FLEXIBLE PROGRAM PREVALENCE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90-00530R000400730012-0
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 12
• Document Creation Date: December 22, 2016
• Document Release Date: August 27, 2012
• Sequence Number: 12
• Publication Date: January 1, 1988
• Content Type: MISC

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I 0 -
Hewitt Associates
Ike catptemaliri
January 1988
Revised
Outlook
Flexible program prevalence?
in words and pictures
Spotlight
A review of new flexible
programs at...
? Abbott Laboratories
? Federal Paper Board Company
? Finnigan Corporation
? Florida Steel
. Hershey Foods
? Mattel
? Rohm & Haas
? Scott Paper
? Wausau Paper Mills
? First Pennsylvania
? National Westminster
? Valley National Corporation
? Beth Israel Hospital
. New England Deaconess Hospital
? Porter Memorial Hospital
? St. Luke's Episcopal Hospital
. Sisters of Charity
of the Incarnate Word
? W.A. Foote Memorial Hospital
? Florida Power
? NICOR Oil & Gas
? Pacific Resources
? Texas Eastern
? United Gas Pipe Line Company
? Arthur Young
? University of Puget Sound
? Applied Physics Laboratory
Viewpoint
Closure on the battle
against the $500 cap
Copyright C) 1988, Hewitt Associates
This year marks the 10th anniversary of Section 125?the
Internal Revenue Code provision that allows employees to
take part in determining how employer dollars allocated
for benefits will be spent on their behalf. During the past
decade, the movement toward "choicemaking" systems has
flourished?with more than 800 flexible programs expected
to be on line by year-end 1988.
Here in words and pictures is an update on flexible pro-
gram prevalence?by employer size, industry, and location.
(Figures are compiled from published sources as well as our
own consulting experience.) The information is based on
602 programs in place through 1987 and another 46 with
January 1, 1988 implementation dates?for a total of 648
programs currently in effect. The figures are intended to
represent major U.S. employers with plans that either
offer some form of choicemaking in employee benefits,
or a flexible spending account (or both).
Flexible Compensation Programs
Among Major U.S. Employers
Number
Programs
800 ?
750 :=
700
650
600
550
of
602
800+
500
494
450-J
400
370
350
300 L.-
250
223
200 -7-
'50
ii
log
95
50
36
p.11
9
15
Pre-
Year 1980
1981
1982
1983
1984 1985 1986
1987
1988 (E)
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Flexible compensation programs have been implemented by companies of
all sizes, but most of the recent growth has been fueled by the "medium"
size organizations?those with 1,000 to 10,000 employees.
Number of 375 ?
Programs 350
325 ---:
300 -7-
275
250
225 -17
200
175 L-
150
125
100 7--
75 IT
50
25 ?
Flexible Compensation Programs
by Size of Employer
223
111
494
267
89
648*
371
108
Year
1984
1986
1988
Under 1,000 Employees
77, 1,000-10,000 Employees
Ell Over 10,000 Employees
* Based on flexible compensation programs in effect by January 1.
Among the very largest industrial companies in the country, 27% of the
Fortune 100 and 16% of the Fortune 500 had flexible programs in effect by
January 1. On the service side, 20% of the Fortune 500 service companies
had implemented programs by January 1, including 44% of the 100 largest
commercial banks, 26% of the 50 largest life insurance companies, 22% of
the 50 largest utilities, and 12% of the 50 largest savings institutions.
By industry, flexible programs are well represented across industry lines, but
larger concentrations of programs are found among manufacturing firms,
banking and financial institutions, and health care organizations.
Flexible Compensation Programs by Industry*
(Percent of Companies)
Education 7%
Insurance 6%
Services 4%
Communication 4%
Mining/Petroleum 4%
Utility 4%
Trade 3%
Other 7%
Health Care 14%
Banking/Finance 18%
* Total ?648 flexible compensation programs in effect.
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Manufacturing 29%
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By state, the "Top 10" for flexible compensation include Illinois (63 programs),
California (50), Minnesota (50), New York (48), Texas (46), Ohio (32),
Pennsylvania (32), Michigan (30), Massachusetts (27), and Colorado (26).
Spotlight
? Manufacturing
Employers continue to implement flexible compensation programs?driven by
different objectives and surrounded by unique circumstances. Following is a
sampling of employers?by general industry groupings? who launched flexible
compensation programs, effective January 1.
Abbott Laboratories, the world-wide health care products company based in
North Chicago, Illinois, launched a flexible benefit program for more than
22,000 employees across the country. Introduction of the program represents
a "return to basics" in health care benefits, according to Henry Weishaar,
Divisional Vice President, Corporate Personnel. "Through our plan design and
communication, we're emphasizing that the real purpose of benefit coverage is
to help protect employees from catastrophic expenses," explains Mr. Weishaar.
The new flexible program includes choices in medical and dental, plus health and
dependent care spending accounts. In the area of medical, the program offers
four indemnity plan options, HMOs, and the opportunity to waive coverage.
(To reassure employees that benefit coverage was not being cut back, Abbott
retained the company's prior plan as an option.) The indemnity plan options
are structured in a relatively unusual manner?as the deductible rises, annual
out-of-pocket limits decrease and lifetime maximums increase. In other words,
as employees take on more risk for front-end costs, Abbott provides greater
protection for major, long-term medical expenses.
Enrollment results indicate that employees took an active interest in evaluating
and selecting the medical coverage best suited to their needs. Only 42% of
employees elected the prior plan; 44% elected coverage under one of the three
new indemnity options; and the balance enrolled in HMOs, waived coverage,
or were covered as a dependent of another Abbott employee.
Federal Paper Board Company, Inc., a forest products manufacturer located in
Montvale, New Jersey, implemented a flexible program to provide a uniform
benefit structure for 1,300 salaried employees.
Prior to the new flexible program, all employees had common benefits except in
medical. The company had taken the first steps toward cost sharing a few years
ago by offering a comprehensive medical plan ($100 deductible) for new hires,
employees of a recently acquired paper mill, and other employees wishing to
switch out of the old first-dollar medical plan. (The first-dollar plan was closed
to all new employees when the new comprehensive plan went into effect.)
"The flexible program allowed us to offer the same benefit opportunities to all
employees, with no cutbacks," notes Don Gardner, Vice President of Employee
Relations. Under the new flexible program, the company maintained both of
the previous medical plans, but added another comprehensive option ($300
deductible). The old comprehensive plan serves as the core plan, which is
completely subsidized by the company. Employees may opt up to the
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first-dollar plan (and pay the higher cost), or down to the new comprehensive
option (which produces a rebate). In addition to choices in medical, the
program features health and dependent care spending accounts.
Over the last decade, benefit costs had tripled for Finnigan Corporation, a
manufacturer of analytical and scientific instruments with 500 salaried employees
based in San Jose, California. The company implemented a flexible program to
help manage benefit costs more effectively in the future, as well as to respond
to employees' changing needs.
The flexible program offers choices in medical, dental, long-term disability, life,
and paid time off (vacation and sick leave combined), plus health and dependent
care spending accounts. Although employees had the opportunity to buy back
former coverages, enrollment results indicated that only 8% elected to do so.
"Keeping track of claims experience is an important part of our effort to manage
costs," explains Russell Williams, International Compensation and Benefits
Manager. Our PC solution enabled us to automate the benefit administration
function and to generate reports that track plan costs and experience on an
ongoing basis. Through our new capabilities, we'll be better equipped to plan
for cost effectiveness down the road."
In designing and implementing its flexible program, Tampa-based Florida Steel
Corporation with 2,400 employees, faced the challenge of introducing employee
cost sharing in medical for the first time. "From a cost management perspective,
we recognized the need to break from our tradition of completely noncontri-
butory medical coverage," comments Jim Hogue, Vice President, Employee
Relations. "But as a union-free employer, we were sensitive to a change
that might create negative employee reactions." The solution? The company
retained its prior medical plan as a flexible option (at no cost to employees)
and added two new, lower-coverage options. Employees who opt down in
coverage receive higher flexible credits. The program also offers choices
in dental and group life, plus health and dependent care spending accounts.
"Offering a choicemaking program, rather than taking a tough stance on cost
containment, was critical to gaining employee acceptance for the concept of
cost sharing," notes Mr. Hogue. "That, coupled with a comprehensive commun-
ication campaign, actually served to enhance our employee relations."
Hershey Foods Corporation, headquartered in Hershey, Pennsylvania,
introduced a flexible program to corporate staff employees as well as Hershey
Chocolate U.S.A. salaried employees across the country?a total of over 2,500
employees. "Three major objectives were met by our flexible program," explains
E. J. Collins, Benefits Planning Manager. "We wanted to introduce flexibility
to meet the changing benefit needs of our employees, to standardize various
options across the company, and to provide an equitable way for the company
to share some of the increases we've been experiencing in benefit costs with
employees?particularly in medical."
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Hershey elected to implement a full flexible program with choicemaking among
virtually all benefit areas, in addition to health and dependent care spending
accounts, and vacation buying. "We'll look at adding other options, including
our capital accumulation plan, at a later date," comments Mr. Collins. "For the
time being, however, I'd say our employees understand the new program and
the consensus is very positive."
With more than 75 married couples employed by Hershey, the company also
faced an equity issue: Should employees who waive medical and/or dental
coverage for themselves?but are covered as the spouse of another Hershey
employee?receive the full opt-out credit allowance? Management decided
that employees in this situation would be entitled to half as many credits
as employees with health care coverage from another source.
Mattel Inc., a leading toy manufacturer located in Hawthorne, California,
implemented a flexible program for nearly 2,000 salaried employees. The
program includes choices in medical, dental and vision, supplemental life
insurance, and health and dependent care spending accounts. Mattel plans
to add choices in other benefit areas in future years.
"For the first time, we were asking employees to think about their benefits,"
notes John Thelen, Director of Compensation and Benefits. "The new flexible
program gave us the opportunity to educate employees about the cost of
health care, and provided a mechanism through which to manage costs."
Rohm & Haas Company, a multinational specialty chemical manufacturer based
in Philadelphia, introduced a flexible program to increase the scope of benefit
coverage for employees?with no incremental cost to the company. The
program, which previously offered choices in medical, now also offers flexible
spending accounts for health and dependent care. "Although our prior benefit
package was quite competitive, the addition of spending accounts is providing
employees even greater benefit value," comments Dan Kendall, Employee
Benefits Manager.
Scott Paper Company, based in Philadelphia, introduced a broad choicemaking
program to 6,000 employees in 23 locations across the country. In conjunction
with numerous other changes, the company previously had implemented health
and dependent care spending accounts. As one of many communication objec-
tives on launching the new program, Scott sought to reinforce the usefulness
and advantages of spending .accounts. "Through an intensive communication
effort, we emphasized the positive features of a choicemaking program, including
the flexible spending accounts, and encouraged employees to take advantage
of the program," notes Patrick Lawrence, Director of Employee Benefits. "A
highlight of our election results was a tripling in employee participation
in spending accounts from year-earlier levels, indicating that the quality
of communication can make a difference."
According to Pamela Queoff, Director, Financial Analysis & Insurance,
Wausau Paper Mills (WI) introduced a flexible benefit program for the "classic"
purposes of providing employees the opportunity to select benefits to fit their
individual needs and controlling long-term benefit costs. The program offers
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? Banking/Finance
broad choicemaking across benefit areas including medical, dental, group life,
long-term disability, and vacation. Employees also may take unused flexible
credits in cash, or direct that amount into a new 401(k) plan implemented along
with the flexible program.
Separately, the paper manufacturer previously had maintained different plans
for employees at each of two nearby operating plants and the new program has
made it possible to offer comparable benefits to all employees.
First Pennsylvania Bank, headquartered in Philadelphia, implemented a
flexible program to enhance benefits for more than 3,300 full-time employees.
In addition to providing the advantages of choice, the bank increased its
financial commitment to benefits by 25% (exclusive of administration costs).
The flexible program includes eleven choices in medical (three comprehensive
options, seven HMOs, and waiver of coverage), three in dental (two improved
options and a waiver of coverage), eight choices in life insurance, and two in
long-term disability. The program also includes new supplemental short-term
disability coverage, restructured personal accident benefits, vacation buying
and selling, plus health and dependent care spending accounts. Employees
with unused "FlexDollars" may elect up to $300 in cash.
Communication was viewed as an opportunity to build both enthusiasm for and
understanding of the new program. Explains Bill Scott, Project Manager: "We
built the communication campaign around the theme of 'Benefits Your Way'
which allowed us to make learning about the new program a simple and enjoy-
able process. We used numerous communication media, including newsletters
in the form of 'Travel Guides,' and an election workbook and video that made
clever use of 'rules of the road' in explaining the different benefit choices."
Concludes Ron Boldt, Vice President of Compensation and Benefits: "We felt
very positive about the new program and wanted to convey that enthusiasm
through the communication material. In turn, our employees felt as good
about the program as we did. Everyone came out a winner."
After studying alternative designs and conducting employee focus groups,
National Westminster Bank, headquartered in New York City, introduced
a flexible program that maintains the bank's traditionally strong financial
commitment to benefits and responds to the feedback provided by employees.
"The bank was particularly interested in a flexible program as a strategic vehicle
that would have appeal to an increasingly diverse workforce," explains Patricia
Brown, Manager of Compensation and Benefits. "We wanted the program to
be viewed as an exciting and positive change by our 4,600 employees." Adds
Jeanne Ragonesi, Benefits Manager: "By planning ahead, we were able to separate
our cost containment objectives from the new flexible program. Last year, we
heightened employee awareness about the need to manage benefit costs by
moving from a first-dollar medical plan to a comprehensive approach with
managed care provisions. With that behind us, introduction of the flexible
program was received most enthusiastically by our employees."
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? Health Care
Under the flexible program, National Westminster retained the prior level of
employer contribution, but made improvements by offering numerous choices
in medical and dental, and by adding vision and hearing, survivor income, and
supplemental short-term disability benefits, as well as health and dependent
care spending accounts. To underscore the bank's recognition of the importance
of benefits, the program contains no cash option.
A flexible approach is helping Valley National Corporation, a southwestern
bank holding corporation headquartered in Phoenix, position its benefit
program to accommodate future growth of the organization. By providing
an "umbrella" benefit structure, the company hopes to facilitate future
mergers and acquisitions.
This year, the program was extended to more than 8,500 employees, including
800 at the corporation's newest acquisition, Valley Utah Bank. The "umbrella"
program offers a common benefit structure to which slight modifications (e.g.,
different premiums and deductibles) can be made to accommodate the special
market circumstances of new acquisitions. The flexible program includes choices
across benefit areas and health and dependent care spending accounts.
Increased ability to recruit and retain employees as well as better control over
benefit costs were the driving forces behind introduction of a flexible program
at Boston's Beth Israel Hospital, a Harvard-affiliated teaching hospital with
more than 4,000 employees. "The current health care environment is very
competitive," comments George Hunter, Compensation and Benefits Manager.
"We're competing both with other hospitals and with private-sector employers
in an era of staffing shortages and cost containment."
Through a flexible program, the hospital was able to maintain the same level of
commitment to benefits while enhancing the overall value of the program. The
hospital introduced choices in new benefit areas (dental, short-term disability,
and flexible spending accounts) and added choices in existing benefit areas
(medical, group life, AD&D, and long-term disability). "Employees are very
pleased with the additional choices and the ability to influence how their
benefit dollars are spent," adds Mr. Hunter.
New England Deaconess Hospital, also a Harvard-affiliated teaching hospital
located in Boston, introduced "Deaconess FLEX," primarily to address diverse
employee benefit needs and cost management issues. The flexible program offers
the hospital's 2,300 employees a broad range of benefit choices, plus health and
dependent care spending accounts. An added bonus on implementation of the
new program was improvement in the efficiency of administrative procedures.
"We examined various methods for administering the program?including the
acquisition of a new payroll/personnel system with a module for flexible pro-
gram administration," notes Mark Grubbs, Manager of Compensation and
Benefits. "We decided on FlexSystemTC, which allows computerized interface
with our current mainframe payroll system for payroll deductions, data
maintenance, and spending account recordkeeping. Overall, the system gives
us quicker, easier access to data and greater control over information."
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One of the issues Porter Memorial Hospital in Denver grappled with on
introduction of their flexible program for 2,000 full- and part-time employees
was incentives for use of Porter (and affiliated) hospitals versus other facilities.
(Porter is a multi-purpose acute-care facility with services in a wide range of
areas.) Design of the flexible program?which offers options in medical and
dental plus health and dependent care spending accounts?encourages utili-
zation of Porter facilities by providing 80% or 90% reimbursement (depending
on option selected) for most services, versus 70% or 80% reimbursement on
use of other providers.
St. Luke's Episcopal Hospital/Texas Heart Institute, one of the six hospitals
located in the Texas Medical Center in Houston, launched a flexible program
for 4,200 employees. The program offers broad choicemaking across benefit
areas, as well as health and dependent care spending accounts. In the area
of medical, the program offers three indemnity options and various HMOs.
Although employees may not waive medical coverage, they may elect a low-
cost, minimum-coverage plan. This option, which covers only 20% of medical
expenses, is designed to supplement an employee's coverage from another
source. "Many of our employees are from two-income households and have
coverage available under a spouse's medical plan," notes Andy Brown,
Benefits Manager. "Employees in this situation are able to elect the low-cost
option and free up flexible credits for use in the spending accounts?or as
a cash option."
Sisters of Charity of the Incarnate Word Health Care System (SCH), based in
Houston, designed a flexible program for 14,000 full- and part-time employees
at 22 facilities in five states. The program offers broad choicemaking across
benefit areas, as well as health and dependent care spending accounts. Gloria
Ludtke, Corporate Director of Employee Benefits, explains, "We introduced
flexible compensation primarily to provide employees at all facilities?large
and small, rural and metropolitan?with a full range of benefit choices in a
tax-effective manner. At the same time, local facility management gained
tremendous flexibility in determining each year the level of employer
contribution to the cost of the package based on local budget constraints
and market needs."
At W. A. Foote Memorial Hospital in Jackson, Michigan, one of the key
objectives for implementing a flexible program was to address inequities in
benefit coverage for full- versus part-time employees. Part-time employees
represent about one-third of the hospital's 1,600-employee work force. To
distribute the employer contribution to benefits more equitably, the hospital
decided to tie flexible credit allocations to its time and attendance system. All
employees working at least 12 hours per week are eligible for the flexible pro-
gram. At the beginning of the year, credit allocations are determined by the
number of hours per week an employee is scheduled to work. However, because
employees often end up working either more or fewer hours than scheduled,
the hospital's payroll system monitors the actual number of hours worked
and automatically adjusts credit allocations on an ongoing basis.
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? Energy
"We think?and employees seem to concur?that we've developed a very
fair system," explains Jerry Culhane, Vice President, Human Resources.
"We expect our flexible program to be an invaluable tool for recruiting
and retaining employees."
Florida Power Corporation, an electric utility based in St. Petersburg, Florida,
introduced broad benefit choicemaking to about 3,400 salaried and 2,300 union
employees after successfully implementing health and dependent care spending
accounts in 1985. "Our philosophy has always called for providing the same
benefits to all employees," explains George Rickus, Vice President, Human
Resources. "So, when we decided to implement a flexible program, it was
only natural to extend choicemaking to union as well as salaried employees."
The flexible program, which offers choices in medical, dental, group life, and
long-term disability, allows employees to replicate prior benefit coverage. In
fact, to ensure that the company's "no takeaway" posture was clear, enrollment
materials were designed so employees could simply check a box to receive their
prior standard benefit coverages. "This straight-forward approach helped us
build credibility?especially with union employees," notes Mr. Rickus. "How-
ever, even with the same coverage available, we were pleased to see that about
80% of our employees elected to change their prior coverage in at least one
benefit area."
Significant medical cost increases led NICOR Oil & Gas Corporation, an
exploration, production, and pipeline company headquartered in Denver,
Colorado, to implement a flexible program for 140 salaried employees. The
flexible program offers choices in medical coverage, plus health and depen-
dent care spending accounts. At the same time as the flexible implementation,
the company introduced incentives for use of cost management features?
including precertification of hospital stays, second surgical opinions, and
a PPO alternative.
Notes Becky Milligan, Manager of Human Resources and Administration:
"Through the program, we're sharing more responsibility for health care costs
with employees, without mandating any particular plan. Instead, we're offering
employees the ability to choose how to spend their health care dollars. Our
employees are responding well as witnessed by our 38% enrollment in the
health and 7% enrollment in the dependent care spending accounts."
Honolulu-based Pacific Resources, Inc. with 1,000 employees operates in two
distinct businesses?as an independent refiner and marketer of petroleum and a
gas utility company. Similarly, the company has two relatively distinct demo-
graphic groups?one featuring longer-service employees, the other younger,
shorter-service employees. "A flexible program enables us to offer an array
of benefit choices to appeal to our employees' wide-ranging needs," explains
Mel Nakamura, Vice President of Human Resources. "In addition, the company
seeks to manage escalating benefit costs through the new program."
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? Services
The flexible program offers options in medical, dental, and vision coverage;
life and AD&D; long-term disability; plus health and dependent care spending
accounts. "Our employees have reacted very positively to the opportunity to
choose the level of benefits they need," notes Mr. Nakamura.
This year, the company maintained the same level of cost commitment to
benefits, but anticipates that price tags will inflate realistically over time.
"Given the realities within our industry, a flexible approach provided us
a reasonable means of introducing cost sharing in the future," explains
Mr. Nakamura. "As employees are asked to pay for a portion of benefit
cost increases, they may choose whether they want to spend more for
higher coverages or opt down to lower levels."
Texas Eastern Corporation, a diversified energy company based in Houston,
began thinking about implementing a flexible program several years ago. "We
were encouraged by the many companies we saw moving over to flexible
programs, but we felt employees would be better served by waiting for the
certainty provided in the 1986 Tax Reform Act," explains Lance Froelich,
Director of Compensation.
The company introduced two new flexible programs?one for about 3,500
Texas Eastern employees and one for 3,500 employees of Petrolane Partners, L.P.
(whose benefits are managed by Texas Eastern as general partner). Although the
plans vary because of differences in the nature of each company's workforce,
both offer choices in medical, group life, and long-term disability, plus health
and dependent care spending accounts.
United Gas Pipe Line Company, a Houston-based natural gas transmission
company is phasing in benefit choicemaking for its 1,900 employees over a
three-year period. This year, the company introduced choices in the areas
of medical and dental, in addition to health and dependent care spending
accounts. During the next two years, the company plans to add choices in other
benefit areas?including group life, AD&D, disability, and possibly vacation.
Alvin White, Vice President, Human Resources and Administration, explains
why management decided to implement the flexible program on an evolutionary
basis: "Our organization, which went private in 1987, previously had gone
through several changes in ownership. Although the introduction of a flexible
program was positive news, employees had experienced so many changes in
recent years that we wanted to make the transition to flexible benefits as
comfortable as possible. We thought a phased approach would demonstrate
greater sensitivity toward our employees than an all-at-once implementation."
Arthur Young & Company, headquartered in New York City, introduced
a flexible program to meet the needs of a changing employee population.
Explains Paul Ostling, National Director of Human Resources: "Perhaps few
industries have experienced the dramatic shifts in demographics that have
occurred within the accounting field. For example, over 50% of our workforce
is single, and half of all professionals we now hire are women. The 'cookie
cutter' mold for which our original program was designed no longer fits the
needs of the majority of our people."
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? Education
? Nonprofit
The flexible program offers six choices in medical and four tiers of coverage
within each choice. "We have a larger number of employees who are single
parents and we wanted to meet their special circumstances by adding a new
coverage tier that differentiates from employee-plus-family coverage," explains
Mr. Ostling. The program also offers a "yes/no" choice in dental (a new benefit
area) and in long-term disability; seven choices in employee life and AD&D;
and four in dependent life; plus health and dependent care spending accounts.
"We intentionally did not replicate our former coverages so that employees had
to evaluate their choices," notes Mr. Ostling. "A flexible approach provided us
an effective way to increase awareness among employees of the cost and use-
fulness of benefits."
The University of Puget Sound located in Tacoma, Washington, designed a
flexible program that offers choices in medical and dental, plus health and
dependent care spending accounts. "We knew that understanding the needs and
attitudes of our population would be important to the success of our program.
By assembling a study group with members representing faculty and staff, we
gained valuable input that was instrumental in the way we communicated the
new benefit program," explains Rosa Beth Gibson, Personnel Director. "In terms
of communication, we found that both faculty and staff preferred a straight-
forward, factual information approach, so we stayed away from frills?not
even designating a special name for the new program."
Concern about employee reaction initially posed a hurdle to introduction of a
flexible program at Applied Physics Laboratory, the research and development
division of The Johns Hopkins University in Laurel, Maryland. "Historically,
our employees have not accepted change easily?particularly where finances
are concerned," comments Patrick Birck, Compensation Manager. "So our
communication effort needed to convince employees of the merits of a
choicemaking program. Once we explained that a flexible program actually
increases the efficiency of benefit expenditures, our employees became very
receptive to the idea."
Employee understanding seems to be evidenced by spending account
participation which was relatively high for a first-year program. About 33%
of employees contributed to health care spending accounts (with an average
contribution of $600), while about 3% of employees established dependent
care spending accounts (with an average contribution of $2,700).
Viewpoint
Before the circumstances that led to defeat of the $500 cap on flexible programs
fade from memory, it may be helpful to try to identify the government con-
cerns that caused the proposal to surface in the first place.
Somehow Washington policymakers have come to believe that tax avoidance
is the key motivation for the spread of flexible compensation programs. Most
likely, it is salary reduction that gives rise to the concern (because salary
reduction turns currently taxable income into nontaxable compensation when
that amount is spent on benefits). In reality, except for that feature, flexible
programs have the opposite effect?turning unneeded, nontaxable benefit
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Declassified and Approved For Release 2012/08/27: CIA-RDP90-00530R000400730012-0
money into taxable compensation (for programs with a cash option). More-
over, companies clearly are deeply involved in providing employee benefit
protection to their employees through flexible programs (as much so as non-
flexible program employers). So the concern about employers shirking respon-
sibility for benefit provision by shifting the burden of payment to employees
through salary reduction is misplaced. However, until Washington understands
the workings of flexible programs, there may be continuing attempts to single
out these benefit arrangements from all others for special punitive action.
In our perspective, it makes more sense to have one set of rules for all
benefits?flexible and nonflexible. The basis for our reasoning is simple: Why
should tax treatment differ by whether the employer makes the decision on how
to spend benefit money, or the individual so decides? Surely the new discrim-
ination rules (in all their complexity) will keep flexible programs from achieving
tax avoidance for the highly paid while the lower paid select (taxable) cash.
In the face of a renewed threat in the future, we trust that the power of
reason will once again prevail against any special limitations for flexible
programs alone.
Hewitt Associates
An international firm of
consultants and actuaries
specializing in the design,
financing, communication,
and administration of
employee benefit and
compensation programs
United States Professional Centers
2100 RiverEdge Parkway, Atlanta, GA 30328
[phone]
100 Half Day Road, Lincolnshire, IL 60015
(312>295-5000
40 Highland Avenue, Rowayton, CT 06853
[phone]
3 Hutton Centre Drive, Santa Ana, CA 92707
[phone]
25231 Grogan Mill Road, The Woodlands, TX 77380
[phone]
United States Regional Consulting Offices
Atlanta Cleveland Denver
Boston Dallas Detroit
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Los Angeles
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International Centers and Offices
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Management Compensation Services
8687 East Via de Ventura
Scottsdale, AZ 85258
[phone]
(A wholly-owned, independently
operated division of Hewitt Associates)
Declassified and Approved For Release 2012/08/27: CIA-RDP90-00530R000400730012-0