New Benefit Schemes Can Be Deceiving

Those flexible “cafeteria-style” benefit plans that sound so enticing are spreading like wildfire across the country, but many workers are being badly burned by them.

The concept is simple enough and on the surface it looks like a great way for workers to make their own choices among all the benefits their employers may offer, from health, pensions, life and car insurance to vacations, day care for kids and cash in lieu of benefits.

They are allowed to pick the benefits they think will best suit their own personal needs. Those with children, for instance, might prefer day-care allowances, while older workers might prefer a top-dollar health plan.

Younger workers may foolishly skip pension benefits in favor of more vacation time or to get more cash in their pockets.

Flex benefit plans are not all the same. They range from those that let workers choose from a list of all benefits the employer has to offer to those that provide a few basics for everyone, such as health insurance, plus a list of options from which workers select those they like best.

But workers should beware of the cafeteria systems, remembering that the goal of most employers who start them is to cut their benefit costs and shift as much of the costs as possible to the workers.

Since a cafeteria plan is rarely more cost-effective than the traditional system, which offers essentially the same benefits to all employees, trimming benefits is the usual way employers save money.

Some companies sincerely try to make their benefit plans fit the individual needs of their workers, but even these firms usually expect to cut costs.

Many workers like a cafeteria plan because it gives them the power of choice. They may think they are gaining when, for instance, they drop out of a group health care program because their spouse has one through another company. In return, they can opt for some other benefit.

But they would lose badly if their spouse were fired, leaving them both without coverage. It is often very difficult for workers to return to their old health insurance plan.

In other words, a major problem with the cafeteria plan is that workers seldom bother to carefully calculate that old bottom line: the cost to them of the right to select the benefits they prefer.

On balance, the employers usually win in that game of choice, as shown by the fact that cafeteria plans cut employer costs by an average of 5%, according to the U.S. Chamber of Commerce. Many companies manage to save far more when workers choose attractive but less-expensive benefits.

Companies don’t initiate the plans to expand benefits for all workers. Unions, with their own benefit experts, almost always fight the plans because they know in the long run their members will usually lose.

Why? One reason is that often employers use a cafeteria plan to shift from defined benefits to defined contributions, which are becoming a more and more popular way of cutting employer costs.

With defined benefits, the workers know the extent of their benefits, whether it is the amount they will get on retirement or the coverage they have under their health insurance program.

With defined contributions, employers pay only a certain fixed amount for the benefits, regardless of what the money can buy.

Many employers find they can shift from defined benefits to defined contributions with fewer objections from their workers by implementing the deceptively appealing cafeteria plans.

In any event, pushed by employers trying to cut costs and by workers who like the free choice idea, the plans are catching on at an astonishing pace.

Fringe benefits generally didn’t become popular until World War II, when government wage controls limited pay increases. To get around that limit, companies, trying to attract workers, offered non-taxed fringe benefits instead, such as pension and health care. Fringes now make up 37.6% of payroll costs and are an integral part of a worker’s pay.

Even more impressive is that cafeteria benefit plans were pretty much nonexistent until 1984, when government rules were finally issued to allow implementation of a 1979 law that permitted them.

By 1988, 20% of all white-collar workers and 6% of all blue-collar workers were covered by some form of a cafeteria plan.

The latest reports from the Bureau of Labor Statistics show that by 1989, such plans covered a whopping 35% of all white-collar workers and 11% of blue-collar workers.

Greg Tarpinian, head of the New York-based Labor Research Assn., notes that skyrocketing health care costs (up 30% in the past two years) have pushed employers to find new ways of saving on benefit costs, and cafeteria plans not only help save money but can also be appealing to workers.

But he says unions also see them as a management tool to shift costs to workers and to keep unions out by providing non-union workers with flexible benefit packages that appear, superficially, as attractive as union-negotiated contract benefits because they offer a choice.

Union objections can be partially overcome if they insist that the employer maintains the same level of benefits, increasing spending as necessary to keep up with inflation, Tarpinian argues.

Cutting employer costs is not wrong, of course, but there are other ways for employers to put a lid on health-care cost increases. Tailoring benefits to the needs and desires of workers makes sense only if that is the real goal of cafeteria plans.