At Clients’ Edge Employee Benefits we specialize in employee benefits and group retirement solutions. We continue to bring you a high standard of services and broad scope of products to effectively meet your unique needs and objectives. We will be posting periodically with relevant topics that may be of interest to you in dealing with your staff and the benefits program.
- Taxable rules on group plans, specifically on pooled benefits
- Probationary periods and late applicants
- Topical employee handbook information
- Mandatory generic drugs
- Drug containment strategies – specifically the pooled drug program
Taxation of group plans
If the employer and employees share the cost of the group plan, what is the best way to share the cost? The main consideration is the taxation of various components.
The tax implications are as follows:
- The health and dental cost of the plan can be paid 100% by the employer and be a non-taxable benefit to the employee (excluding Quebec employees where all benefits are taxable benefits to the employee)
- The Life, accidental death and dismemberment (AD&D) and short term disability (STD), long term disability (LTD) and critical illness (CI) premiums are taxable benefits to the employee if paid by the employer. If the employee pays 100% of these premiums or are recorded as taxable benefits to the employee, the benefits are received tax free. On the other hand, if the employer pays the premiums and the premium is not recorded by the employee as a taxable benefit, the benefits will be taxable on receipt by the employee.
Eligibility rules of group plans
Group plans are issued without medical evidence of insurability. There is usually a 90 day waiting period after joining the employer on a full time basis to be eligible for benefits. On any hire, the employer can waive the waiting period with notice to the insurance company or honour it; but benefit coverage must commence either immediately or you have to wait for the full 90 days.
Based on the hire date and the waiting period, an eligible employee has 31 days to enroll in the group plan without medical evidence. After that 31 day period, the enrolment is considered late. The insurer then requires the employee to complete a medical underwriting form, which could affect their participation in the plan as then pre-existing conditions are considered by the insurer.
Plan administrators often smartly submit the enrolment as soon as the employee is hired regardless of any waiting period (but with an effective date 90 days down the road) so they don’t forget to add the employee later.
Most insurance companies consider the minimum full time employment definition to be 24 hours per week.
The same 31 day rule applies to adding a spouse or a child to an existing plan. After the 31 days of such event, the new dependent will need to complete a medical underwriting form, which could again affect their participation in the plan.
All full time employees must participate in the group plan as a general rule, but there are some exceptions. In the case of health and dental only, the employee can opt out if they are a participant in a spouse’s group plan. Many insurance companies have various thresholds of acceptable participation depending on the size of the group, but the goal is 100% to avoid anti-selection. Pooled benefits if offered such as life and LTD are mandatory benefits.
Employee handbook insert
To control risk, we recommend the following being inserted in either the employee handbook and/or the benefits handbook. “After twenty-four (24) consecutive months of receiving long term disability benefits, all health and dental benefits cease. During the 24 months, the employee will be responsible for their portion, if any, of the premiums. Coverage will lapse for non payment of their portion.”
Mandatory generic drugs
In the past many group plans covered the full cost of brand name drugs when the member submitted a prescription with “no substitutions” indicated. Since late 2012, many employers have adopted mandatory generic substitutions into their plans. The key difference here is despite the doctor indicating “no sub” on the prescription; the plan would only reimburse the generic cost, subject to the regular co-pay rules of the plan. Most carriers have implemented an exception process for those cases where there is an essential need for a member to remain on a brand name drug at regular co-pay rules.
While many providers make mandatory generic substitution the default formulary, it is still possible to keep the traditional generic substitution drug plan design but with some cost implications. Together we can determine what is best for your Company and its members over the long term.
Drug containment strategies – specifically the pooled drug program
The frequency of biologics/catastrophic drug claims is increasing and these drugs can cost in excess of $50,000 per year. Treatment regimens for these drugs tend to be on a chronic basis. Over the past ten years or so, the cost of these drugs has not been passed on to the plan sponsors but it would appear this will no longer be the case. According to Equitable Life of Canada, and others, the “drug holiday” is over.
Under a fully insured arrangement, there is often a $7,500, $10,000 or $15,000 large pooling level (depending on the size of your group). In other words, only claims below this level would affect the renewal rates. Historically, claims above the pooling level should not affect the renewal and only affect that carrier’s pool. This is no longer sustainable. Recent inter-carrier collaboration now stipulate that the portion above $25,000 will not fall into the carrier’s pool but will be shared by all carriers and not have a material affect on any single group’s renewal premiums. This `EP3’ program will by design pool the drug claims in excess of $25,000 per employee and not affect the plan sponsors large pooling charge which factors into the renewal premiums.
In contrast, under an Administrative Services (ASO) arrangement, the plan sponsor is responsible for the claims and purchases a stop-loss insurance plan (similar to those built into traditional fully insured plans) to cover the extended health claims including drugs above a certain ceiling. Any claims above this ceiling are borne by the stop-loss carrier and do not affect the cost of the plan. Going forward however, either the stop-loss ceiling and or the stop-loss premium will be increased. The only remedy for the plan sponsors would be to limit the drug maximum of their plan.
Once an employee surpasses $25,000 in drug claims under an ASO arrangement, the underlying health condition will be considered a pre-existing condition and these claims will not be eligible for the EP3 program if the sponsor wishes to switch to a fully insured plan.
The content of this communication is for general use and information purposes only. It is not intended to be legal or tax advice. The content is based on current information and is subject to change. You may wish to discuss with your professional advisors your individual situation.