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Call 2005 the year of great expectations. On January 1, early adopters will roll out health savings accounts for their employees while the rest of corporate America watches, waiting to learn from their successes and mistakes.

    For all the recent attention HSAs have received–research reports, articles in the consumer press, Web sites explaining how things work–companies will probably not quickly shift to high-gear adoption of the plans.

    It’s not for lack of expectation. HSAs and the high-deductible health plans attached to them are being held out by everyone from the newly re-elected President Bush on down. They’re seen as a way to curb runaway medical insurance costs while giving people more control over what they spend and where they spend it.

    HSAs can be thought of as medical IRAs: Employees pay for health-care expenses with pretax dollars kept in accounts they control, up to $2,600 annually for individuals and $5,150 for families. Funds in an HSA can be invested, rolled over from year to year and are portable, so if an employee leaves, they do too.

    The accounts are tied to insurance plans with minimum deductibles of $1,000 a year for individuals and $2,000 for families. For employers, the attraction lies in higher deductibles and lower insurance expenses. Employees who invest wisely build up a tax-free nest egg they can use for routine care, elective surgery or retirement–if the money lasts that long.

    But while the federal law that created HSAs is nearly a year old, companies remain cautious. Treasury Department guidelines outlining how the plans could be implemented weren’t completed until summer, and insurers spent the better part of the year putting together their offerings.

    That wasn’t enough time for all but the most progressive–or financially desperate–companies to offer HSAs this year or for 2005, according to insurers, financial institutions and others familiar with the plans. The first wave of organizations offering workers HSAs includes a smattering of Fortune 500 businesses such as Textron, Pitney Bowes and Guidant Corp., and hundreds of smaller companies. The U.S. government will offer an HSA through Aetna to about 4.5 million federal employees January 1. That’s half of the federal workforce.

    Industry watchers expect most businesses to spend the coming months evaluating what’s out there and, if they opt to offer HSAs, drafting education programs so employees are prepared for open enrollment for 2006 or 2007. Big companies “will watch the dust settle in 2005, then make their move,” says Chris Delaney, vice president of marketing at Definity Health, a consumer-driven plan provider.

    While company executives do their homework, look for major insurers such as United Healthcare, Aetna and Cigna and consumer health-care specialists such as Definity Health and Lumenos to continue building awareness for their insurance and HSA products.

    Next year, expect to see investment options multiply as more banks, mutual fund companies and stockbrokers join the financial institutions that started offering HSA investment products this year including Mellon, Wells Fargo, Vanguard and JPMorgan Chase Bank. Many players will also add “smart” cards that work on MasterCard or Visa debit card readers and automatic account debits for monthly prescriptions and other regular expenses.

    If things fall into place as expected, by 2006, about 73 percent of U.S. employers are likely or somewhat likely to be offering HSAs, according to a survey by Mercer Human Resource Consulting.

    Some early adopters are seeking alternatives to traditional medical coverage to halt health-care spending that jumped 11.2 percent in 2004 alone, the fourth straight year of double-digit growth, according to a 2004 employer benefit survey from the Kaiser Family Foundation and the Health Research and Education Trust. In 2004, premiums for family coverage hit $9,950, with employers picking up about 72 percent of the tab, the Kaiser survey found.

    Other HSA pioneers will be white-collar businesses, “due to the education level of their workers” and the ability and willingness of those workers to sock money away, says Karli Dunkelberger, vice president of business development at Conexis, a benefits administrator in Orange, California.

    They’re also likely to be companies with a history of embracing innovation, says Andy Anderson, a benefits administrator attorney and HSA expert with Hewitt Associates. “For the experimenters, it’s an intellectual extension of what they’ve been doing with cafeteria plans for years,” he says.

    In 2004, investment options for HSAs were limited mainly to savings-type accounts earning 1 percent to 4 percent interest. That will change in 2005 as more banks, brokers and mutual fund companies jump into the fray. One of the most aggressive is Mellon Bank, which has deals with Definity Health, Lumenos, North American Health Plans, an administrator for self-insured companies, and Great-West Healthcare.

    Vanguard, Wells Fargo and MSAver, a banking subsidiary of Lumenos, were the first to offer mutual funds for HSAs, but Fidelity Investments expects to enter the market by 2006, according to a recent Wall Street Journal report.

    More investment options also means more risk. Employees who park idle HSA funds in mutual funds or stocks could end up losing money if they don’t invest wisely. And come tax time, it’s the responsibility of the employee–not the company–to prove that the money they spent was on legitimate health-care costs. “It’s not smart to take it out and buy a boat, but you could,” Anderson says. “You’ll pay income taxes on it, and a 10 percent penalty, but there are people who think that way.”

    Putting pretax dollars aside to pay for health care isn’t a new concept. Flexible spending accounts have let people do that since the early 1980s. But industry watchers believe HSAs will take off faster because employees can roll over funds they don’t use to the next year, whereas in traditional flexible spending accounts, they forfeit unused funds.

    Another reason for quicker adoption is an easier payment mechanism. Unlike FSAs, which typically require people to pay expenses out of pocket and submit receipts to be reimbursed from their accounts, most HSAs are linked to debit cards–or will be soon. Whether the cards are branded by the employer, insurance company or card maker, all work through either the MasterCard or Visa debit card networks.

    The latest-generation cards, including those offered by companies such as Motivano, can funnel what someone spends into up to 50 “buckets”–for the doctor, dentist, pharmacy, chiropractor, hospital, etc.–and can block unacceptable purchases. If someone tries to use his or her HSA card at the drugstore for a prescription, potato chips and a six-pack of Coke, the medicine would go through but not the rest, says Mark Keck, Motivano’s executive vice president. “We’re ordering hundreds of thousands of cards as administrators come to us,” he says.

    The re-election of President Bush, who made consumer “ownership” of retirement and health care a campaign watch word, could put HSAs on an even faster track. Just days after the election, health industry analysts were predicting that the administration would work to make HSAs more compatible with FSAs and a third plan, the health reimbursement account. HRAs are like HSAs, but with a crucial difference: They’re not portable. The money belongs to the company and stays there when an employee leaves. Currently, companies with HRAs can’t transfer funds to newly created HSAs, but that could change during the second term of the Bush administration.

    The support for HSAs is good news for insurers, banks, debit card makers and other companies with a vested interest in making the plans work. But despite outside pressures to plunge in, industry experts counsel large and small employers to take their time determining what’s best for their situation and employee base. Says Anderson: “This is a beast the likes of which hasn’t been seen yet in the employee benefits community.”

    As companies lay their plans, they could look to BASF Corp., the U.S. arm of the German chemical company, for some pointers.

    The company is set to launch its HSA on January 1 after a positive experience with an earlier consumer-driven health plan. In 2004, BASF Corp. began offering eligible employees a high-deductible insurance plan combined with an HRA through Definity Health. To promote the new plan, BASF contributed to workers’ HRAs–up to $2,250 for employees with family coverage. Even with the contribution, the HRA cost 8 percent to 11 percent less than traditional coverage, according to spokesman Jack Maurer. That was enough to persuade BASF managers to add an HSA. For the new HSA, BASF employees can put away up to $5,250 a year in their account through standard payroll deductions.

    To get people to sign up, management should follow BASF’s lead and share part of the savings that it will gain instituting the lower-cost plan by making contributions to employees’ accounts, says Dan Perrin, executive director of the HSA Coalition, a pro-HSA advocacy group in Washington, D.C. Employees understand that the higher deductible, the cheaper the cost to the company, and that they’d be leaving money on the table because if they picked another plan, their employer would pay more, Perrin says.

    That could be happening. About half the companies to which Aetna has sold policies are making some type of contribution to employees’ HSAs, says Betsy Sell, a spokeswoman for the insurer.

    From the CEO on down, management has to be committed, says Ed Pudlowski, with Ernst & Young’s human capital practice in Dallas. At companies with successful consumer-driven health-care initiatives, managers were involved in all phases.

    Where companies haven’t been successful, executives “haven’t been doing things to interact with (employees), like offering education programs,” Pudlowski says.

    “That shows us there’s a gap in their ability to move forward and they might have to do some things before introducing consumer-driven health care.”

    Education is critical to employee acceptance–and not just education about HSAs, experts say. Many carriers and third-party administrators have added online tools to their consumer Web sites so that people can compare their out-of-pocket expenses under HSAs with other plans.

    Other tools help consumers evaluate costs of different doctors and hospitals, and give out quality ratings. Cigna’s MyCignaPlans.com, for example, uses cost-comparison tools licensed from WedMD.

    While those accounts are being phased out, many insurers will still offer a high-deductible health plan to individuals and small businesses, either coupled with an HSA or unbundled, so individuals can choose their own HSA.

    The HSA Coalition also has a Web site called HSA Insider that businesses can use to compare plans and fees from dozens of insurance carriers and financial institutions.

Workforce Management, December 2004, pp. 72-75 — Subscribe Now!

Dear Homegrown:

Forget the one-size-fits-all retention strategy. Instead, realize that the ultimate goal is to retain one focused, motivated worker at a time. The best retention efforts include a mix of personally tailored elements, in addition to the usual programmed fare.

One of the cheapest, most effective and most underutilized practices is re-recruitment. This refers to a regimen of planned measures aimed at engaging the new employee from the beginning.

Some examples:

• Once candidates accept a job, make sure they receive selected pieces of intra-company communication, including employee handbooks and benefits information but also information on what makes the brand of your company unique.

  
  

• Talk with new employees during their first day on the job to make sure the relevance of the work is understood, including how it fits within the organization. Toward the end of that first day, spend a few minutes answering any questions they may have, and learn the name of anyone who has been particularly helpful that day, so you can thank that person appropriately.

  
  

• After about two weeks, ask a manager at least two levels higher on the organizational chart to spend a few minutes with each new employee. This affirms the person’s decision to come to work for your organization and provides support and encouragement.

  
  

• After 45 days, review performance expectations with new employees, asking for candid self-assessment. Be sure to coach as necessary.

  
  

Other retention measures generally fall into one of four categories: financial, personal support, family support and career support.

Financial
In addition to cash, consider non-cash financial retention measures. If your company is publicly held, these could include the use of stock incentives distributed as options, grants or appreciation rights. Other financial measures might include targeted reimbursements for things such as automobiles, home-based personal computers, education and recreation.

Personal Support
One of the most precious commodities is time–in particular, time off from work. The use of periodic lump-sum vacation bonuses and sabbaticals has become a retention mainstay for many organizations. Similarly, affording employees the opportunity to telecommute is also a valuable time-saver.

Family Support
Increasingly, decisions about whether to change jobs hinge on factors having to do with employees’ families. Accordingly, many organizations are revisiting provisions for child care, elder care and health care.

Career Support
Decisions about staying in a job or leaving it frequently come down to whether the organization, through its leaders, takes an acute personal interest in the individual. This interest manifests itself through measures such as regular and honest appraisal discussions, personal coaching, personalized development plans, and support for personally initiated projects and interests.

SOURCE: Richard Hadden and Bill Catlette, co-authors, Contented Cows Give Better Milk, www.ContentedCows.com, December 31, 2003.

LEARN MORE:Truths and Myths of Work/Life Balance.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

The fallout of all those corporate accounting scandals has finally settled on the desk of the nation’s tax collector, and companies that aren’t ready to face IRS scrutiny could pay a heavy price.

Since the Internal Revenue Service instituted two intense corporate audit initiatives a year ago, the agency has identified dozens of companies violating tax-code provisions for executive compensation and pension plans. In pension plans alone, an undisclosed number of companies in a pool of 40 initially audited by the IRS could be on the hook for a combined $2 billion to $3 billion in corrections and adjustments, says one source familiar with the audits.

“It’s a huge amount of money. Some of the (cases) they described were corrections in the hundreds of millions of dollars,” says Chris Lipski, a partner with Ernst & Young’s human capital practice in Cleveland who’s working with several companies being audited.

It’s all part of an IRS pledge to beef up compliance and enforcement in light of behemoth executive pay package scandals at companies such as Tyco International and WorldCom, where executives played fast and loose with tax laws. Increased public attention on pension plans in light of recent instances of underfunding is behind the retirement-plan audits.

In October 2003, the IRS started a yearlong pilot to more closely examine executive compensation programs at public and private companies with $10 million or more in annual revenue. As a first step, the IRS’ large and medium-size business division targeted 24 companies for audits. The agency has not publicly named them.

What they’ve found so far: corporate executives who didn’t file individual tax returns, repay corporate loans or declare as income fringe benefits like private use of company jets, says Andrew Liazos, a Boston-based partner at McDermott Will & Emery, who has been briefed by the IRS. The agency also found irregularities in long-term compensation payouts, golden parachutes and compensation-related performance goals, among other things, according to Monique Guesnon, a PricewaterhouseCoopers human resource services manager. She is working with at least five clients who are auditing their own executive compensation plans in light of tougher IRS audits of executive pay.

According to IRS documents, the agency is already incorporating seven of eight compliance areas initially targeted in the pilot into routine audits. An eighth issue, offshore employee leasing, wasn’t found to be common among large and medium-sized businesses, but it is being looked into by the IRS’ small-business division.

Also in late 2003, the IRS launched a separate 12-month pilot project to scrutinize corporate pension programs, specifically targeting defined-contribution and defined-benefit plans with more than 2,500 participants. For the first 40 companies it examined, audits lasted 200 to 300 days, compared with five days for a typical qualified plan review, according to industry sources. Among the problems pension plan audits have uncovered: ineligible participants; calculation errors affecting contributions, deferrals and benefits; and lack of proper documentation.

To minimize the impact of these new-generation audits, companies should undertake their own comprehensive compliance reviews, say accountants, lawyers and other industry experts. In the case of pension plans, a little preventive medicine could go a long way. The IRS has begun a voluntary compliance program to which companies can apply if they’re initiating an internal pension plan review. Once a company is enrolled in the voluntary program, the IRS won’t start an audit, and if the business ends up owing taxes, it won’t incur additional penalties, according to IRS documents.

To give the audit initiatives teeth, the IRS is expanding resources and training staff, by some estimates adding as many as 200 agents. “If they’re spending money and hiring people and finding errors, they’re serious,” Liazos says.

–Michelle V. Rafter

The archetype of the “overworked American” putting in more hours than ever before is only partly true, according to a new report.

The American Sociological Association, in its publication contexts, argues that employees are “increasingly divided between those who put in very long hours each week and who are concentrated in the better-paying jobs, and those who have comparatively short workweeks.” The second group is “more likely to have fewer educational credentials and are more likely to be concentrated in the lower-paying jobs.”

What’s happening is that more people–27 percent of working men, compared with 21 percent in 1970–are working longer hours. And more people are working shorter hours–9 percent, compared with just 5 percent in 1970. Managers and professionals with college degrees are in high demand, while those employees without as many credentials are often working fewer hours than they would like

Fathers with children are working long hours and feel strained, according to the American Sociological Association. And “single parents, who are overwhelmingly mothers, are another group who are truly caught in a time squeeze.”

More information on work/life balance is available online.

Group health-care plan cost increases are slowing dramatically, with the rate of increase in 2004 the lowest in five years.

    This year, group health costs rose by an average of 7.5 percent, to $6,679 per employee, according to a national survey of more than 3,000 employers released by Mercer Human Resource Consulting in New York.

    The 2004 cost increase is the lowest since 1999–when costs increased an average of 7.1 percent–and breaks a three-year run of double-digit cost increases. Cost increases peaked in 2002, when they climbed by an average of 14.7 percent, while they rose 10.1 percent in 2003.

    Total health plan costs for large employers–those with at least 500 employees–climbed 9 percent this year, averaging $6,918 per employee; that’s down from 2003’s 10.2 percent increase. Group health plan costs for smaller employers increased just 5.5 percent this year, averaging $6,359 per employee–a significant drop from last year’s 9.7 percent increase.

    In calculating total health-care costs, the Mercer survey included employer and employee contributions for medical, dental, prescription drug, vision and hearing care and mental health coverage.

    The easing of cost increases, which was much greater than employers had earlier predicted, is the result of several factors coming together, says Blaine Bos, a Mercer consultant in Minneapolis who is one of the authors of the survey.

    For example, smaller fully insured employers benefited from a point in the underwriting cycle that saw both nonprofit and for-profit health insurance carriers cut back premium increases compared with prior years.

    Additionally, plan design changes implemented by employers, especially in the form of greater cost-shifting to employees, reduced the use of services among the employees of small and large firms, Mercer said. As their exposure to much greater out-of-pocket costs has increased, employees have become more judicious in their use of health care services, Bos says.

    Also contributing to a decrease in health-care inflation was the migration of employees out of point-of-service plans and into preferred provider organizations, which tend to be less costly, especially for larger employers.

    Among large companies, 55 percent of employees were enrolled in PPOs this year, up from 51 percent in 2003, while enrollment in POS plans dropped to 11 percent from 14percent. This enrollment trend, in turn, is swaying large employers’ plan offerings. In 2004, 86 percent offered PPOs to employees, compared with 84 percent last year and 75 percent five years ago. Simultaneously, large employers are moving away from HMOs, with 46 percent offering them in 2004, compared with 49 percent in 2003 and 51 percent in 2000.

    The cost-shifting trend shows no sign of decelerating, as just over one-fifth of the surveyed employers said they intend next year to shift more costs for health benefits onto their employees through higher deductibles, copayments or out-of-pocket maximums.

    Furthermore, many more employers are expected to embrace consumer-driven health plans, or CDHPs, in the next two years. While just 4 percent of large employers said they offered a consumer-driven plan this year, 14 percent said they are likely to offer one in 2005, and 26 percent said they are likely to offer a consumer-driven option in 2006.

    “We’re going to see geometric growth, an uptick that is faster than year-over-year straight-line growth for CDHPs in the next three or four years,” Bos predicts.

    Such arrangements feature a high-deductible health insurance plan linked to an account-funded by employers and/or employees-that covers only a portion of the deductible.

    With employees more directly exposed to costs through the high deductible and being able to roll over account balances at the end of the year, the plans give employees a strong financial incentive to use services carefully, CDHP proponents say.

    Investing in disease management programs for chronic illnesses is also becoming increasingly popular among larger employers–the two most common plans are for diabetes and heart disease/hypertension. That’s with good reason: The programs are paying off. This year was the first in which a sizable number of respondents, 31 percent, said they saw a return on their investment.

    Says Bos of long-term cost-management strategies, “We knew that they had a positive impact on quality of life and quality of care, but now we know that they are having a positive impact on financials as well.”

    When asked to predict their group health costs for 2005, employers said they expected inflation to continue to ease, estimating that cost would increase overall by 6.6 percent following plan and/or design changes.

    “I think that’s a very reasonable figure,” says Bos, because the majority of companies at this point have already transacted their renewals process or selected new vendors. “But the question becomes, how long is this sustainable?”

    Other findings in the survey include:

• Forty-two percent of large employers based in the Northeast and 38 percent of employers in the West extend same-sex domestic partner benefits to their employees. By contrast, just 14 percent of employers in the Midwest and 10 percent of employers in the South extend domestic partner benefits.

  
  

• A growing number of large employers are implementing “spousal charges.” In 2004, 7 percent had adopted special provisions that either denied or attached surcharges to health insurance premiums for the spouses of employees who could obtain coverage elsewhere, and another 8 percent of large employers plan to add such provisions in 2005.

  
  

• Nearly all–97 percent–of the respondents believe that the U.S. health-care system is “in need of significant reform,” though they are divided about who should lead the changes.

  
  

• Forty-six percent say that the private sector–employers, consumers and the health-care industry–should initiate the reforms, while 36 percent say the federal government should enact reforms to address problems in the system. In addition, 14 percent favor a federally financed system, such as Medicare, that would cover all Americans.

  
  

From the November 22 issue ofBusiness Insurance. Written by Rupal Parekh.

The search for a new Walt Disney Co. CEO was one of the most coveted assignments in the extremely competitive executive search firm industry. And Chicago-based Heidrick & Struggles emerged as the winner over Russell Reynolds Associates and Spencer Stuart due in part to Gerry Roche.

Insiders say Roche, senior chairman of the $318 million firm, snatched the assignment away from front-runner Charles Tribbett III, head of the diversity practice at Russell Reynolds.

“I heard that the (Disney) board offered Gerry 45 minutes to do a presentation, and supposedly he said he only needed 15,” says Scott Scanlon, chairman and CEO of Hunt-Scanlon, an industry market research firm.

Roche won’t discuss the Disney assignment, but his past work might point to how he intends to find candidates to succeed Michael Eisner, who plans to step down when his contract expires in September 2006.

In what Scanlon called a “brilliant headhunter move,” Roche deftly orchestrated the placement of two big-company CEOs in 2000.

His clients: Home Depot and 3M. The candidates: two of the three men who were being groomed to succeed Jack Welch at General Electric. Roche says he was in touch with the GE candidates, and all he had to do was wait for GE to tap Welch’s successor. As soon as it did, choosing Jeffrey Immelt as GE’s chairman and CEO, Roche swooped in and plucked Robert Nardelli to become Home Depot’s president and CEO and W. James McNerney Jr. to be CEO at 3M.

Perhaps Roche’s pick will be a cross-industry or cross-functional placement such as these. It is a style Roche has mastered, experts say, pointing to his placement of Pepsico president and marketing guru John Sculley at Apple Computer in 1983.

Roche, who has been in the recruiting business for more than 40 years and whose peers named him “Headhunter of the Century” in a 2000 poll conducted by Hunt-Scanlon, is said to have placed more CEOs than any other recruiter.

“Heidrick delivers quality candidates,” says recruiter Kevin Berchelmann of Triangle Performance in Bellaire, Texas. “You could mix (the candidate names) all up in a bucket and pick any of them. They are going to be dead-on.”

Roche, who has personally placed CEOs at the Gap, IBM and PricewaterhouseCoopers, discloses his technique for finding the best candidate: “The secret is putting the client, the candidate and the whole process ahead of yourself.”

How well Roche does will be determined in part by the change in Disney’s stock price the day a successor is named, which should be by June, Disney reports.

–Sheree R. Curry

The rates of return for professionally managed traditional pension plans beat out the returns of employee-controlled managed 401(k) plans from 2000 through 2002, according to Watson Wyatt.

By contrast, 401(k)s outpaced traditional pension, or defined-benefit, plans from 1997 to 1999.

Both styles of retirement plans did poorly during the declining stock market, but defined-benefit plans didn’t lose as much money. In 2002, for example, 401(k)s declined by about 12.3 percent, while defined-benefit plans dipped about 8.4 percent.

Sylvester Schieber, director of research and information at Watson Wyatt, notes that the professional managers running the traditional plans may have diversified their investments more. Employees, on the other hand, may have loaded up on high-risk, high-reward stocks that sometimes perform very well during bull markets and very poorly during bear markets.

“The results probably suggest that employers should be communicating with their workers not only periodically about appropriate allocations and diversification of assets, but they ought to remind people that in order to fulfill the (investment) strategies they’re trying to implement, they’ll have to adjust their portfolios from time to time,” Schieber says. “The folks who manage defined-benefit plans are rebalancing portfolios on a periodic basis. …They certainly have avoided the depth of the market downturn that was inflicted on defined-contribution participants because they weren’t doing that.”

Schieber says a typical employer puts about 50 percent to 60 percent of its retirement assets in stocks. Employers stick to it with discipline, so that when the market rises and they find themselves too heavy in stocks, they’ll sell off perhaps 5 percent to 10 percent. “In a strong bull market it acts as a damper on their return,” Schieber says, but in a bear market, the strategy can reduce losses.

Employees, meanwhile, might find themselves with 60 percent of their portfolio in stocks, and forgo any rebalancing, letting it become 65 percent or 70 percent as the market takes off. “You feel awfully good about that,” Schieber says, “but not when you go through a period like 2000 to 2002.”