Hybrid benefits plans are catching the interest of advisors and employers alike. After hosting four sold out seminar sessions about hybrid plan design, we can testify that these plans are gaining momentum as a viable alternative to both traditional benefits plans and Healthcare Spending Accounts (HCSAs).
What are Hybrid Plans?
A hybrid plan is a balance between a defined benefit plan and a defined contribution plan. While these terms are most commonly used in connection with pension plans, they are equally applicable to a discussion about benefits plan design.
A defined benefit plan is a conventional employee benefits package. The percentage of reimbursement, eligible and ineligible expenses, and annual and lifetime maximums, are all defined. The insurance company establishes defined benefits premiums annually to cover future insurance risks, routine expenses, and administration costs. These packages typically include Life, AD&D, Long Term Disability, Extended Healthcare, and Dental Care. Defined benefit plans offer the most familiar type of coverage. They can offer tax advantages if defined properly for key executives. With a conventional benefit plan, cost control is in the hands of the insurer.
On the other hand, a defined contribution plan is a Health Care Spending Account (HCSA). A popular alternative to conventional plans, with an HCSA the contribution amount is set annually in advance by the plan sponsor. Employees can then claim from their HCSA as they incur Canada Revenue Agency (CRA) eligible expenses. With an HCSA, control over costs is maintained by the employer.
A hybrid plan combines the best of both worlds. Hybrid benefits plans offer the advantages of both conventional benefits plans and HCSAs, combined to create a very flexible and cost-effective solution to satisfy both employers and employees. The answer to how much of a conventional plan and how much of an HCSA should be included, depends on the goals of the employer. Employers can now choose where they would like their plan to fall in the range between conventional benefits plans and HCSAs. Instead of choosing one or the other, advisors will be able to combine elements of both, like a basic core defined benefit plan complemented with an HCSA.
Depending on how much flexibility employers want to give to plan members, they can decide on larger or smaller HCSA amounts. A key advantage of hybrid plans is that they can be designed to achieve specific goals unique to each business. For instance, employers can choose to define the HCSA amount as a percentage of employee earnings, a percentage of new sales revenue for the sales team, or a minimum amount for new employees with a larger amount for long-service employees to improve retention.
Employers can also choose different points along the defined benefit – defined contribution spectrum for different groups of employees in their organization. It’s up to the employer to decide what works best for their organization.
Hybrid Plan Example
The following is an example of a hybrid plan for a 10 person group in a highly profitable professional services company. Originally, they had a 100% non-contributory conventional plan, with standard plan maximums. This group was looking for a more flexible alternative, and wanted to provide different coverage for three distinct groups with different roles in the company.
Their advisor helped them to build a customized hybrid solution with the following key elements:
For All Employees:
- Keep the conventional pooled benefits (Life, AD&D, Long Term Disability, $5,000 Stop Loss, Out of Canada Emergency Medical Coverage). This provides essential insurance protection in case of a catastrophic event.
For 3 Executives:
- Provide a 100% defined benefit plan, covering all CRA eligible medical and dental expenses with no deductibles or caps. For individuals in the top tax bracket, this provides a tax-effective way to pay for medical and dental expenses through the business, rather than out of pocket.
For 2 Key Team Leaders:
- Add a $2,000 HCSA to the existing conventional plan design. This supplements the conventional benefit plan with a flexible HCSA to cover expenses in excess of the defined maximums, or expenses not covered by the conventional plan.
For 5 Staff:
- Revise the conventional plan to provide an 80% drug plan, semi-private Hospital, and a $500 HCSA + $250 for each year of service (capped at $2,000). This continues the convenience and familiarity of the drug card, and adds an HCSA targeted at rewarding employees for longer service with the company. For the employer, overall compensation costs for this group of employees are reduced.
With a hybrid plan, small and mid-sized businesses can achieve much greater flexibility than conventional packaged plans offer. In addition, employers can provide a range of benefits to different groups in their organization depending on the compensation budget and goals for each group.
>> The Benefits Trust offers the full range of hybrid benefits plans. Click here to contact us today and find out how we help successful business owners build a better benefits plan than they can get anywhere else.
