<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:86437.wais]
CAFETERIA BENEFIT PLANS: MORE VALUE FOR FEDERAL EMPLOYEES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON THE CIVIL SERVICE,
CENSUS AND AGENCY ORGANIZATION
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
MAY 21, 2002
__________
Serial No. 107-195
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
86-437 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California PATSY T. MINK, Hawaii
JOHN L. MICA, Florida CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania THOMAS H. ALLEN, Maine
DAVE WELDON, Florida JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia ------
JOHN J. DUNCAN, Jr., Tennessee BERNARD SANDERS, Vermont
JOHN SULLIVAN, Oklahoma (Independent)
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
James C. Wilson, Chief Counsel
Robert A. Briggs, Chief Clerk
Phil Schiliro, Minority Staff Director
Subcommittee on the Civil Service, Census and Agency Organization
DAVE WELDON, Florida, Chairman
DAN MILLER, Florida DANNY K. DAVIS, Illinois
CONSTANCE A. MORELLA, Maryland MAJOR R. OWENS, New York
JOHN L. MICA, Florida ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
C.L. ``BUTCH'' OTTER, Idaho ELIJAH E. CUMMINGS, Maryland
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
Garry Ewing, Staff Director
Melissa Krzeswicki, Professional Staff Member
Scott Sadler, Clerk
Tania Shand, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on May 21, 2002..................................... 1
Statement of:
Jacobs, Dennis, Circuit Judge, U.S. Court of Appeals for the
Second Circuit............................................. 69
Wilson, David E., CFCI, senior consultant and president,
Flexben Corp.; Marjorie H. Young, commissioner, Georgia
Merit System; Derrick Thomas, national vice president,
Second District, American Federation of Government
Employees, AFL-CIO; and Leslie Schneider, senior
consultant, the Hay Group.................................. 7
Letters, statements, etc., submitted for the record by:
Jacobs, Dennis, Circuit Judge, U.S. Court of Appeals for the
Second Circuit:
Benefit Improvement Initiative executive summary......... 70
Prepared statement of.................................... 89
Schneider, Leslie, senior consultant, the Hay Group, prepared
statement of............................................... 56
Thomas, Derrick, national vice president, Second District,
American Federation of Government Employees, AFL-CIO,
prepared statement of...................................... 47
Weldon, Hon. Dave, a Representative in Congress from the
State of Florida:
Prepared statement of.................................... 3
Prepared statement of Colleen M. Kelley.................. 95
Wilson, David E., CFCI, senior consultant and president,
Flexben Corp., prepared statement of....................... 9
Young, Marjorie H., commissioner, Georgia Merit System,
prepared statement of...................................... 16
CAFETERIA BENEFIT PLANS: MORE VALUE FOR FEDERAL EMPLOYEES
----------
TUESDAY, MAY 21, 2002
House of Representatives,
Subcommittee on Civil Service, Census and Agency
Organization,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 1 p.m., in
room 2247, Rayburn House Office Building, Hon. Dave Weldon
(chairman of the committee) presiding.
Present: Representatives Weldon, Davis, Morella, and
Norton.
Staff present: Garry Ewing, staff director; Melissa
Krzeswicki, professional staff member; Scott Sadler, clerk;
Tania Shand, minority professional staff member; and Earley
Green, minority assistant clerk.
Mr. Weldon. The hearing will now come to order.
Good afternoon. I want to welcome our witnesses and
everyone in our audience to this important hearing.
The purpose of this hearing is to examine cafeteria plans.
Cafeteria plans are an alternative to one-size-fits-all benefit
packages that allow individual employees to tailor their
benefits to meet their own needs. The Federal work force is 1.9
million people strong, not counting postal workers. Not
surprisingly, a work force this large is extremely diverse.
There are both full time and part time employees in the Federal
work force.
Federal employees also range across a spectrum of jobs. The
Government employs top scientists and highly skilled
information technology workers, professionals and blue collar
workers.
There is diversity in age and circumstances of life. Some
Federal employees are straight out of college and working in
their first full time job, some are very near retirement. Some
are single, while others are single parents or married couples
with children. These groups of employees do not have the same
needs and interests.
The needs of employees also change through their careers.
Young singles do not have the same needs as a middle aged
couple with children. Employees with young children may have a
strong interest in a child care benefit. An older employee may
be more interested in a benefit that would help him or her care
for elderly parents.
In short, we do not have a one-size-fits-all world.
Increasingly, private employers as well as State and local
governments have recognized this simple fact. And they have
responded by offering flexible benefits to recruit, and
importantly, retain, well qualified employees. Consequently,
the Federal Government finds itself competing for talented
workers with employers who offer cafeteria plans and other
flexible benefit programs. Employees find such programs
attractive because they empower the individual to maximize the
value of the benefits an employer offers. Many employers have
found cafeteria plans to be valuable recruiting tools.
To ensure that the Federal Government will be able to
compete effectively for talent in today's market, it is the
obligation of the subcommittee to carefully examine the
potential offered by cafeteria plans and other flexible benefit
arrangements. I look forward to benefiting from the views and
insights of our distinguished witnesses as we examine this
important issue.
[The prepared statement of Hon. Dave Weldon follows:]
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Mr. Weldon. I now recognize the distinguished ranking
member for his opening statement, Mr. Davis.
Mr. Davis of Illinois. Thank you very much, Mr. Chairman.
First of all, let me thank you for holding this hearing. I
also want to thank all of the witnesses for coming to
participate.
Mr. Chairman, Federal employees can currently participate
in a number of benefit options offered by the Federal
Government. They include health insurance, group life
insurance, long-term care insurance and retirement programs.
Additionally, Federal employees can earn annual and sick leave
on a prorated basis.
However, this does not preclude the Federal Government from
improving its benefit options and structure for Federal
employees, particularly at a time when we're trying to recruit
and retain the best and the brightest for Federal service. To
this end, the Clinton administration implemented one of three
primary types of flexible benefit plan options for employees.
In 2000, the first type of flexible benefit plan, a premium
conversion plan, was put into place to allow Federal employees
to pay their Federal employee health benefit premiums on a pre-
tax basis. Permitted under Section 125 of the Internal Revenue
Code, premium conversion plans would allow employees to convert
post-tax contributions to pre-tax contributions through salary
reductions for payment of employee premiums.
The second type of flexible benefit plan is called a
flexible spending account, FSAs. FSAs allow employees to
purchase qualified benefits such as medical or dental expenses
on a before tax basis. The 1998 Department of Labor survey of
full-time employees in State and local government found that 47
percent, 6.7 million people, had access to an FSA. Federal
employees should also have access to health care and dependent
care FSAs.
The third and more controversial flexible spending plan is
a cafeteria type benefit plan. Cafeteria plans offer employees
a menu of benefit options. Employees would be allowed to design
their own benefit package by selecting different types and/or
levels of benefits that are funded with non-taxable employer
dollars. Under this plan, each employee is allotted a
predetermined number of dollars, credits or points with which
he or she may purchase benefits from options made available by
the employer.
A major and very valid concern here is that the Federal
Government will attempt to control the cost of benefits by
limiting increases in the number of dollars employees are given
to purchase benefits. For example, employers generally use the
increase in the consumer price index as the benchmark for
annual increases in the amount of dollars they provide
employees to purchase benefits.
With inflation averaging 2 to 3 percent in recent years,
and annual health insurance premium increases averaging between
10 and 13 percent, the cost of these benefits would be shifted
to the employee. This and other concerns that have been raised
about cafeteria plans must be addressed. I hope we address them
in this hearing.
Perhaps a cafeteria plan could be designed to address these
concerns. But shifting the cost of benefits from the Federal
Government to its already underpaid Federal employees is not an
option. I look forward to today's testimony, and again, I thank
you for holding this hearing.
Mr. Weldon. I thank the gentleman.
Did the gentlelady from Maryland seek to make a statement?
Mrs. Morella. Thank you, Mr. Chairman. I just want to add a
sentence to it. I think this hearing couldn't come at a more
appropriate time and I thank you for having it. With the FEHBP
premiums rising by almost 30 percent in the last 3 years, and
15 percent of the 1.8 million Federal employees not
participating in the program, we need to look at making
changes. And while I have serious reservations about the merits
of cafeteria benefits plans, I want to thank the panelists for
their testimony, for sharing their personal experience. We will
keep an open mind.
Incidentally, if I might just add that I feel required to
go to the White House because the Maryland Terrapins are going
to be honored. So I will be back before the end of the hearing,
probably.
Thank you, Mr. Chairman.
Mr. Weldon. I thank the gentlelady, and we do have a second
panel. So if the President doesn't keep you too long, you
should be able to be back here later.
We will now hear from our first panel of witnesses. Before
us today we have Mr. David Wilson, president of FlexBen Corp.,
in Troy, MI. Mr. Wilson is an expert in designing and
implementing flexible benefit programs.
We also have Ms. Marjorie Young, Commissioner of the
Georgia Merit System. Ms. Young administers the State of
Georgia's cafeteria plan.
Our third witness is Mr. Derrick Thomas, who is the
national vice president of the second district of the American
Federation of Government Employees.
And finally, we will hear from Ms. Leslie Schneider, who is
a Senior Benefits Consultant for the Hay Group in Atlanta,
Georgia. Ms. Schneider also has extensive experience as a
consultant with both private and public employers in designing
and implementing flexible benefit programs.
I want to thank all of you for joining us here today to
share your thoughts on these important issues. Without
objection, your written statements will be made part of the
record.
After administering the oath, I will recognize each of you
for 5 minutes. I would ask that you try to summarize your
statement within that time period. There are lights in front of
you that will indicate how much time you have left. The green
light indicates that you have 4 minutes, you are still in your
4 minute statement. Then the yellow light turns on when you
have a minute remaining, and the red light will turn on when
your time has expired.
We on the committee also try to comply with the 5-minute
rule that we are asking you to.
Now I would ask to administer the oath. The committee
requires that all witnesses take the oath. So could you please
rise.
[Witnesses sworn.]
Mr. Weldon. Will the court reporter please note thee
witnesses have answered in the affirmative.
Again, thank you for being here. Mr. Wilson, we'll begin
with you. You're recognized for 5 minutes.
STATEMENTS OF DAVID E. WILSON, CFCI, SENIOR CONSULTANT AND
PRESIDENT, FLEXBEN CORP.; MARJORIE H. YOUNG, COMMISSIONER,
GEORGIA MERIT SYSTEM; DERRICK THOMAS, NATIONAL VICE PRESIDENT,
SECOND DISTRICT, AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES,
AFL-CIO; AND LESLIE SCHNEIDER, SENIOR CONSULTANT, THE HAY GROUP
Mr. Wilson. Thank you. Let me begin by thanking you, Mr.
Chairman, and the members before us today for the opportunity
to discuss with you one of the most important and wise
legislative actions passed by this House over the last four
decade period.
Section 125 of the Internal Revenue Code, known as
cafeteria or flexible benefit plans, and its expansion, is
vital to the financial health of all Americans. As the wisdom
within our constitution liberates and defines our opportunities
as Americans, the wisdom and advent of Section 125 within the
tax code liberates the genius of the marketplace.
It has and continues to redefine the employer-employee
financial and reward relationship. It provides employees the
opportunity to liberate their financial resources within the
employer-employee reward system, enabling employees to tailor
their benefits program to their individual and family financial
and security needs.
Said simply, employees and their dependents love choice.
The opportunity of intelligent employee benefit choice results
in understanding, greater real value and greater employee
appreciation. Understanding the broad adoption of employee
benefit plan choice and Section 125 by the private sector,
State, county and municipal employers over the last 20 year
period, we are very pleased to see the Federal Government's
embracement of Section 125 beginning with President Clinton's
adoption of non-taxable employee premiums and now the
implementation of health care and dependent care reimbursement
accounts under the Bush administration.
We have encouraged the continued and prompt adoption of
employee benefit choice by the Federal Government through the
establishment of a broad based flexible benefit plan structure.
This is both a competitive need and a requirement for the
delivery of maximum award financial value to American workers
who dedicate themselves to national service. It is the right
and wise thing to do. Americans love choice. America's private
sector and Government workers alike appreciate the opportunity
to secure their financial well being and financial security.
What is a flexible benefit plan? I'd like to go through a
couple of things that I presented in my testimony. One is that
it is established under Section 125 of the Internal Revenue
Code. This section of the Code establishes that employees shall
not be taxed differently than employers in the purchase of
employee benefits simply because employees have choice. A
flexible benefit plan is a benefit delivery system, it is not
the benefit. It is the milk truck, not the milk.
I'd like to address the concept of credit formula plans
later, if we may.
Effectively managed, the flexible benefit plan liberates
and focuses financial resources on the important financial
security needs of the individual employee and his or her
family, creating employee appreciated financial value. By
definition, it requires annual and ongoing education by the
employer, providing the employee the opportunity to learn,
create understanding and create increased value. It is
dependent on the utilization of technology and advancements in
technology that continue to create new value and knowledge
management opportunities.
It liberates the genius of the marketplace to never-ending
new opportunities to increase the value of the employer-
employee relationship and its financial reward to employees. It
establishes the core foundation within the marketplace for the
continued evolution of employee-centric consumerism and the
evolution of the employer-employee financial security/reward
system.
I presented in my testimony a summation, if you will, of
what the marketplace perceives to be a standard flexible
benefit plan in the traditional sense, 1985 to 1993 kind of
genre. I won't go into that, I'll leave that to questions that
you may have.
I do present following that in the testimony a depiction of
what a flexible benefit plan might look like today. Let me just
draw on the time that I have remaining some comparisons between
the old and the new. In the early years, we defined a flexible
benefit plan as a benefit plan that had basically statutory
benefits under Section 125 as the offerings and many offerings
in the medical plan design area, for example, fewer options
deeper into the menu.
Today if you look at best practice, you're going to see
fewer medical plan options, try to drive attention to the
employee making a good financial decision relative to health
care, but using more of the dollars to get a stronger
underpinning of the total financial security of the employee.
This is the value. The employee gets to see the whole security
value of the benefit program over time, and thus begins to make
wise decisions that create more value for them.
I think my time is just about to expire.
[The prepared statement of Mr. Wilson follows:]
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Mr. Weldon. Thank you, Mr. Wilson.
Ms. Young, you're recognized for 5 minutes.
Ms. Young. Chairman Weldon and committee members, I
appreciate the opportunity to address the subcommittee
concerning the State of Georgia's benefit plans.
As Commissioner of the Georgia Merit System, I administer a
cafeteria plan. This agency has been administering this plan
since 1986. I also serve on the board of the Employer's Council
on Flexible Compensation as many of my predecessors have in
support of cafeteria plans.
Our benefits have been a fundamental part of our total
reward or compensation initiative, enabling the State of
Georgia to address major issues, such as turnover in our work
force, employee requests for increased benefit choices, and
taxpayer demand for more cost-effective government. As employee
benefit costs have risen, the pre-tax element of the Internal
Revenue Code Section 125 plan, coupled with the economies of
scale realized through the large group plans, have mitigated
cost increases for our participants, allowing for greater
benefit selection at an affordable level that is attractive to
current and potential employees.
While the Georgia Merit System offers the flexible benefit
and deferred compensation plan, the Georgia Department of
Community Health offers the State Health Benefit Plan. The two
departments coordinate open enrollment period between April and
mid-May for the plan year beginning July 1st. The Georgia
Department of Community Health and the Georgia Merit System
offer an array of benefits through the cafeteria plan design. I
have enclosed exhibit A and the attachments displaying the
details of our current options.
In addition to the health plan options offered by the
Department of Community Health, the Georgia Merit System offers
term life insurance up to a maximum of five times pay and
offers spousal and dependent life care insurance; short term
disability with two options of 7 day and 30 day waiting
periods; long term disability; dental insurance; legal
insurance; vision insurance; and long term care insurance, as
well as health care spending accounts and child care spending
accounts.
We attribute a substantial portion of our success to a
coordinated benefit package that addresses the individual
financial needs and desires of employees. For example, the
State of Georgia has a liberal leave policy for both annual and
sick leave. Employees accrue 1.25 days of sick leave and
between 1.25 and 1.75 days of annual leave, depending on years
of service. Our short term disability coverage provides for a
7-day waiting period for those employees who have not accrued
adequate leave to cover their disability period. Then we offer
more affordable coverage with a 30 day waiting period for those
who have more accrued leave.
Another example of benefit coordination relates to our long
term disability plan. An employee is eligible through the
Georgia Employee's Retirement System to receive a disability
retirement after 13 years and 4 months of service. The
disability retirement is coordinated with our long term
disability plan to ensure affordable premiums for employees.
The benefits plans are designed to ensure that there is no
overlap of coverage. Let me say that we compare our services to
not only Fortune 500 companies but to other companies in
Georgia, and find that our employees are very pleased in
comparison with our plans.
I want to emphasize the importance of excellent
communication during the implementation of the cafeteria plan.
It's really important that employees understand the benefits
and employers understand the risks. For example, an employer
needs to evaluate the impact of pre-payment of benefits through
the health insurance spending accounts.
I want to emphasize some things that I think would make
cafeteria plans more helpful. It would be helpful to employers
if a more accommodating structure could be legislatively
enacted to make spending accounts a legitimate reimbursement
account, to have them operate like the child care spending
account. A second legislative improvement would be to do away
with the forfeiture, the use it or lose it, features of the
health care spending account, allowing unused coverage to roll
forward.
A third legislative improvement would permit retirees to
participate on a pre-tax basis in spending accounts and other
benefits options. And finally, legislation is needed to permit
long-term care premiums to be paid on a pre-tax basis. The cost
of long-term care insurance is substantial and this would help
considerably in mitigating those costs. We think it would make
a great improvement in our total compensation and total rewards
for recruiting and retaining employees.
[The prepared statement of Ms. Young follows:]
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Mr. Weldon. Thank you very much.
Mr. Thomas, you are recognized now for 5 minutes.
Mr. Thomas. Thank you, Mr. Chairman, and members of the
committee. On behalf of the more than 6,000 Federal and
District of Columbia employees AFGE represents, I thank you for
the opportunity to testify before you today.
AFGE is strongly opposed to the establishment of cafeteria
plans in FEHBP. We believe that the Federal Government, as an
employer, has a duty to provide health insurance benefits to
all its employees and a cafeteria plan approach would take us
even farther away from the goal than we are today. FEHBP has
several serious flaws that makes it more expensive than it
should be. Its financing structure, along with its high cost,
have made health insurance unaffordable for a large and growing
number of Federal employees and their families. Introduction of
cafeteria plans would only make this problem worse.
Cafeteria plans are deceptive. Under the slogan of freedom
of choice, the plans force employees into either/or decisions
between benefits that should be provided universally. Health
insurance is not a choice that some people need and others do
not. It is not a benefit that appeals to some but not others.
Health insurance is a crucial component of economic security.
As such, it should remain the employer's financial
responsibility to provide, as part of a comprehensive
compensation package.
Cafeteria plans have much the same impact on a group's
insurance risk as vouchers or medical savings accounts. They
provide a financial incentive for young, healthy workers to
drop in and out of coverage. This in turn leads to an average
risk that is higher than it would be under universal coverage
of the group, and thus higher than necessary costs for the
program as a whole.
Health insurance is most efficiently provided to large,
diverse groups who pool their risk in order to pay less on
average than any one would have to pay for him or herself.
Cafeteria plans, along with MSAs or vouchers, defy this basic
principle of group insurance. Cafeteria plans for Federal
employees would transform the basic structure of the health
insurance program from a defined benefit to a defined
contribution. Defined contribution programs are best understood
as vouchers. With a voucher structure for FEHBP, the Government
could set its contribution each year without regard to changing
health insurance premiums or other cost and without regard to
the percentage of the premium the voucher would cover.
In any year that the voucher is increased by a smaller
percentage than the increase in premium, the overall share of
the Government's contribution would fall. When vouchers and
cafeteria plans have been contemplated for FEHBP in recent
years, legislative proposals have suggested annual adjustment
equal to the CPI, which is used in the Government's budget to
adjust baseline agency budgets. If such a plan had been in
effect over the past 4 years, FEHBP's most popular plan, the
Blue Cross/Blue Shield standard option, the cafeteria plan
voucher would have only been increased by 9.5 percent, while
premiums went up by 49 percent.
Although cafeteria plans may at first seem like a vehicle
for facilitating health coverage for the more than 200,000
uninsured Federal employees, by allowing them to tradeoff cash
value of benefits now provided by the Government in favor of
other benefits not fully subsidized, serious potential problems
do exist. First, employees may not have the skills or expertise
to design a benefit package that is best for them from among
the options presented. If forced to choose, how does a young
family rank its simultaneous need for child care, health care
and time away from work and disability insurance? Which is
expendable? Which can be foregone?
The employer's only motivation for establishing cafeteria
plans is to save money on employee benefits. Because cafeteria
plans carry their own additional administrative costs, just to
keep employee benefit costs constant requires benefit cuts.
Since the reason most commonly cited by the uninsured who are
eligible for FEHBP participation is lack of affordability,
lowering the Government's share and raising the employee's
share is hardly the way to achieve universal coverage.
The combination of cafeteria plans and FSA holds numerous
potential problems for employees. FSAs involve having workers
voluntarily reduce their gross pay by specific amounts in an
amount equal to the difference between what the employer pays
for benefits and the costs of the benefit. The worker chooses
the amount of the salary reduction at the start of the plan
year.
Another financial disadvantage to workers of combined FSAs
and cafeteria plans also comes from the fact that employee
contributions to FSAs are salary reductions. Thus, benefits
based upon salary are automatically lowered. Life insurance and
disability insurance would be similarly affected, unless the
Government specifically decides to rewrite the terms of its
policies for Federal employees. Social Security benefits will
be lower for workers who lower their salaries in a combined FSA
cafeteria plan. The Government could, of course, compensate
Federal employees for these differences, but that would deprive
it of the primary motivation to establish these plans, saving
money.
That concludes my statement. Thank you.
[The prepared statement of Mr. Thomas follows:]
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Mr. Weldon. Thank you very much, Mr. Thomas.
Before recognizing Ms. Schneider, the Chair will announce
that it is his intent to hear the testimony of Ms. Schneider,
and then recess for the votes on the floor. There is a series
of three or four votes, then we will reconvene for questioning
of the panel after the votes are completed. Ms. Schneider, you
are recognized for 5 minutes.
Ms. Schneider. Thank you for the opportunity to testify on
cafeteria benefit plans.
Flexible benefit plans allow organizations to offer their
work force a choice between non-taxable benefits, such as
health benefits or disability coverage, and taxable benefits,
such as additional cash in their pay. Typical reasons for
implementing a flexible benefit plan include meeting the needs
of a diverse work force, giving employees more decision power
and a higher return on their benefit dollars, providing both
employees and employers with tax advantages, raising employees'
awareness of the cost and value of benefits, assisting
employers in attracting and retaining quality employees, and
allowing the employer to better predict their benefit costs.
There are three primary types of flex plans. The first is a
premium conversion plan, which the Federal Government has
already implemented. The second type of plan is flexible
spending accounts, which let employees set aside money on a
pre-tax basis in either health care or dependent day care
account, to reimburse themselves for eligible expenses.
The third type of plan is a full flexible benefit plan. The
most utilized types of full flex plans are structured in one of
two ways. The first is a credit plan in which the employer
provides a set of core benefits for all employees and then a
set of optional benefits from which the employee may select to
purchase either flex credit or salary reduction. Unused credits
can be taken as cash.
The second type of plan is a trade plan that includes a
standard set of benefits and allows the employee to either
trade up or down. Trading down for less expensive benefits
results in additional dollars that the employee can use to
purchase more generous benefits, or take as cash.
Overall, 84 percent of employers surveyed in the Hay 2001
Benefits report offer premium conversation plans, 78 percent
offer health care FSAs and 83 percent offer dependent day care
FSAs. Twenty-two percent offer full flex plans, with 61 percent
of these offering credit plans.
The typical design and implementation process includes
first, defining the plan objectives. These typically include
financial, employer relations, administration and employee
communications objectives. Second, identifying challenges to
implementing a new program, for example, systems constraints.
Third, gathering information on existing plans, competitive
employer plans and employee and management opinions regarding
the benefit.
Fourth, based on the information gathered in the program
objectives, developing a set of guiding principles for the plan
design, which might include things like the existing HMO and
PPO medical plans will be offered, there will be a choice of
dental plans; flexible spending accounts will be included. The
next step is to design the plan based on the guiding
principles. The design includes the types of coverage, level of
choice that will be offered, employee contribution strategy and
use of credits, and if credits are used, the credit structure
and formula, whether employees will have complete freedom to
choose the options they want or will be required to select
benefits in certain categories, consequences of not enrolling
and whether the plan design changes will be phased in over
time.
Once the plan is designed, final steps include selecting
vendors or developing internal capabilities for enrollment,
administration and new plan options, modifying payroll and
human resource systems for the new plan, developing
administrative procedures and guidelines, developing and
distributing employee communications, and administering the
enrollment.
With the proper investment of time, resources and money, a
well designed flex plan can be effectively used to meet the
needs of a diverse work force, attract and retain highly
qualified employees, and maximize the value of benefits to
employees. The three critical components of flex plans are plan
design, administration and communication. For a plan to be
successful, it is essential that all of these components are
carefully implemented.
Over the last 20 years, employers have faced many
challenges with the design and implementation of flex plans.
With the advancement of technology, the administration and
communication have become more cost efficient and effective
than ever before. Today there are many established best
practices for employers to draw from as they consider these
plans.
The unique organizational structure, complexity and sheer
size of the Federal work force will create challenges that will
have to be addressed as you proceed with your consideration of
flexible benefits.
Thank you.
[The prepared statement of Ms. Schneider follows:]
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Mr. Weldon. I thank the gentlelady. The committee now
stands in recess for 4 votes, for 30 minutes.
[Recess.]
Mr. Weldon. The hearing will now resume. I want to thank
all the witnesses for waiting. Sorry for the extended delay. We
had a series of five recorded votes on the Floor of the House.
The Chair now recognizes himself for 5 minutes of
questioning. Let me begin with perhaps several of you, Mr.
Wilson, Ms. Schneider in particular can respond to this. Ms.
Young testified that the State of Georgia has found cafeteria
plans a necessity when trying to attract employees. I found
that extremely interesting. In your experiences, Mr. Wilson and
Ms. Schneider, have cafeteria plans actually made employers
more attractive in the labor marketplace, would you say?
Ms. Schneider. I think for most employees, if they've
experienced a flexible benefit plan somewhere else that they
have worked, when they're looking for employment, it is
something that they look for because of the choice and because
of the tax advantages that are involved. I don't have specific
statistics that talk about or address the attraction and
retention issue, but certainly know that in talking to
employees and focus groups, that kind of thing, employees enjoy
the plan and there are certain aspects that they miss greatly
if they don't have the opportunity to participate in them in
the future.
Mr. Wilson. Our experience clearly indicates that employees
value choice to the point that they value it economically.
There's no question that for our clients that they report back
to us significant value appreciation, both in terms of surveys
that we help them conduct, but realities in the hallway, that
geez, this is great, why didn't we do this before?
Clearly from the perspective of an employee who has had a
prior experience, and that employer does not have a flexible
benefit plan, it is highly unlikely they will go to work for
that employer that has a standard, traditional plan.
Mr. Weldon. So it's an impediment for employers that do not
offer it to attract employees who have been previously working
at a place where they had a flexible benefit?
Mr. Wilson. I think that's true.
Mr. Weldon. Was that one of the drivers, Ms. Young, that
drove the State of Georgia to adopt cafeteria plans, just the
ability to attract employees?
Ms. Young. Yes, it was the ability to attract employees and
our employees' awareness of things that were happening in the
private sector. One of the things that we've been struggling
with, and I know that's true not only with the State, but
probably in private sector, at the local level and at the
Federal level, we're struggling with retaining our work force
and attracting the work force, especially our young people.
As we surveyed, we had some consultants come in and review
our benefits program. They compared us to Fortune 500
companies, as well as employers across the State of Georgia.
They strongly compliment our plan and have made recommendations
even for future improvements. But it was through consultants'
evaluation of the original plans that the original cafeteria
plan was set up. Because employees were asking, frankly, they
asked for a whole lot more than what we're doing, they're still
asking, because we survey them.
So it's based on what the employees asked for that we're
doing.
Mr. Weldon. So the driving force is to meet the needs and
requirements of the employees in the competitive marketplace?
Ms. Young. Yes.
Mr. Weldon. It was not a desire to save money on the part
of the State legislature?
Ms. Young. No.
Mr. Weldon. Mr. Thomas in his testimony raised an important
point about health care benefits gobbling up other benefits
with health care inflation being what it is. How do these
flexible benefit plans deal with that typically? I guess in
some of them the health benefit is outside the flexible
benefit?
Ms. Young. Yes.
Mr. Weldon. Is that how you handle it in Georgia?
Ms. Young. Yes, as a matter of fact, we have two separate
agencies managing the program. There's a Department of
Community Health that administers the health benefits, and my
agency administers the flexible benefits. The health benefits
have no negative impact at all on the benefits to the
employees, because employees basically choose their benefits,
choose what they want and pay for what they want. It has no
impact on the health plan.
Mr. Weldon. Are there examples in the private sector where
there have been plans where the health benefit and the other
benefits are all together and have been problems with health
care inflation?
Ms. Schneider. Typically, when the health care benefits are
included in the plan, the credit formula is designed to cover a
certain percentage of those health care benefits. So it
actually can be designed so that the employee contribution
percentage, as you relate back to the health care, is no
different than if it were an outside flexible benefit plan,
except that it's pre-tax and they have the ability to trade.
So you might say in your credit formula that, as an
employer, we're going to make sure that there are enough
credits to cover 80 percent of the health care costs, would be
an example in perhaps 80 percent.
Mr. Weldon. So by locking in that percentage, you have the
protection on health care inflation issues?
Ms. Schneider. Yes. It's a design issue.
Mr. Wilson. Mr. Chairman, this is a point of education, I
think. In my opening remarks, I tried to convey that a flexible
benefit plan is a delivery system compared to a car. You can
get into a car and use it for transportation, to go to work and
pick up your family and use it productively. Or you can get in
the car and smash it into a wall.
The concept of a flexible benefit plan intelligently
managed is to provide productive choice to the employee
population that they are going to value within the total reward
system. Making decisions not to duplicate benefits
unnecessarily, but to purchase the benefits that are of
greatest value to them.
I think the point I would want to make here is that in the
management of health care costs, there is no question that by
creating more value within the flexible benefit plan, employees
have made decisions not to necessarily buy the most expensive
health care plans. They've decided to buy a plan that maybe is
a little less expensive because they want more dental coverage.
They find that the health care reimbursement count would be
more important to fund because their child has orthodontia
expenses in that year, and the dental plan doesn't cover that
full cost.
So the point that I would want to try to relate to you here
is that almost all of these are design issues. Not the car,
whether the car is red or blue or what the interior is, can
simply be addressed by design issues, the question about health
care costs, actuarially going up because some employees don't
take the health benefit plan. You design around those issues.
That does not occur in the marketplace. We know what that is.
We know how to actuarially expect what will happen given the
design of the plan.
Ms. Young. And Mr. Chairman, may I add that we began the
cafeteria plan in 1986. It's only been in the last 3 years that
the plan has been separate from the health plan. The same
agency, the Georgia Merit System, administered both of them
together until 3 years ago, when the State health plan was
pulled out in order to create another department with a focus
on community health.
Mr. Weldon. OK, so it was not separated because of the
issues that Mr. Thomas brought up?
Ms. Young. No. That had nothing to do with it.
Mr. Weldon. It was an unrelated issue?
Ms. Young. Yes.
Mr. Weldon. OK. Ms. Schneider, as a Floridian, I was
particularly interested in your experience in helping set up
the Miami-Dade County program. Could you describe to me whether
that covers only non-union employees or both, and a little bit
about your experience there?
Ms. Schneider. Miami-Dade County of course has to deal with
several unions. The unions, some union employees have a choice
of whether or not to go into the flexible benefit plans and
utilize the union health benefits or the county benefits. The
plan itself is set up so that there is a flat credit amount
that's given. Employees get additional credit, so they select
lower level medical plans, and then they choose, with their
credits, to purchase medical, dental actually is provided as a
benefit plan that they don't need credits to purchase.
But vision, life insurance, above one times pay, and then
outside the plan, and flexible spending accounts they have, and
then outside the plan they have a group legal plan that's part
of the total package.
Mr. Weldon. So it covers all employees, union and non-
union?
Ms. Schneider. I'm not sure if all union employees are a
part of it. I know that there are some union employees who have
a choice of whether or not they want to be part of the plan.
Mr. Weldon. Was there opposition from the unions when the
plan was initially set up?
Ms. Schneider. It has been part of the labor negotiations
on a continuing basis. And the parties worked together to come
up with a plan that's suitable for all parties. It's been in
existence for quite a while, though.
Mr. Weldon. OK. Mr. Thomas, you argue that when employees
reduce their taxable salary by using flexible spending accounts
they will also reduce the amount of their pensions, life
insurance and disability insurance, which are all based on the
employee's salary.
Since this was contrary, and this may have been in your
written statement that I originally reviewed and not in your
verbal statement, since this was contrary to my understanding,
I asked OPM, which advised me that it was not the case,
according to OPM, like premium conversion, FSAs will not reduce
the gross salary on which these benefits are based. I have a
letter from OPM stating that. And I ask unanimous consent,
without objection, to introduce that into the record.
I was wondering if you wanted to clarify your position on
that issue.
Mr. Thomas. Social Security benefits would go down. As you
know, a number of Federal employees are now covered by the
Social Security benefit program. Those benefits would be
affected by the reduction in their income, as opposed to those
Federal employees who are covered under the Civil Service
Retirement Plan, which I believe is what OPM is referring to.
Mr. Weldon. But the statement that you had made in your
written statement that contributions into pensions would go
down, that is not my understanding of it, correct? That is not
true?
Mr. Thomas. Yes.
Mr. Weldon. OK. I don't have any other questions. And the
ranking member has not returned yet from the voting, so I want
to thank all the witnesses here in this first panel. I again
want to apologize for keeping you all waiting. Your testimony
has been very, very informative.
The Chair notes that some Members may have additional
questions they may wish to submit in writing. So without
objection, the hearing record will remain open for 2 weeks for
Members to submit written questions to these witnesses and
place their responses in the record.
The first panel is now excused. Again, thank you very much.
The committee appreciates your time.
On our second panel, we have the Honorable Dennis Jacobs.
Judge Jacobs sits on the U.S. Court of Appeals, Second Circuit,
in New York City.
Judge Jacobs, as before, you are required to take the oath.
[Witness sworn.]
Mr. Weldon. Thank you. You may have a seat. Will the court
reporter please note the witness has answered in the
affirmative.
Judge Jacobs, you're the only witness in this panel and I
seem to be the only one here, so I will be somewhat flexible on
the 5-minute rule as it's right now only my time and your time
that we're dealing with. But if you could, please summarize
your written statement to the best of your ability. You are
recognized now for an opening statement.
STATEMENT OF DENNIS JACOBS, CIRCUIT JUDGE, U.S. COURT OF
APPEALS FOR THE SECOND CIRCUIT
Judge Jacobs. Thank you very much, Mr. Chairman.
I'm Dennis Jacobs, Circuit Judge of the Court of Appeals
for the Second Circuit. I sit in New York. I appear today on
behalf of the Judicial Conference of the United States, which
is the policymaking body of the Federal Judiciary. I have this
distinction because I chair the Conference Committee on
Judicial Resources, which has jurisdiction over personnel
matters.
It's a privilege to speak to the interests of 32,000
people, and I am acutely aware from what I've learned at the
earlier panel that the matters that this subcommittee are
considering will affect an enormous number of people in ways
that are far-reaching, and that could reach forward into a
generation and affect people's lives in very real and important
ways.
I have been anxious and pleased to receive your invitation
to testify, because we have implemented a cafeteria benefits
plan. We've had excellent experience with it. And I thought
that I would tell you briefly why we did it and what our
experience has been with what it is we have done.
We implemented the plan in response to a need. In the
1990's, in the early to middle 1990's, there was something of a
crisis because health care premiums were going up and benefits
were going down. There was a tremendous anxiety existing among
employees in the Federal Judiciary.
And in response to that, the director of the Administrative
Office, L. Ralph Mecham, initiated recommendations that were
adopted by the Judicial Conference to seek out the advice of
one of the Nation's foremost advisors on benefits, the Towers
Perrin Group. They issued a report in March 1998. I remember
the report very well because I was, at the time, one of the
newest members of the Committee on Judicial Resources. It was
enough to stir genuine anxiety.
The Federal Judiciary, like I believe other branches of
Government, was at a point where we could expect large numbers
of baby boomers to be retiring, and we would have to replace
them. And we wanted to replace them with people of comparable
talent, skill and dedication. We knew that we had identifiable
competitors for those services, not just in the private sector
but also within State government and State courts.
The Towers Perrin report indicated that we were quite
deficient and perhaps even flatly uncompetitive with the
agencies and institutions that would be hiring the people that
we needed.
We have spent the intervening years filling the gaps that
the Towers Perrin study has identified. It occurred to me
coming down here that it might be useful to file for the
reference of the committee the executive summary of that, which
I have read and which has been a very useful document, to
outline the nature of those deficits and the recommendations.
Mr. Weldon. Without objection, we will take a copy of that
and submit it into the record.
[The information referred to follows:]
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Judge Jacobs. Thank you very much.
Partially in response to the Towers Perrin program, in
March 1998 the director of the administrative office was given
authority to establish a program of supplemental benefits. We
have done that. I think with your indulgence, I'll just review
the five programs that we have established very briefly.
One is a health care reimbursement account. The employee
decides before the end of the calendar year how much money to
set aside on a pre-tax basis to pay certain medical expenses.
These sums are used for co-payments, deductibles, vision,
dental care, everything that's not covered, virtually
everything that is not covered, by the Federal employee health
benefits. About 7,500 employees enrolled in that in the year
2002. It's a very high number, and it reflects the high level
of interest that Towers Perrin had detected when they conducted
their study.
We also instituted a dependent care reimbursement account.
It works, there are bells and whistles that differ, but
basically it is also a program by which employees deposit money
and uses that money to pay for benefits that are not otherwise
available, such as child care, care for sick dependents,
elderly people, and so forth.
About 9,000 employees of the Federal Judiciary are
participating in these reimbursement accounts. That's about 27
percent of those who are eligible. This is a very high
percentage. We are advised by experts in the area that the
usual for the area would be 10 or 15 percent out in the
national work force. It reflects a very high interest in it and
also reflects, I think, an intense educational effort to
publish the details and the information about these programs to
warn people of some pitfalls that lie in them, that is, for
example, a use-it-or-lose-it feature that was referred to by
one of the speakers on the earlier panel, and to make people
sufficiently comfortable with it.
Our experience is that complicated as it is, it's extremely
valuable. And every year, appreciable additional percentages of
people participate. The data of that is in my report, and I'm
not going to tarry over the actual numbers. But the success of
that program has been in part a result of a very determined
educational effort.
The program is a great benefit to everyone concerned. One
of the subjects that people most cite as a benefit, an
advantage that they have from the health care account, is being
able to pay for orthodontia. For young children, it is an
astonishingly expensive item. It is not at all uncommon for
people to pay for it on an installment basis, because it is
such a huge expenditure. These funds are available. The health
care reimbursement account has now reached a $10,000 limit, a
very large and very substantial benefit.
To go on to the next program, which is the premium payment
program, it essentially reduces by about 38 percent the cost of
the Federal employee health benefit, because it allows a
deduction from the pay check every month which is placed
directly in an account that pays the premium. I should add that
does not affect annuities or other arrangements. It does, as
you have pointed out, Mr. Chair, it does affect Social Security
payments, but in a completely insignificant way.
Next to last, the Federal Judiciary long term care program
allows people to pay premiums to buy 5 years of coverage for
long term care, not only for themselves, the employee can buy
such coverage regardless of pre-existing conditions, without a
medical examination, but also allows purchase of a long-term
care program for relatives, parents, grandparents and others.
The nature of the custodial arrangements that are insured are
legion. It can be a nursing home, it can also be home care, it
can be community care and so on.
Finally, we instituted a commuter benefit program, which
allows employees to set aside pre-tax dollars to pay for mass
transit and parking expenses.
Programs like these are common, as the subcommittee has
learned from the prior panel, common in State government and
the private sector. We implemented these measures within the
existing statutory framework, but to do more, we require
legislation. And we would propose to add these benefits on a
cost sharing basis. We would like to establish a full
cafeteria-style program, funded in part by a modest
contribution from the Judiciary as employer. We are thinking in
terms of $500, at least as an example, but we would have to do
a good deal of actuarial work in order to come up with the
exact amount that would be useful.
The programs that we envision could be offered would be
dental insurance, foremost, because a very large proportion of
the expenses accrued under the health care reimbursement
account is for dental care. This clearly is a felt need. Vision
insurance, leave conversion, expanded commuter subsidies, also
very important, short-term and long-term care disability.
Mr. Weldon. I've let you go on for 10 minutes now. Could
you try to wrap it up?
Judge Jacobs. The astonishing thing I have learned on my
years on the committee has been that it's really very difficult
to figure out what other people need in the way of benefits.
This cafeteria system is a way of assuring that people can make
their own choices based on their own needs, based on their own
family circumstances. And if I were to go on, I would basically
be repeating much of what you said, Mr. Chairman, when this
meeting started. That's a good note, I think, to end on.
[The prepared statement of Judge Jacobs follows:]
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Mr. Weldon. Great. Thank you very much. I appreciate your
testimony. It's been very, very informative.
I take it, based on your testimony, that you have
experienced an improved ability to retain and attract employees
as a consequence of offering this? Has it been an overall
useful recruiting and retention tool?
Judge Jacobs. We think it has been. Although as members in
the earlier panel indicated, it is not so easy to quantify
this. Recruiting and hiring in the Federal Judiciary takes
place in about 110 courts, spread all over the country. To know
whether people are having trouble or not having trouble, we
would have to, as it were, survey 100 chief judges.
But if there are problems, we hear about it. We think that
the primary benefit of this is in retention. We compete with
State courts for many of the same people doing many of the same
things. It is a very hard thing for us to lose people that we
have trained at great cost and expense to State courts that do
offer these cafeteria programs. So we are quite confident that
we are seeing an improved measure of retention.
Mr. Weldon. Mr. Thomas in his testimony earlier in the
first panel made a statement that one of his concerns was that
some employees would have difficulty understanding or
negotiating these plans with all the choices in them. Have you
had any experience in that arena, where employees have had
problems with it?
Judge Jacobs. We have had no problems. I believe, however,
that Mr. Thomas is identifying a real concern. I think the
concern can be dealt with with very carefully drawn brochures.
And most of all, we in the Federal Judiciary use an interactive
link, so that someone who has a question about their benefits
can contact the benefits officer in their court. The benefits
officer in their court can ask a very specific question and it
will be answered in Washington the same day.
So we think it's very important, I agree that many of these
arrangements are complicated. And they involve, and they
require, a certain level of explanation by the Government. I
think it's a responsibility, when you're offering these things,
to explain them. But we have developed brochures for it, and we
have had no trouble, because we have made a substantial effort.
Mr. Weldon. Would you be willing to work with the committee
in developing legislation to authorize the Judiciary to offer a
full-fledged cafeteria plan?
Judge Jacobs. The Judiciary and the staff, the
administrative office and I would dearly love the opportunity
to do that.
Mr. Weldon. Well, I thank you for your testimony and I
again thank all the witnesses. And with no other Members here
for questioning, the hearing is coming to a conclusion. The
Chair notes that some Members, as stated before, may have
additional questions, particularly for the second panel. We
will keep the record open for 2 weeks to allow sufficient time
for the submission of written questions and responses from our
witnesses.
I also ask unanimous consent to enter into the record the
written statement submitted by the National Treasury Employees
Union and the Senior Executive Association.
[The information referred to follows:]
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Mr. Weldon. With that, the meeting is now adjourned.
[Whereupon, at 2:47 p.m., the subcommittee was adjourned,
to reconvene at the call of the Chair.]
[Additional information submitted for the hearing record
follows:]
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