Group Insurance Plans and Plan Design
Designing a group plan
Plan design balances cost, competitiveness, and employee needs. Designers choose benefit levels, contribution structures (noncontributory vs. contributory), eligibility rules, and funding arrangements. Flexible benefit (cafeteria) plans let employees choose among benefits using employer credits, often under IRC Section 125.
Concepts to master
- Contributory vs. noncontributory: Noncontributory plans are fully employer-paid and typically require higher participation; contributory plans require employee premiums and usually set minimum participation percentages.
- Funding arrangements: Fully insured, self-funded, minimum premium, and administrative services only (ASO). Self-funded plans assume claims risk and often use stop-loss coverage.
- Cafeteria plans: Allow pre-tax salary reduction and choice among benefits; they must satisfy nondiscrimination rules.
- Coordination with payroll: Premiums, imputed income, and pre-tax deductions affect take-home pay.
- Plan documents: Summary plan descriptions (SPDs) communicate benefits and are required under ERISA for many plans.
- Cost controls: Deductibles, coinsurance, copays, utilization review, and wellness programs.
Traps
Examiners test participation requirements and the difference between fully insured and self-funded arrangements. Another trap: assuming cafeteria plans are tax-free for all benefits - some elections create taxable income. Watch for questions about stop-loss coverage, which protects the employer, not the employee.
Worked example
An employer with 100 employees offers a contributory plan requiring 75% participation. If only 60 employees enroll (60%), the plan fails the participation requirement, and the insurer may decline to issue coverage or require evidence of insurability. If the employer instead pays the full premium, the plan becomes noncontributory and participation rules change.
Rule of thumb
When a question asks how to increase participation, consider employer contributions, simplified enrollment, and plan design changes. For funding questions, remember self-funded plans shift risk to the employer.