Sometimes it makes sense to combine benefits administration services with a single administrator – and sometimes it doesn’t.
Using a single administrator to manage multiple benefits programs can be very beneficial for an employer when it’s done right, but it’s not always easy to do. This practice is often called "bundling." Let's use COBRA and flexible spending accounts as an example.
COBRA continuation coverage was introduced as part of the Consolidated Omnibus Reconciliation Act of 1985. Under COBRA, certain individuals have the right to continue their employer-sponsored group health plan coverage when they would otherwise lose that coverage due to a qualifying event such as termination or divorce.
COBRA represented a major change in the way things worked, and the law placed the burden of compliance on employers. With complex rules, multiple timelines and deadlines to track and manage, and several new notice requirements – not to mention costly fines and penalties for non-compliance – it quickly became clear that employers would need help administering COBRA. New businesses and software solutions sprung up overnight, and existing third-party administrators began offering COBRA services to meet the burgeoning demand.
Just a few years earlier, the Revenue Act of 1978 created Internal Revenue Code Section 125 which formally introduced tax-qualified flexible benefit plans. Section 125 sets the foundation for cafeteria plans, premium conversion plans (often called premium only plans or POPs), and health flexible spending accounts (FSAs).
Health flexible spending accounts allow eligible employees to set aside money from their paycheck on a "pre-tax basis" (i.e., before calculating and deducting taxes). These funds are then used to pay for qualifying health care expenses incurred by the employee and eligible family members. There’s a similar plan for dependent care expenses as well (often called a dependent care assistance program or DCAP).
When sponsoring an FSA plan, employers must follow very strict rules regarding eligibility and participation, as well as stringent rules governing how funds are deducted, held, and distributed to employees. Because these rules are difficult to understand and even more difficult to manage, many employers choose to have a third-party administer their plan.
As the popularity of FSA plans increased over the years, so did the number of companies offering FSA services. The market includes large national administrators with thousands of clients and small "mom and pop" businesses that rely on leased software to administer these programs. The range of experience and expertise varies greatly, as does the user experience for employers and plan participants.
While COBRA and FSAs are both governed by complex federal regulations and difficult for employers to administer, there is no natural connection or overlap between the two. Each program requires different datasets, as well as different administrative processes and vastly different areas of compliance expertise and experience. Finding an administrator that excels at administering both programs is not common.
Despite these facts, many employers adopt a practice of choosing the same company to administer both their COBRA program and their flexible spending accounts. Employers often make this decision so they can reduce the number of vendors they work with, thinking it will result in less work for their teams, and a more streamlined experience for their participants.
Employers often find that the benefits they were hoping to realize from using a single vendor never materialize. Sometimes it’s because these vendors use multiple systems – often leased from other companies – requiring employers and participants to maintain multiple usernames and passwords to access different systems for account management. In other cases, a vendor’s lack of experience and expertise results in inefficient processes and poor results, leaving employers facing more work and greater risk of noncompliance. In the worst-case scenarios, it’s both.
In the right situation, employers can find tremendous value in choosing the same company to administer multiple benefits programs. When evaluating vendors for this purpose, employers should carefully consider the following:
Does the administrator use a single system and user interface to administer the programs under evaluation? Does the administrator assign a single point of contact for employer support?
Many administrators maintain multiple systems that require separate usernames and passwords, forcing employers and participants to use multiple systems for account management. Aside from being inefficient and inconvenient, this can lead to more work for employers by requiring duplicate data entry and multiple updates to the administrator.
It’s common for administrators to assign different support contacts to their clients based on products. Instead of assigning a single point of contact that can help employers with all products, these administrators force their clients to contact multiple individuals for support. It’s not uncommon to find administrators who provide individual client managers for certain products while using a "pool" or team approach to supporting other products. A single point of contact ensures consistency in service delivery and results in a better experience for employers.
Does the administrator use a single data set to administer the programs under evaluation?
Some administrators say they use a single data set, but in reality, they require multiple files that each have their own set of specifications. Setting up and maintaining multiple files requires extra work from your IT team and can potentially lead to errors and delays.
Does the administrator have the proper compliance and product expertise to administer each program correctly and efficiently, protecting the employer from compliance errors and providing a quality user experience to both the employer and participants?
An administrator’s lack of program knowledge and compliance expertise can be devastating to an employer. Employers should make sure they thoroughly vet the administrator(s) they are evaluating, including contacting references provided by the administrator. It’s also critical that employers review the contractual agreements used by the administrator to determine if the administrator indemnifies the employer against any fines and penalties for non-compliance that may arise due to the administrator’s actions.
To maximize the value of using a single administrator to administer multiple programs, the answer to each question should be yes. Failing to meet just one of these critical requirements can lead to a poor experience for the employer and its participants, stripping away the value of using a single administrator.