The University Record, January 17, 1994

Committee recommends U adopt flex benefits plan

Editor’s Note: The full text of the Flexible Benefits Advisory Committee’s report, as well as articles on focus groups and surveys and a series of questions and answers about flexible benefits, follows page 6.

The Flexible Benefits Advisory Committee has issued a preliminary recommendation that the University adopt a flexible benefits program.

In its report, the Committee says its analysis led to “the conclusion that a flexible benefits plan is viable at the University.” The Committee believes its recommended plan “meets the objectives established for the plan, is responsive to faculty and staff input, and satisfies the Committee’s decision criteria.”

The Committee is seeking comment from potentially affected faculty and staff during January and early February (see box on upcoming activities on page 6) so the Committee and Executive Officers have “the benefit of feedback before making a decision—specifically, using this feedback to confirm and refine the recommended design.”

Should the plan be adopted, it would be effective Jan. 1, 1995, with enrollment taking place during October 1994.

The report says that the Committee believes that “a flexible benefits plan would be a valued change in the way that the University provides benefits. It would increase the depth and breadth of our current benefits package by allowing greater choice of how the University and individual faculty and staff dollars are used for benefits.

“The Committee successfully used a communication process, similar to that proposed for January, that embraced important organized groups and individuals who were willing to express their opinions.

“The surveys and focus groups reached an estimated one-third of the faculty and staff who would be eligible for flexible benefits. The consistency of these opinions gives the Committee confidence in the plan developed.”

The Committee notes, “Organizations—both universities and non-universities—have implemented flexible benefits with the goal of increasing the value to their employees of the benefit dollars being spent. Participants in these programs generally have a broader choice among benefit options and the ability to direct the use of benefit dollars spent on their behalf. Proper operation of such programs can lead to greater employee satisfaction with benefits and can meet the mutual needs of the employer and employee to control/manage benefit costs.”

The hoped-for result of the proposed University program is to “give each participant the greatest possible value for his or her benefit dollars, with minimum impact on the University’s benefit budget,” the Committee notes. “Over time, such a program should continue to provide the best possible benefits with the least possible increases in individual and University contributions.”

Concept

In explaining the underlying concept for the proposed plan, the Committee notes: “Although the University’s current benefits are perceived as better than those of other employers by significant numbers of survey respondents (71 percent in one and 85 percent in another), answers to four questions provide insight into the attractiveness and acceptability of the flexible benefits structure to the faculty and staff. Specifically:

o “Over 78 percent indicated they would rather choose how to spend University money for their benefits than have the University choose for them.

o “Over 63 percent reported that cash instead of certain benefits was an attractive option.

o “Just under 90 percent stated that being able to change their benefit coverages as their needs change over the years is important to them.

o “Less then 5 percent of respondents to the mailed survey indicated that they would choose to keep the current University budget allocation among benefits the same for each and every benefit area. Other respondents to this question reported they would prefer to allocate more or less to a particular benefit or in total.”

Financial Aspects

In discussing the financial aspects of the proposed plan, the Committee notes: “The flexible benefits concept enables individuals to become actively responsible for tailoring a benefits package to meet personal/family needs. The key term here is ‘responsible.’

“Intrinsic to this assumption of responsibility is the participant’s concern about future University funding of benefits. Although the individual has control and accountability over the allocation of monies among benefits, the Uni-versity would retain control over the size of the benefits budget from year to year.

“The Committee recommends that the current policy for handling benefit cost increases continue with one key exception—rather than the past practice of annual budgetary planning for the University’s contribution for benefits, the University should commit to a three-year benefits budget plan. Such a commitment would reassure plan participants that the University’s motives for adopting flexible benefits do not include benefit reductions and cost-shifting.”

The Committee report presents details and recommendations about the specific allocation of the University’s budget for flexible benefits among participants, option pricing policy and multi-year financing commitment.

Plan Components

The recommended program is made up of two parts: core benefits outside of the flexible benefits plan; and flexible benefits, which are paid for with University-provided dollars and faculty and staff dollars. (See Proposed Flexible Benefits Plan chart on page 6.)

Core benefits, which are primarily the current benefit design, include the retirement plan, vacation, extended sick leave and others. Pre-tax flexible benefits—such as medical coverage and vision coverage—and after-tax flexible benefits—such as personal life insurance and cash back for unused flex dollars—are either derived or expanded from current benefits or represent new benefits. The Committee report presents details of all benefit features.

Funding Formulas

Under a flexible benefits program, an allowance—or flex dollars—is allocated to each participant on some flat rate, formula or combination of the two. Flex dollars typically come from money the employer is already spending on benefits. Participants then “buy” their benefits with funds from two sources: the employer-provided flex dollars and their own money. Any unused flex dollars would be folded back into the individual’s gross income.

Thus, under the Committee’s recommended plan, “a portion of the University’s benefit budget needs to be converted into individual flex dollars for each participant. The proposed plan includes two types of flex dollars: the University’s benefit subsidy and an attendance incentive.

o “The sources of the subsidy flex dollars would be generated from the University’s contributions for current life insurance, dental and medical benefits.” The dollars would be distributed based on a flat, equal amount for life insurance; a variable amount dependent on the level of medical coverage; and the annual attendance incentive. (See Table 4 above.)

o “The proposed plan modifies the current sick leave from 15 days to 12 days and offers an attendance incentive as flex dollars. These flex dollars would be determined by an individual’s actual usage of sick time during the prior fiscal year. This financial incentive is suggested as a direct response to faculty and staff input.” (See Table 5 at left.)

(For the first year of the flexible benefits program, every participant would receive $125 as attendance incentive flex dollars.)

“A characteristic of flexible benefits plans is that prices for benefit options and the flex dollar formula are determined independently.” For medical coverage, the Committee proposes that the flex dollar formula increase at the same rate as the underlying benefit options for at least three years. This formula would remain in place during the three years unless there is a significant event, such as national health care reform.

According to the report, continuing the current practice, with minor modifications, would mean that the distribution of flex dollars between one-person, two-person and three-or-more-person coverage will remain similar to current practice and that participants with a spouse working at the University would be given the same opportunity for flex dollars as participants whose spouse works for another employer.

Eligibility

The initial flexible benefits plan would cover most University faculty and staff who are not members of a bargained-for group. Retired faculty and staff would not be included in the plan and would continue to have the program they now have.

The Committee was appointed last May by Provost Gilbert R. Whitaker Jr and Farris W. Womack, executive vice president and chief financial officer, to act as an advisory group working with retained consultants, Towers Perrin, and others in the planning, design and possible implementation of a flexible benefits program.

The Advisory Committee

The Committee is co-chaired by David J. Anderson, professor of electrical and computer engineering, and Chandler W. Matthews, associate vice president for finance.

The appointment of the Committee followed discussions of U-M benefits by several University committees, including the Budget Priorities Committee, Provost’s Advisory Committee on Excellence, and the Advisory Committee on University Budget.