Assembling the Pieces

When open enrollment season rolls around, Bonnie flips through her employee benefits forms, checking off the same boxes each year. Is that a sign of satisfaction with the choices she’s made? Unfortunately, no. Bonnie says it’s a signal of her utter confusion.

First there’s the medical care alphabet soup, then there’s the sheer volume of material to wade through. HMOs, PPOs, EAPs and POS plans baffle with directories the size of phone books and intricate schedules of co-payments and deductibles.

Next she’s supposed to weigh life and disability insurance choices. Does she need a “salary continuation plan”? How much life insurance does she want? Would she like to contribute to the dependent care account? Has she adequately planned for retirement by funding her 401(k)?

Bonnie goes home with an armload of reading material and a single conviction: If the answers to her benefit questions lie somewhere in the hundreds of pages of information she carted back from the company’s annual benefits fair, she doesn’t know where they are and she’s not sure they’re worth finding.

But if she invested the time to do it right, Bonnie could save thousands of dollars a year--the equivalent of giving herself a tidy raise.

“This is an area that nobody can ignore,” says Harold Loeb, principal and consulting actuary at Buck Consultants in Century City. “There’s just too much money--and potential exposure--involved.”

But as the so-called “open enrollment” season nears--fall is usually the time when companies give workers the chance to rejigger their benefits--many employees, like the hypothetical Bonnie, are confused about just how to do it.

“Benefit by benefit,” advises Cynthia Drinkwater, senior director of research at the International Foundation of Employee Benefit Plans in Brookfield, Wis. “It’s almost too big a picture to look at on an overall basis.”

Consider each benefit you’re offered in three steps: Determine how much coverage you have, how much you need and how much your employer will charge you for additional coverage, assuming you have the option to buy more through your company plan.

The best mix of benefits will take into account your age, your family status and the specific needs of you and your family.

For instance, a young worker with a stay-at-home spouse and several small children would want to pay more attention to insurance benefits, particularly life and disability. A top-of-the-line health plan might be nice too, but when dollars are limited--as they always are--this family may determine that the need for income protection supersedes the value of being able to pick and choose their doctors.

Meanwhile, a family with a chronically ill member may spend hours examining the specifics of the health insurance plans offered. Which one covers the services they know they need and which offers access to the best doctors?

A single woman with no dependents might be interested in spending more on retirement savings and far less, if anything, on life insurance.

Once you figure out what type of benefits, in general, make the most sense for you, it pays to understand the two basic types of company plans--flexible and inflexible.

If you have an inflexible plan, you’ll be offered a single choice in certain benefit categories, such as health insurance, disability insurance and, perhaps, life insurance. Your employer may or may not require financial contributions from you to participate.

Your decision boils down to whether to accept the benefits you’re offered.

In a flexible plan, typically, you have the option to spend the benefit dollars your company gives you on just the benefits you want. For instance, you may be able to opt out of life insurance completely in order to buy more health coverage.

Before you wade into your employee benefits package this year, take a glance through the following primer on the pieces you’ll need to solve your own benefits puzzle.

Health Insurance

Health insurance has changed dramatically over the past decade, leaving consumers with a wide array of options.

Traditional health insurance, called “fee for service,” allows you to choose any doctor, with the insurance company paying a portion of the cost, often about 80%. These plans were the primary option for most workers a dozen years ago. Today, they’re just one of four potential choices.

The other three common types of health insurance plans are lumped under the heading of “managed care.” These plans closely supervise care and restrict patients’ choice of doctors in an effort to control costs. By and large, there are fewer out-of-pocket costs in a managed-care plan. But dealing with these plans can be more time-consuming because visits to specialists are controlled by the health plan in a sometimes lengthy process.

A handful of managed-care plans allow you to refer yourself to a specialist. But there are numerous restrictions on when and how you can self-refer, says Tim Beck of Buck Consultants.

The most common types of managed-care plans are health maintenance organizations (HMOs), point-of-service (POS) plans and preferred provider organizations (PPOs).

HMOs provide health care for a small, flat fee and rarely charge for necessary hospital visits. Generally, claim forms are not required and care must be coordinated through a primary-care physician.

A POS plan, also called an open or open-ended plan, allows members to obtain care either in or outside of a network. Out-of-network care typically costs more and requires members to file claim forms to be reimbursed.

A PPO is a type of POS plan in which network doctors, hospitals and other providers agree to provide health care services at negotiated rates. These plans often require slightly higher out-of-pocket payments for visits to the doctor, but may give you more choice of physicians.

By and large, managed-care plans are likely to cost less. But consumers need to consider whether they can live with the plans’ restrictions.

“If you can evaluate the hassle factor before you get in, you’ll be much happier in the long run,” says Patti Smith, practice leader at William M. Mercer, a benefit consulting firm in Los Angeles.

To help determine that, check the plan documents and answers these 13 key questions:

* Are your regular doctors members of the plan?

* If not, do you mind switching doctors?

* Are your current doctors willing or able to enroll in the plan?

* Does the plan monitor the quality of care offered by plan physicians?

* What are your options if you become dissatisfied with the quality of care?

* How long does it take to schedule a first visit with a primary-care physician?

* How quickly can you get in when someone is ill?

* How quickly are referrals to specialists processed?

* Can you self-refer?

* If so, what conditions must be met for your self-referral to be accepted by the plan?

* If you see certain specialists regularly, such as a pediatrician or gynecologist, can you choose that doctor as your primary-care physician, thus eliminating the need for a referral?

* Are plan doctors available 24 hours a day?

* What are your health care options if you are on vacation or a business trip?

Finally, you should consider the cost of each plan. To do this, you’d be wise to get a notebook and set up a grid, listing plan options and the cost categories. For instance, you may have three plan choices running down your page. Then, across the top, you write “premium co-payment”; “payments for doctor’s visits”; “cost of prescriptions”; and “cost of hospital visit.” You might even want a fifth column for “cost to see out-of-plan doctor.”

Then, by going through the plan documents and your records of past medical visits, estimate how much each plan may cost you during the year.

After you have evaluated costs, your health care needs and the plans’ options, you will have a good basis for making a sound health insurance choice.

Life Insurance

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Most workers--about 91%--have some life insurance coverage through their employers. And it’s usually free, according to the International Foundation of Employee Benefit Plans in Brookfield, Wis. About 13% of the nation’s workers are in flexible benefit plans that give them the option to buy more life insurance, Drinkwater said. For some workers this is an important consideration.

The typical company plan offers a death benefit equal to one or two times the worker’s wages. An increasing number of policies also offer an accelerated benefit option that allows you to get cash for your policy if you become terminally ill.

Employees who have sufficient savings or a working spouse may find the company policy adequate. If you have little money saved, small children and a nonworking spouse--or consider yourself a high risk for a costly terminal illness--you might consider buying more coverage.

How much more? That depends. Ask yourself:

What would happen to my family if I died? How much money would they need each year to adequately cover their living expenses? How many years would they need support before they’d be able to provide for themselves? Would they be able to handle monthly expenses fairly quickly, if the life insurance was sufficient to pay certain debts, such as the mortgage?

Most families need more insurance when their children are young and their assets are modest. After that, their life insurance needs gradually diminish.

Disability Insurance

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How long could you get along without a paycheck?

California offers a disability program that will pay a portion of your wages for up to a year. If you are disabled and incapable of working for more than a year, the federal government will pay you a monthly disability stipend through the Social Security program. Both stipends are relatively modest--particularly for those who earn substantial wages. Often, you can buy additional coverage through your employer.

Disability policies come in two varieties: Short-term and long-term. Short-term plans cover disabilities that last anywhere from three months to a year. They’re often termed “salary continuation” plans in company benefit documents.

Most companies structure their long-term plans, when offered, to pick up after their short-term coverage ends.

Is it wise to use scarce benefit dollars to buy disability insurance?

You must consider the specifics of each plan--what constitutes a disability; how long the disability must last before benefits are paid; and what percentage of your income would be paid under the plan--and evaluate your own personal chances of disability.

If a period without a paycheck would leave your financial life in ruins, a disability policy is advisable.

Tax-Saver Accounts

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These are savings plans that allow you to put away a portion of your salary, before taxes, to pay child care, elder care or unreimbursed medical costs during the year.

About half of those who work for large companies are offered some type of tax-saver or flexible spending account, benefit consultants say.

For parents with children in day care--or for families with high-deductible health insurance coverage--tax-saver accounts can be highly beneficial.

Consider someone who pays about 30% of his or her income in taxes and has a $1,000 health insurance deductible that’s always met. If this person saves the $1,000 in a tax-saver account, it’s deducted before taxes are taken out. That saves $300--or 30% of the $1,000 expense.

Day care expenses? Up to $5,000 in child care expenses can be reimbursed through a flexible spending account. That would save this hypothetical consumer a tidy $1,500 in taxes. Those who are in higher tax brackets save more.

The downside? Dealing with these accounts requires a certain amount of paperwork. Generally, you have to provide the administrator of the plan with bills for day care or health care in order to be reimbursed.

But the more significant problem is that you must estimate your costs carefully because you usually can’t change contribution levels during the year, and any money that’s left unspent at the end of the year is lost. You can’t get a refund.

Nonetheless, if you have predictable child or health care expenses and a flexible spending account is available, it’s certainly worth considering.

Retirement Plans

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There are two basic types of company-sponsored retirement plans--defined benefit and defined contribution.

Defined benefit plans promise to pay a set monthly amount at retirement for the rest of the participant’s life. Employees are not required to contribute to these plans and they don’t choose how the company’s retirement plan money is invested. About 56% of those who are offered a retirement plan are offered a defined benefit plan.

The downside to this plan is that it is not portable. Workers who switch jobs in less than five years generally lose their right to any defined benefit stipend at retirement.

Moreover, benefits are not indexed for inflation, so if you worked for a company long enough to qualify for the pension early in your career, you may find the monthly benefits surprisingly stingy years later at retirement. It’s not unusual, for instance, for a plan to pay, say 10% of the person’s average monthly wages at retirement. So your 1970 job, which paid $500 a month--a reasonable wage back then--might net you a $50 monthly retirement stipend.

Defined contribution plans, on the other hand, require worker contributions. Most companies also contribute to these plans. The employee can invest the money in one or more of the investment options offered by the plan. How much you will have at retirement depends on how much you saved and how well it was invested.

The most common type of defined contribution plan offered through work is called a 401(k), which is named after the Internal Revenue Code section that authorizes it.

Three things have made 401(k) plans very popular with workers.

First, they’re portable. If you switch jobs, you can take your retirement savings with you. Secondly, most companies provide matching contributions that become yours after, typically, five years. And that match is often generous. According to a survey by the benefit consulting firm Foster Higgins, 75% of employers offering these plans will kick in an amount equal to 50%--or more--of what workers save. There are limitations on how much workers can contribute, however.

Finally, worker contributions are taken out of paychecks before tax. That allows you to save substantial amounts on income taxes.

For a more detailed explanation of 401(k) plans, please see the two 401(k) stories in this issue.