LLQP Group Benefits Plan Concepts 2 — Questions and Answers

Question 1: What is the primary advantage of group insurance over individual insurance for employees?

Higher coverage limits
Lower cost due to group underwriting and employer premium sharing (Correct answer)
Better investment returns
Guaranteed insurability for all medical conditions forever

Correct answer: Lower cost due to group underwriting and employer premium sharing

Group insurance is typically less expensive because the risk is spread across many members and employers usually share premium costs.

Group insurance provides several cost advantages over individual coverage. First, the insurer underwrites the group as a whole rather than each member individually, which reduces administrative costs and adverse selection. Second, employers typically pay a significant portion (often 50% to 100%) of the premiums, reducing the employee's cost. Third, group purchasing power results in lower per-person rates than individual policies. Fourth, there are economies of scale in administration, marketing, and claims management. While group insurance may offer lower coverage limits and less customization than individual policies, the cost advantage is the primary benefit for most employees. This is particularly valuable for employees who might not qualify for or afford individual coverage due to health conditions.

Question 2: What does 'Administrative Services Only' (ASO) mean in the context of group benefits?

The insurer provides only administrative support while the employer self-insures the risk (Correct answer)
The insurer handles all aspects of the plan including risk assumption
Administrative staff manage claims without insurer involvement
Only administrative employees are covered under the plan

Correct answer: The insurer provides only administrative support while the employer self-insures the risk

Under an ASO arrangement, the employer retains the financial risk of claims while the insurer provides administrative services such as claims processing and plan management.

In an Administrative Services Only (ASO) arrangement, the employer assumes the financial risk for claims and pays for them directly from their own funds. The insurer acts as a third-party administrator, providing services such as claims adjudication, eligibility management, plan communications, and reporting. ASO is typically used by larger employers who have sufficient employee populations to predict claims costs with reasonable accuracy. Advantages include: elimination of insurer risk charges and profit margins from premiums; greater plan flexibility; potential cash flow benefits; and direct access to claims data. Disadvantages include exposure to higher-than-expected claims costs, which is often mitigated through stop-loss insurance that caps the employer's liability above a certain threshold per claim or in aggregate.

Question 3: What is a 'health spending account' (HSA) in Canadian group benefits?

A savings account at a bank designated for health expenses
An employer-funded account that reimburses eligible medical and dental expenses not covered by the base plan (Correct answer)
A government program that supplements provincial health insurance
A retirement savings vehicle for healthcare in retirement

Correct answer: An employer-funded account that reimburses eligible medical and dental expenses not covered by the base plan

A health spending account is an employer-funded benefit that reimburses employees for eligible medical and dental expenses, providing flexible coverage beyond the base plan.

A Health Spending Account (HSA) is a notional account funded by the employer that allows employees to claim reimbursement for eligible medical and dental expenses. Under CRA guidelines, eligible expenses are those that qualify for the medical expense tax credit under the Income Tax Act. HSAs are particularly valuable because they: provide flexibility for employees to cover expenses not included in the base plan; are a tax-effective benefit (reimbursements are not taxable income to the employee, and contributions are deductible for the employer); accommodate diverse employee needs; and can cover deductibles, co-payments, and services like orthodontics, vision care, or paramedical practitioners. HSAs typically operate on a use-it-or-lose-it basis within the plan year, though some plans allow a carryover period.

Question 4: In a group benefits plan, what is the purpose of the 'non-evidence maximum' (NEM)?

The maximum amount an employee can contribute to the plan
The maximum coverage amount available without requiring individual medical evidence (Correct answer)
The maximum number of employees who can join without evidence
The maximum claim amount payable without documentation

Correct answer: The maximum coverage amount available without requiring individual medical evidence

The non-evidence maximum is the coverage amount up to which employees can obtain coverage without providing individual medical evidence of insurability.

The non-evidence maximum (NEM) is a key concept in group insurance underwriting. It represents the maximum amount of coverage an employee can receive without submitting individual medical evidence (such as health questionnaires, blood tests, or medical examinations). The NEM is set based on the group's size, demographics, and claims history. For example, a group life insurance plan might have a NEM of $200,000, meaning any employee requesting coverage up to that amount is automatically approved based on group underwriting. Employees wanting coverage above the NEM must provide satisfactory evidence of insurability. The NEM facilitates efficient plan administration and ensures most employees can obtain coverage without a burdensome medical process, which is one of the key advantages of group insurance.

Question 5: What is the typical waiting period before a new employee becomes eligible for group benefits in Canada?

Immediate coverage on the first day of employment
Usually 3 months, though it varies by employer (Correct answer)
One year of continuous employment
Five years of service

Correct answer: Usually 3 months, though it varies by employer

The most common waiting period for group benefits eligibility is 3 months, though employers can set different periods based on their plan design.

Most Canadian group benefits plans impose a waiting period (also called a probationary period) before new employees become eligible for coverage. Three months is the most common waiting period, as it aligns with typical employment probation periods. However, employers have flexibility in setting this period, and some may offer immediate coverage or longer waiting periods depending on their industry, competitive market, and plan design. During the waiting period, the employee has no coverage under the group plan and must rely on individual coverage or provincial health plans. Some insurers set maximum waiting periods (e.g., no longer than 6 months) to prevent excessive gaps in coverage. Once the waiting period ends, coverage for eligible employees and their dependents typically begins automatically without individual underwriting up to the NEM.

Question 6: What is a 'flex benefits' or 'flexible benefits' plan in the Canadian group benefits context?

A plan where employees can choose their own benefit options from a menu of choices (Correct answer)
A plan that only covers flexible spending
A plan where premiums flex based on market conditions
A plan exclusively for contract or flexible workers

Correct answer: A plan where employees can choose their own benefit options from a menu of choices

A flexible benefits plan allows employees to customize their coverage by choosing from a menu of benefit options, allocating employer-provided credits according to their personal needs.

Flexible benefits (flex) plans represent a departure from traditional one-size-fits-all group benefits. Under a flex plan, the employer provides each employee with a set number of benefit credits or flex dollars, and employees select their coverage levels and options from a menu of choices. Options might include different levels of life insurance, dental coverage tiers, extended health options, and health spending account allocations. Employees can customize their benefits package to match their personal and family needs. For example, a single employee might choose lower life insurance and higher dental, while an employee with a family might prioritize dependent coverage. Flex plans are more complex to administer but offer significant advantages in employee satisfaction, cost management, and attracting diverse talent. They are increasingly popular among mid to large Canadian employers.

LLQP Group Benefits Plan Concepts 2

What is the primary advantage of group insurance over individual insurance for employees?