Buonocore Revised Lesson 3

Narration: Welcome to Training Lesson number three in the Basic Flexible Benefits Plan module. This lesson is Positioning Premium Only Plans to the Employee. “Understanding how to position Premium Only Plans to an Employee will help you write more business because you will have the knowledge of how a POP can benefit an employee. Which means to you; that you can explain and answers questions regarding how pre-taxing works. And the real benefit to you is that you are able to help them make the best benefit choices possible.” It is recommended that you have already gone through Lesson One and Two in this module. If you have not already reviewed those lessons, please return to the menu and select Lesson One or Two. Click the next button to start the training.

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Lisa Buonocore EDET 709 Big Redesign

Narration: The purpose of this training is to help you understand how to best position this value added service with an employee. By the end of this lesson, you will be able to: •Understand the benefits and tradeoffs of POP to an employee •Communicate the concept of pre taxing •And, demonstrate how to apply what you learned during your conversation with the employee

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Narration: As discussed in Lesson 1, the terms "cafeteria plan,” “flex plan,” and “section 125 plan” are all words used to describe a flexible benefits plan. Flexible benefits plans include POP, FSA, HSA, DFSA and HRA. In this lesson we will go into more detail on Premium Only Plans and how to position them to an employer. [Facilitator Notes: Premium Only Plan: Allows employees to have their portion of the life and health insurance premiums deducted from their pay on a pre-tax basis. Flexible Spending Account: This benefit account allows participants to set aside pre-tax dollars to pay for certain types of qualified medical expenses. Health Savings Account: A tax-advantaged account that allows participants to set aside pre-tax funds to pay for qualified medical expenses incurred by the participant, their spouse, and any tax dependents covered under the participant’s qualified high-deductible health plan (HDHP). Health Reimbursement Account: Employers fund individual reimbursement accounts for their employees and define what those funds can be used for (e.g. specified out-of-pocket expenses such as deductibles and co-pays). ]

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Narration: In this lesson we will focus on the employee. To review from the Introduction to Flexible Benefits Plans lesson, the benefits to the employee from Premium Only Plan include: •Providing employees the ability to tailor a benefits program to meet their individual needs. •Making the purchase of employee benefits more affordable through federal, state, and FICA tax savings. •And, giving a potential increase in spendable income, or the opportunity to purchase additional benefits with the tax savings. There are some trade-offs for the employee as well, including: •The employee is locked in to the plan for a year •Benefit elections are irrevocable during the plan year. They can be changed only if there is a qualified change in status or at the annual open enrollment period. •Any reduction in your taxable pay may also lead to a reduction in your Social Security benefits; however, for most employees, the reduction in Social Security benefits is insignificant compared to the value of paying lower taxes today.

We will discuss the employee benefits and tradeoffs in more detail throughout the lesson.

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Narration: Let’s review the concept of pretaxing for payroll taxes. Adding a Premium Only Plan to a company’s employee benefits program has the potential to save tax dollars for the employer and the employees. This illustration shows the payroll taxes that are typically paid by an employee and an employer.

•First – let’s look at FICA which is Social Security taxes; and is paid at 7.65 percent by both the employee and employer for a total of 15.3%. The employer matches the employee’s FICA payment. •The employee is responsible for paying Federal income tax and State income tax which varies by state and employee. •The employer is also responsible for federal and state unemployment tax (FUTA and SUTA) which varies by state and employee.

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Narration: The $1,000 example is a great way to explain the concept of pretaxing to an employee. You start by explaining to the employee that you want to show an example of the impact by pre-taxing on their paycheck. Again, make sure that the employee knows that this is just an illustration, not their actual situation. Each pay period the employee makes $1,000. In the scenario without a POP the first thing that is done is the taxes are calculated on the entire $1,000. In this case, using an average tax rate of 25%, that amount comes to $250 - which is the first thing deducted from the $1,000 each pay period. That leaves the employee with $750. Then the insurance premiums of $100 are deducted from the $750 leaving $650 as the employee’s take home pay – or spendable income. Now, in the “with a POP” scenario we still have the same $1000.00 in salary each payroll period, but the first thing that is deducted is the $100 for the insurance premiums. This is done before any taxes are calculated – it is done pre-tax. <ANIMATION – Arrow pointing appears> This leaves $900, which is now the employee’s taxable income. The taxes are calculated as $225, which is deducted from the $900, leaving $675 as the take home pay. This is an increase of $25 in take home pay as compared to the “without POP” scenario. This employee saves $25 each pay period just by pre-taxing their insurance premiums. <ANIMATION – Star with $25 appears > This is an annual tax savings of $300. This is a huge win for the employee! This $1,000 example using a 25% tax rate is an easy way to illustrate how pre-taxing works. It is recommended that you learn it so that you can write it out and explain it to an employee quickly and effectively during a one-on-one meeting, if you do not have the brochure example handy. [Facilitator Notes: This $1,000 example uses very simple numbers so that the math is easy to do and the example is easy to remember. They can also use the Flexible Benefits “brochure.” Have the class take a few minutes and write out this $1,000 example, you could even divide them up and have them role play it as they explain the example.]

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Narration: What could that employee do with an additional $25 per pay period – or $300 per year? There are any number of options – some of the more popular are: •To keep it in their take home pay and view it as a $25 per pay period raise. •To pick up additional core benefits that their employer offers – or increase coverage options on ones they already have. •Set it aside for their Christmas fund – or “fun” money. •But as a sales representative – you would like to see them use it to purchase additional protection for themselves and their family with one of our products. Many of our product coverage options are less than $25 per pay period. Because of this they can pick up additional protection while still taking home slightly more pay than before. The tax savings that they experience offsets the premium for the coverage! If an employee has an additional $25 per pay period due to pre-taxing, they can easily pick up this Cancer plan for $22.50 and still see an additional $2.50 in their take home pay – so it stays almost the same as it was before they picked up the additional coverage!

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Narration: As we mentioned in Lesson 2, All participants in a Premium Only Plan must be “employees” of the employer. It’s important to note that the IRS may not consider some workers “employees.” For example, independent contractors or 1099 employees are not eligible to participate. Employers determine their employees’ eligibility requirements for participating in the Premium Only Plan, such as what is considered full-time, and how long employees must have been employed to participate. These requirements must be listed in the employer’s plan document, which is a written document necessary to establish a Premium Only Plan.

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Narration: Once employees elect to participate in a Premium Only Plan, they may not make any changes in their elections during the plan year (i.e., adding, canceling, or altering elections) unless: They experience a status change. AND The election change requested is consistent with the status change. The following are some examples, according to IRS Code Section 125, of qualifying events that may allow employees to make changes in their pre-taxed elections:

•Change in marital status •Change in dependent status •Termination or commencement of the employee’s or spouse’s employment •A change in employment status •Unpaid leave of absence by the employee or the employee’s spouse •A significant change in health coverage •Addition or elimination of a benefit option •Significant cost changes to benefits

Example of Status Change: [click to appear] Mary and Mike have been married for many years and are having a baby. Since Mary has the better of their individual health insurance coverage, they would like to add the new baby to her plan. *This would be considered a qualified status change and would be allowed during the plan year as long as Mary makes the change within the parameters outlined in the Plan Document. *Mary could NOT add Mike to her plan mid-year unless for example he loses his job and no longer has coverage of his own.

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Narration: When selling our products, you should tell employees up-front that they may owe taxes on some of the benefits they receive and how their Social Security benefits may be affected. Reductions in employees’ taxable incomes as a result of pre-taxing benefits lowers the amount of FICA withheld from their paychecks and the contributions made to the Social Security programs for retirement, disability, and survivor benefits. Therefore, there may be a minor reduction in future Social Security benefits. According to the tax laws, if disability premiums are employer-provided or paid with pretax dollars, any disability claim payments received by the employee will be considered income for income tax purposes. Employees will be subject to federal income taxes the entire time they are receiving taxable total disability payments and in the first six months of a disability, the disability benefits are also subject to FICA taxes. For Indemnity benefits, when employees receive claim payments from one of our products that was pre-taxed, the payment may be considered as taxable income and a 1099 could be issues. We provide Taxability of Benefits flyers to employees for each product to better understand what may or may not be taxed. Refer to the Advanced Flexible Benefits Module, Lesson 1 on Taxability for more information.

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Narration:

We’ve created these lessons so you can better understand the benefits and tradeoffs of Premium Only Plans. Not only does pre-taxing increase employee spendable income, allowing them to purchase our products, it also gives you the opportunity to see all eligible employees creating great working conditions. The IRS requires that all eligible employees have the opportunity to enroll in the Premium Only Plan which provides a great opportunity to get working conditions. You may conduct group meetings to inform employees about the benefits and how the changes premium only plans affect them. The primary objective here is to tell employees what they need to know to make their enrollment decisions.

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Mr. Bob Jones opened a He currently offers health insurance to his employees on a post-tax basis. As you meet with one of his employees, Jenny, you explain that she can save money through tax savings by pretaxing benefits through a Premium Only Plan. You ask Jenny if she is familiar with the advantages of pretaxing benefits, but Jenny is not familiar with the advantages. How would you explain the pros and cons of pretaxing to Jenny?


First, explain both the pros and the cons to pre-taxing with Jenny. • You can use your additional take-home pay for a number of things. • You can pick up new core benefits, add it to your holiday savings fund, keep it in

your paycheck, or add additional protection for Jenny and her family through one of our plans.

• Make sure Jenny understands that she cannot make changes to her benefit elections mid-year unless she has a qualified status change.

• Make sure Jenny understands that any disability payments received will be considered taxable income. And, if she receives any indemnity benefits she may receive a 1099 under certain circumstances.


At this point, is Jenny is willing to move forward with a pretaxing? If yes, then help make it simple for Jenny. Explain her options in simple, straight forward terms to help her determine what’s right for her and her family. Help Jenny figure out what areas makes sense, how to determine the right amounts (if any) and assist her in filling out any necessary paperwork. Help Jenny make the decision with ease and confidence!


Narration: We have many excellent resources and tools when it comes to Flexible Benefits Plans. All of the marketing materials can be ordered and shipped to you – and many can be printed right from Propr. On the screen you see several Internet links where you will find all the information about our partnership with AmeriFlex, as well as many useful forms and processes. Please take the time to review all the information you can about Section 125 and Flexible Benefits Plans. On Propr: FPSF User Guide AF Implementation Guide ePOP ordering webinar ER topic sheet

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Documents

Buonocore Revised Lesson 3