordable for the employer, called the dental maintenance organization (DMO).

The DMO offers the employee a choice. He or she can go to a dentist on a panel and have a very good coverage, which may include 100 percent of preventive care, such as cleaning and check-ups; 100 percent of general services, such as X-rays and fillings; and 60 percent of major services, such as crowns.

Or he or she can go to any dentist outside the panel and still receive coverage, just not quite as much, possibly 100 percent of preventive, 80 percent of general and 50 percent of major services.

Both the 100-100-60 and the 100-80-50 options have some appeal to an employee, depending on which dentist he or she wants to go to. And the blended plan has fiscal appeal to the employer.

– Cafeteria Plan

Provides Choices

Your broker should be introducing you to the section 125 option, known in common parlance as a “cafeteria plan.” Simply stated, this allows you, as an employer, to significantly expand the supplemental benefits you offer, but minimizes your direct costs, since some of the funding comes from the employee.

The 125 allows the employee to contribute pre-tax dollars in order to get enhanced benefits of his or her choosing. These might include better health insurance coverage, supplemental life insurance, long-term disability insurance, long-term care insurance, vision care or payment of other unreimbursed health-related expenses. Because the employee is contributing pre-tax dollars to the fund, it actually increases his or her health and insurance-related buying power. In general, we recommend the employer pay 75 percent of the cost and the employee pay the remaining 25 percent.

Let’s say an employee is earning $40,000 a year, and would normally be taxed on that amount at a cumulative , state and federal , rate of about 40 percent. If that employee elects to contribute $2,000 to his or her 125 fund, the taxable income is reduced to $38,000, reducing the tax liability by $800. That $800 is additional purchasing power in the 125 fund to go towards new glasses, desired supplemental insurance coverage, unreimbursed day care or other important expenses. The employer, therefore, has effectively given the employee a pay raise.

The employee can contribute up to a maximum of $2,500 a year but there is a catch. It becomes a “use it or lose it amount,” since any money left in the 125 fund at year-end reverts back to the employer. For that reason, we tend to advise employees to be conservative, and only fund what they believe they will use in a given year. That reduces the risk of an employee losing his or her contribution and, at the same time, minimizes the direct cost to the employer.

– Creative Ways

To Offer Benefits

As cited in a recent New York Times News Service article, some employers are offering employees the chance to use the Internet, at work, to access “the virtual discount mall.”

It’s a way to please employees without increasing pay or other fixed costs and let them obtain corporate discounts. And by letting employees shop during work hours, traditionally seen as a time-waster, employers are winning in two ways.

Employees have more time and a higher quality of life because they get chores done in a more efficient fashion. And employers enjoy higher productivity, since shopping on the Internet takes less time than driving to a mall, parking, walking to a store, making a purchase and returning to work.

As we race down the information highway, we are likely to see more benefits of this kind coming online. In fact, we have been helping employers offer their employees group purchasing discounts through the Internet for a few years.

Regardless of the specifics, we are certain to see more and more types of employee benefits, and more and more creativity in that area. Intellectual capital is the most expensive and rarest capital there is, and that’s not going to change in an information-driven economy. That means that add-on benefits are not the option they once were; they are necessities.

Martin is president and CEO of RKM Partners In Trust, Inc., an insurance and corporate services company based in Downtown San Diego. RKM provides clients that have two to 3,000 employees with employee benefits, insurance, human resources, marketing and other corporate services.


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