How employee health trusts can help manage ballooning benefits costs

With escalating drug costs and the strain of retiree benefits dragging down balance sheets, it’s no wonder employers are looking for creative ways to limit their liabilities and get a handle on their expenses. One way to do that is with an employee life and health trust that offers a defined contribution approach to funding benefits.

The first such trust in Canada — the Auto Sector Retiree Health Care Trust — emerged in 2010 when General Motors of Canada Co. and Chrysler Canada Inc. moved to offload benefit liabilities for more than 50,000 retirees as part of their government bailout package. Since then, several more such trusts have emerged or are currently in the works across a range of sectors — from the entertainment industry to government agencies — for both active employees and retirees.

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Employee life and health trusts will likely become even more popular for two key reasons. First, they allow plan sponsors to exchange ballooning retiree benefit liabilities and unpredictable costs for active members for the certainty of defined payments. Secondly, unlike traditional plans, trusts allow for advanced funding of benefits.

In simplest terms, an employee life and health trust is a pot of money set aside for the sole purpose of providing life, health, dental and disability benefits to eligible members and their beneficiaries. The trust can use the money contributed only to provide approved benefits and cover any reasonable expenses associated with managing and administering the trust.

The employer must fund the trust, at least in part. But when it fully transfers the risk (as was the case with the auto-sector trust), that’s where the employer’s responsibility ends. A board of trustees, acting in the best interests of the members, is responsible for designing and administering the trust. The board must have member representation and, while the employer can as well, it can’t constitute the majority of trustees.

While there’s still somewhat limited experience with employee life and health trusts, one theme that has emerged is the notion that member engagement is key to their success. Why? Every cent wasted is one less cent available to provide benefits.

Truly engaging trust members isn’t just a point-in-time intervention; rather, it’s about involving them in the entire process, even before implementing the trust. Soliciting members’ input on which benefits are most important can help to ensure the delivery of a plan that best matches their needs, rather than wasting money on services they don’t use or appreciate.

On an ongoing basis, engagement means educating members on how the trust works. And most of all, it means encouraging them — as well as their spouses and dependants — to be smart benefits consumers and motivating them to take more responsibility for their benefits-buying decisions.

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In any organization, effective engagement has to start at the top. Senior leaders must visibly reinforce and promote key messages around smart consumerism. But more importantly, they need to understand the financial realities of the plan and support investment in a robust member education effort as a fundamental necessity.

In the near term, trusts can help employers limit their benefit liabilities and cost volatility. But it’s member engagement, through ongoing communication and education, that will keep plans sustainable for years to come.