Payroll Deduction Employee Benefits: Modulev-B

PAYROLL DEDUCTION EMPLOYEE BENEFITS: MODULEV-B

Payroll deduction employee benefits can involve a number of coverage products ranging from Term, Whole, or Universal Life to Disability Income products and 401 (k) plans. An agent can sell just one of these products on a payroll deduction basis, or a combination of them. The agent can also sell specialized payroll deduction plans such as Section 125 plans (these plans are discussed later in this campaign).

The concept of payroll deduction is simple: An employer provides employees the opportunity to purchase these products by paying premiums out of each paycheck. Premiums are automatically deducted from the employee's pay. Most often, these plans are used as a supplement to the insured's company-paid Group plan.

The variety and arrangement of plans available depends on the insurance carrier through which the plans are written and the type of plan offered. The agent's role in selling these plans can also vary-from just selling the idea to the employer and then letting an outside enrollment firm handle employee sales and administration to selling and administering the plan entirely alone. Most agents choose the former course because the administration of such a program entails specialized knowledge and much work.

The plans themselves vary with carriers, as noted, but, typically, a payroll deduction employee benefit plan will have these features:

• Several coverages offered, such as Life, Disability
• Discounted premiums due to the Group sales volume
• Either guaranteed-issue coverage or liberalized underwriting with no medical examinations required
• Employee ownership of coverages-the employee owns the policy and therefore can keep it if employment is terminated
• Spouse-only coverage-an employee need not be enrolled in order to enroll a spouse or dependent
• Double Indemnity for accidental death
• Waiver of premium if the insured becomes totally disabled during the policy period
• Immediate protection-coverage begins immediately upon completion of enrollment forms and authorization for payroll deduction

Agents can become involved in these programs on different levels. Basically, there are three options. An agency can

1. design, sell, and administer the voluntary benefits program itself,
2. sell programs that are designed and administered by an insurance company, or
3. sell the program to employers and engage the services of a firm that specializes in selling and administering these programs on the employee level.

Each approach has its pros and cons. With the first option, the agent has total control of who talks to the client when, and receives full commission for his or her efforts. But this method also means a lot of work. An agency needs a strong 'back room' staff to handle the administrative work for a program like this. An agent's staff must also know or learn how the enrollment process works, and should work at enrollment full time. Without proper administrative support and knowledge, the program is likely to fail. (You'll find more information on this under the subtitle 'Cons.')

Choosing a plan administered by an insurer eliminates some of the work to be handled by the agency, but means no choice of markets and a lower commission to account for the work the carrier is doing. (You'll find more information on this under the subtitle 'Cons.')

If an agent chooses to use an outside firm, he or she will again pass on some of the workload, but will also have to share the commission. The outside firm will also have access to his or her client's employees. If they don't do a presentable job, the agent won't look good. The key is to choose the right firm. (More on what to look for in an enrollment firm later in this campaign.)

Payroll deduction employee benefit programs offer advantages to the agent, the Commercial client, and the client's employees as well. For the agent, the advantages of selling such a program are added commission income and client retention. According to estimates by firms in the business, a 300-employee group can generate $15,000 in commission income to the agency in the first year. Re-enrollment a year later can add new employees and those who didn't sign up the first time around, which adds new commission to the agency. On those who continue the program, renewals will usually be paid. Most carriers will also pay renewals for the lifetime of the employee's participation, either within the company or on direct bill should the employee terminate employment.

An agent can also benefit from a payroll deduction program through client retention. Number one, you're offering a service that many people are talking about these days as costs of Group benefits rises. If you haven't offered it, chances are fairly good that someone else will at some time. Selling it to existing P/C clients ties them closer to you and isolates them further from your competition; selling it to prospects offers the opportunity to sell the P/C coverages also.

The agent's client, the employer, benefits in more subtle ways from a voluntary payroll deduction benefits plan. With such a plan, the company can provide desirable benefits to employees with no out-of-pocket, hard dollar expense. The company may also benefit from a number of public relations standpoints: by providing employees with products and services they might not be able to obtain on their own, by establishing a competitive edge in attracting new employees and retaining present ones, and by offering individually flexible benefits to employees instead of offering one generic package. (Note: With some plans such as those formed under Section 125 of the Internal Revenue Code, the employer may see some actual monetary benefit. These types of plans are discussed later in this campaign.)

Employees who take advantage of the program benefit the most. The specific advantages will vary with the program, of course, but, in general, employees benefit in the following ways:

• Guaranteed-issue or liberalized underwriting coverage. Medical exams or questions are not likely to be necessary above a certain premium level.
• Ownership. Employees own their own policies and, should employment terminate, employees can continue coverage without any reduction in benefits and, most likely, without any increase in premium.
• Spouse-only coverage. With most plans, spouses and dependents can be insured whether or not employees are enrolled in the program.
• Discounted premiums. The average savings have been estimated by some experts in payroll deduction to be as high as 30% for some coverages.
• Immediate coverage. Upon signing the enrollment forms and the authorization for payroll deduction, employees will be covered in some cases.
• Money-market rate participation. If interest sensitive products are part of the benefit plan, employees can participate in money-market rates without the lump-sum investment usually involved.
• Double indemnity benefit. Employees receive twice the face amount of Life insurance for accidental death. Most payroll deduction plans include this feature at a nominal cost.
• Access to coverage. Employees might not otherwise be able to obtain or even be offered these coverages in the regular marketplace. Employees in mid- and low-income brackets are not normally targeted by agents or carriers for the products offered.

Payroll deduction can be a boon to the independent agent who goes about selling it correctly. And the benefits to both the employer and employees make the selling job easier.

When talking about the negative aspects of selling voluntary payroll deduction employee benefits, one has to look at the different approaches an agent can take to the program (as described under the subtitle 'The Coverage' in this campaign). An agent who handles the entire program alone can run into different problems than agents who contract with carriers or specialists to provide the payroll deduction service.

When an agent inexperienced in the field tries to handle the entire payroll deduction process, from selling the client to enrolling the employees to renewal, major cash flow and systems management problems can surface. First of all, most agencies do not at present have the staff that will be needed to handle the volume of business and paperwork generated in the employee enrollment process. The agent, if he or she knows the payroll deduction product and its advantages, will likely have few problems handling the initial sale to the Commercial client; the problems arise when the agent tries to sell coverage to numerous individual employees and keep track of the paperwork and details that attend these sales.

A sampling of things that have to be handled include: making a group presentation to employees; meeting with each employee to sign them up for coverage; having employees who do not wish to participate sign waivers; coordinating the carrier's billing schedule with the employees' pay schedule; handling the rollover from payroll deduction for employees who are terminated; adding new employees during the policy year; servicing claims; re-enrolling at renewal date; and much more.

To obtain the kind of staff that could handle these situations, especially if the agent intends to make this a substantial operation with more than just one or two cases, a cash outlay of probably more than $100,000 would be warranted. The agent would need to hire a producer or salesperson to spend all working time arranging meetings and selling to employees, and hire the clerical staff to support the producer in handling paperwork, insurance company correspondence, claims, and so on.

The payroll deduction market can probably support this type of outlay in the long run if the agent is serious about making the investment. But the investment should be a wise one in that the agent spends some time learning about the payroll deduction business, and in that he or she hires people experienced in the field, or knows enough to train these people properly.

What all this amounts to is that, to be successful and profitable for an agency, a voluntary benefits payroll deduction program must be well-run. Employees who are unhappy with their benefit programs can make life very unpleasant for an employer, who can in turn make it unpleasant for the agent, even if service on the P/C side has been exemplary. So, any agent taking on a payroll deduction program, especially taking it on alone, risks alienating clients if the program does not satisfy.

An agent may choose to use an insurance carrier that both provides the payroll deduction products and enrolls and administers the program. We touched on this topic briefly under the subtitle 'The Product.' Using one carrier's program limits your choice of products. The carrier may have a product that is ideal for use with certain types of employees. But then you run across a group that is perhaps more sophisticated and needs a different type of product-perhaps an interest-sensitive program. That carrier may not be strong in this area. Also, an agent should look carefully at carriers who offer enrollment services. Does the carrier have full-time enrollers, or does it use clerical employees whenever the need arises? Clerical employees will not know the business as well and may present different stories to your client's employees. If the carrier is not experienced or does not specialize in payroll deduction plans, the agent can run into administrative headaches if billings and claims are not handled properly.

Contracting with an outside firm to provide enrollment and administrative in a voluntary benefits program takes the burden off the agent. However, the agent will have to pay for this lightening of the load with part of his or her commission. The commission paid to the agent will vary greatly depending on the carriers and products used, the enrollment firm's practices, and more. However, you should expect to receive at least 25% of the total premium generated by an account. For most agents, it's well worth the percentage given up to be relieved of the potential headaches; for others, it's a drawback because they believe they could handle the administrative end themselves.

Use of an enrollment firm will pay off only if the right firm is chosen. The agent must choose a firm that he or she can trust to provide good service.

Which brings us to a drawback of both enrollment firm- and carrier-handled plans: As the agent who sold the employer, you're putting the credibility of your agency, including your P/C operation, into the hands of someone who is not affiliated with your agency. You need to to take care in selecting a provider, to know exactly what the provider plans to do for each case and when, and to follow along and monitor the cases as closely as you can.

Section 125 plans merit separate discussion because of their uniqueness. They have advantages and disadvantages that are distinct from regular payroll deduction Life or Health insurance plans. In fact, these plans are not payroll deduction plans in the real sense; they are payroll reduction plans.

The plans, which are also known variously as cafeteria plans or flexible benefit accounts, are formed under Section 125 of the Internal Revenue Code, which permits an employer to enable employees to pay for certain insurance premiums before taxes, instead of after taxes. The code restricts eligible benefits under these plans to Group Medical and Term insurance; Group Disability insurance; Group Dental insurance; and individual disability, accident, hospitalization, dental/vision, or cancer plans.

Interest-sensitive Life insurance plans cannot be sold under the provisions of these plans. Like traditional payroll deduction plans, Section 125 plans are often sold as an addition to the insured's in-place, employer paid Group plan.

The basic form of a Section 125 plan is sometimes known as a conversion plan, and works like this: An employee reduces his or her gross pay by the amount needed to pay chosen insurance premiums. The premiums are paid with the money pre-tax; in other words, funds used to pay the premiums are not taxed to the employee. The reduction in gross pay causes a reduction in withholding and FICA (Social Security) taxes, which oftentimes yields the employee greater take-home pay. Here's an example:

An employee making $1,200 a month is paying $100 a month for Health insurance, either on his own or through a payroll deduction plan. With a Section 125 Conversion plan, that employee can elect to reduce his gross monthly pay by $100 and put that money toward the Health insurance. In other words, the Health insurance will now be paid for pre-tax-the dollars used to pay for it are no longer part of the employee's taxable income. So what happens to his take-home pay? His taxes are reduced, and he actually ends up with more money. See the illustration below to see how this works.

Before Conversion Plan

• $1,200.00 gross salary
• 85.80 FICA (.0715)
• 96.00 withholding
• $1,018.20 net salary
• 100.00 Health insurance
• $ 918.20 net to employee

After Conversion Plan

• $1,100.00 gross salary
• 78.65 FICA (.0715)
• 84.00 withholding
• $ 937.35 net salary
• (insurance already paid for)
• $ 937.35 net to employee

The above example is based on a married employee with two dependents. As you can see, the employee gains $19.15 a month by converting his Health insurance to pre-tax dollars via the Section 125 plan.

This is obviously a boon to the employee, but he's not the only one who gains from this plan. The employer gains by saving on matching Social Security (FICA) taxes, and other payroll related taxes. For example, if the employer has 400 employees and 100 pay for dependents' Health insurance at $100 a month, pre-tax, they would have $120,000 annually of reallocated salary. The employer can conservatively save 10% of that by not paying payroll taxes for FICA, unemployment taxes, and Workers Compensation, meaning a $12,000 annual savings.

That's how a basic Section 125 plan works. A more complicated plan involves what is often known as a flexible spending (as opposed to flexible benefit) plan, or a reimbursement account plan. This type of plan allows employees to direct, on a voluntary basis, pre-tax dollars into a reimbursement account to be used to pay for dependent care and non-reimbursed medical expenses. Essentially, it covers those items not normally covered by an insurance plan. Deductibles and co-payments are eligible expenses, along with any item the Internal Revenue Service would normally allow as an itemized deduction on its 1040 income tax form. So, instead of putting the $100 a month in the above example toward a specific insurance premium, the employee could direct that money, pre-tax, into an account designated to pay for child care, or for unreimbursed medical expenses.

For example, the employee may at present be paying $100 a month to a day-care center or babysitter. If he or she puts that money into a pretax situation, the same savings as apply in the illustration above would apply here. The drawback to this particular approach to paying child care expenses would be that the employee loses the Dependent Care Tax Credit when he or she files a tax return. However, for most people this is not really a drawback at all because the reimbursement account is a more financially rewarding choice. Generally, if an employee's marginal tax rate (income tax bracket) is greater than the percentage allowed for his or her tax credit, the reimbursement account is a better choice. More importantly, the employee benefits immediately with tax savings instead of having to wait for a refund.

The major drawback to reimbursement account plans is that the IRS sees these as a form of self insurance. If funds that are channeled into pretax accounts are not used, they are forfeited. In other words, if an employee elects to put $100 a month into a pre-tax reimbursement account, and then does not incur $1,200 worth of unreimbursed medical expenses or child-care expenses in a year, he or she forfeits whatever funds were not spent.

The other major drawback that applies to both the basic conversion plans and the reimbursement account plans is that the reduction in FICA taxes will ultimately result in a lower Social Security benefit for the employee. To counter this drawback, many agents who sell the plan suggest that employees put the 'extra' money they're now earning after taxes into an interest-sensitive Life insurance plan (sold separately from the payroll deduction plan) that can help them build retirement funds.

Another thing worth noting is that, once in these plans, employees cannot pull out at a whim. Once pay is reduced, it is permanently reduced until renewal of insurance.

As noted previously, the right payroll deduction enrollment firm can be instrumental in an agency's success with a voluntary benefits payroll deduction program. The agent who chooses to use a provider instead of doing the administrative work in-house should choose carefully to ensure that insureds will get the best service. These basic characteristics of a good payroll deduction service provider should help you make your choice:

If an agent chooses to use an enrollment firm to provide payroll deduction services, that firm will usually provide the carrier for the coverages. The agent in this situation need not go searching for a carrier, although it's still wise to know those qualities that constitute a good payroll deduction carrier and to question the enrollment firm if these qualities aren't apparent.

When looking for a carrier to provide products for the payroll deduction market, and perhaps to provide service on those products as well, an agent should keep in mind that this is a specialized market that requires some specialized work and service from carriers. When choosing a company, the agent should consider the following points: