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A Glossary Of Employee Benefit Terms

This glossary helps define some of the terms that are commonly used in the employee benefits industry. We've tried to make the explanations as friendly as possible so that you can better understand your employee benefit plans.

Ambulatory Care:
Health services provided without the patient being admitted. The services of ambulatory care centers, hospital outpatient departments, physicians' offices and home health care services fall under this heading.

Administrative Services Only (AS0) Plan:
An arrangement under which an insurance carrier or an independent organization will, for a fee, handle the administration of claims, benefits and other administrative functions for a self-insured group.

Cafeteria Plan:
The Cafeteria Plan is a non-discriminatory employee benefit program designed to take advantage of certain provisions of Section 125 of the Internal Revenue Code. A Cafeteria Plan allows an employee to pay certain qualified expenses, such as employee benefit premiums, on a pre-tax basis, thus reducing the total taxable income. For more information, please refer to Frequently Asked Questions: "What is a Section 125 Plan?"

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) requires that firms employing 20 or more full and part-time employees on at least 50% of the employer's working days in the preceding calendar year must offer COBRA continuation in their group plan benefits. COBRA election allows qualified persons (former employees and their covered dependents) to continue group health coverage, after it would otherwise end, at the former employee's expense. The term "group health coverage" includes any medical, dental or vision coverage. Life and disability insurance are examples of coverage's that are not eligible for COBRA benefits.

Most plans require you to pay a fee each time you see the doctor (typically $10-$20) or fill a prescription (from $5-$40). Similarly, most plans specify that the insured must pay a fee for each visit to the emergency room. In all these cases, the fee is referred to as a co-payment and is generally not applicable to the plan's deductible or out-of-pocket maximum.

Co-insurance is a percentage of covered charges you share with the insurance provider. Typically 80/20 where the insurance company pays 80% and the patient/subscriber pays 20% of the charge up to the Out-of-Pocket Maximum, otherwise known as the stop-loss.

A group insurance plan issued to an employer under which both the employer and employee contribute to the cost of the plan. See also Non-Contributory.

Coordination of Benefits:
The mechanism used in group health insurance to designate the order in which the multiple carriers are to pay benefits and to prevent duplicate payments. This is typically used when an employee has coverage under two separate insurance plans.

Deductible Carry Over Credit:
Charges incurred during the last three months of a calendar year that may be applied to the deductible and which are carried over into the next calendar year.

The specified amount of healthcare expenses that an insured must pay each year before the plan begins to pay for your care. Office visits and prescription drugs are generally exempt from the deductible, and can be paid for with a set co-pay per visit or prescription purchase (See First-Dollar Coverage). Plans such as HMO or POS plans generally do not have a deductible for in-network services.

Elimination Period:
A term referring to disability income insurance. The specified number of days that must pass before a claimant may qualify for a disability income benefit.

Emergency Care:
Care required to treat the unexpected onset of illness or injury which, if not treated immediately, would jeopardize or impair the health of the member, as determined by the payer's medical staff. This is significant in that an emergency may be the only acceptable reason for hospital admission without pre-authorization.

Employee Retirement Income Security Act (ERISA):
Legislation passed in 1974 applying to most private pension and welfare plans that require certain minimum standards to protect participating employees.

Explanation of Benefits (EOB):
A statement summarizing insurance payments for medical services and patient responsibility for payment on a claim.

Exclusions & Limitations:
Services not covered by your plan, usually because they are not medically necessary.

First-Dollar Coverage:
Insurance coverage where the deductible does not need to be met before the insurance pays a benefit. In other words, the patient will pay a pre-determined co-pay upon going to the doctor or picking up a prescription for the first time, and the insurance coverage will immediately cover the remaining costs.

Formulary vs. Non-Formulary Prescriptions:
Today most prescription plans are three-tiered with a list of "approved", "preferred" or "formulary" drugs. A drug that is "on the list", be it "generic" which would be the first tier, or "name brand" which would be the second tier are both referred to as formulary. A drug that is not "on the list" would be in the third tier and considered non-formulary.
1st Tier: Generic - Formulary i.e. on the list
2nd Tier: Name Brand - Formulary i.e. on the list
3rd Tier: Non-Formulary - Not on the list

A Primary Care Physician (PCP) responsible for overseeing and coordinating all aspects of a patient's medical care. In order for a patient to receive a specialty care referral or hospital admission, the gatekeeper must preauthorize the visit, except in the case of an emergency.

Grace Period:
A specified period of time after a premium payment is due, in which the policyholder may make such payment, and during which the protection of the policy continues.

Health Maintenance Organization (HMO):
Also referred to as pre-paid medical because in exchange for intrusting your medical care to the organization, they will in return cover you for all of your medical expenses. HMO's typically are more restrictive and have no out-of-network benefits.

Indemnity Plans:
Also known as fee-for-service plans. It allows you to choose any doctor or hospital you prefer. Typically you pay an annual deductible and then pay a percentage of the medical bill (co-insurance). These plans are uncommon nowadays because of their high cost.

In-Network refers to the providers who are contracted with your plan to provide services for a discounted fee. You will receive the highest level of benefits when you use providers "in the network".

Key-Person Insurance:
Insurance designed to protect a business firm against the loss of income resulting from the death or disability of a key employee, such as the owner or CEO.

Late Entrant:
Is a member who requests coverage for themselves or dependents more than 31 days after the date they are first eligible for coverage.

Lifetime Maximum:
Some, but not all, medical plans will establish a maximum dollar amount that they will pay on a member's behalf for that member's lifetime. Once you have reached your lifetime maximum, the plan may no longer pay for your care. Most plans that have a Lifetime Maximum maintain a benefit cap of $1,000,000 or $2,000,000 per member.

Managed Care:
Healthcare plans that integrate the financing and delivery of appropriate health care services to covered individuals by arrangements with selected providers. This arrangement facilitates the administration of a comprehensive set of health care services, explicit standards for selection of health care providers, formal programs for ongoing quality assurance and utilization review, and significant financial incentives for members to use providers and procedures associated with the plan. Managed Care programs utilize a Gatekeeper (also known as a Primary Care Physician) who works in tandem with the patient to establish a plan for that patient's care, especially if that care incorporates the use of other medical facilities or specialists.

A term applied to employee benefit plans under which the employer bears the full cost of the benefits for the employees. Generally, under non-contributory policies one hundred percent of the eligible employees must be insured. See also Contributory.

Open Enrollment:
A specified period, during the month prior to the effective date or anniversary date of the policy, in which employees may make changes to their coverages, when they might not otherwise be able to. Particularly applying to medical coverage, during this time an employee can come onto the plan if they declined coverage when they were first eligible. An employee can also make changes in dependent coverage during this time without a qualifying event. Outside the Open Enrollment period a qualifying event, such as marriage, birth, death, or divorce would be required in order for a member to add or delete dependents. In this case, the change in coverage must be consistent with the nature of the qualifying event.

Out-of-Network refers to providers who are not contracted with a plan's carrier. A covered individual would receive a lower level of benefit, or, in the case of most HMO plans, no benefit at all when using non-contracted or out-of-network providers.

Out-of-Pocket Maximum:
Many plans carry a provision limiting the member's personal expenses for the plan year. This maximum tends to include co-insurance payments and deductibles, but tends not to include pre-established co-payments. Once you reach this maximum expenditure, the plan will pay 100% of your medical expenses for the remainder of the calendar year, excepting pre-established co-payments. This is also referred to as the plan's stop loss.

Partial Disability:
A benefit found in most disability income policies providing for the payment of reduced monthly income in the event the insured cannot work full time and/or is prevented from performing one or more important daily duties pertaining to his or her occupation.

Participating Provider (PAR):
A provider who has contracted with the health plan to deliver medical services to covered persons. The provider may be a hospital, pharmacy or other facility or a physician who has contractually accepted the terms and conditions as set forth by the health plan. They may bill a claim directly to the insurance carrier, but are not necessarily contracted to provide a discount such as PPO in-network providers would.

Point of Service (POS):
Point of Service plans work like an HMO plan but offer the additional option of using Out-of-Network providers for a reduced insurance benefit. To receive the greatest benefit from this plan, you must select a primary care physician (PCP) who manages your care and is responsible for referring you to in-network specialists.

Pre-existing Condition:
A health problem that existed before the date your current insurance became effective. Insurance companies are required to cover pre-existing conditions if the member had no break in insurance coverage for that condition prior to enrolling in the current plan.

Preferred Provider Organization (PPO):
Preferred Provider Organizations are generally "open access" plans where you have the option of choosing any doctor you wish from your plan's Preferred Provider list without needing a referral. By contract, these providers agree to waive the amount over what the insurance company deems usual, customary & reasonable (UCR) for all members of the PPO plan.

Primary Care Physician (PCP):
The doctor that plan participants must choose to be their Gatekeeper upon enrolling in an HMO, POS, or Managed Care style of plan. A PCP supervises, coordinates and provides medical care to members of a plan. The PCP should be selected from physicians who work in a more general medical field, such as a family practitioner, general internist, pediatrician and sometimes an OB/GYN. The PCP typically must initiate all referrals for specialty care.

Qualifying Event:
See Open Enrollment.

Timely Entrant:
A member who enrolls in coverage for themselves or dependents within the 31 days after the date they first become eligible for that coverage.

Section 125 Plan:
A Section 125 Plan is a non-discriminatory employee benefit program intended to take advantage of certain provisions of Section 125 of the Internal Revenue Code. It is an employee benefit that allows employees to legally pay for health benefit premiums with pre-tax dollars, thus reducing their taxable income for the year. See also FAQ "What is a Section 125 Plan?"

The practice of an employer or organization assuming the responsibility for health care losses of its employees. This usually includes setting up a fund against which claim payments are drawn and claim processing is often handled through an administrative services contract with an independent organization also known as a Third Party Administrator (TPA).

Stop Loss:
See Out-of-Pocket Maximum.

Total Disability:
An illness or injury that prevents an insured person from continuing to perform every duty pertaining to his or her occupation or engaging in any other type of work. (This wording varies among insurance companies.)

Usual, Customary and Reasonable (UCR):
A term used to describe charges from a physician or dentist. A charge
is considered UCR if it does not exceed the amount customarily charged for the same service by other physicians or dentists in the same area for the same or similar procedures. When visiting an in-network provider, the provider agrees to waive any fees above the UCR amount normally charged. When visiting an out-of-network provider, the member is responsible for any fees above the UCR amount charged by the provider.

Waiting Period:
The length of time an individual must wait to become eligible for benefits for a specific condition or type of treatment after overall coverage has begun. See also the article entitled "The Waiting Period Regulations for Pre-existing Conditions in Washington State."

Financial Terms...

Asset Allocation:
Investing in a combination of various assets or different types of investments in order to diversify and reduce risk for optimal return.

Defined Benefit Plan:
A pension plan stating either (1) the benefits to be received by employees after retirement or (2) the method of determining such benefits. The employer's contributions under such a plan are actuarially determined.

Defined Contribution Plan:
A plan under which the contribution rate is fixed and benefits to be received by employees after retirement depend to some extent upon the contributions and their earnings.

A method of reducing risk through asset allocation, by investing in several different risk classes such as stocks and/or bonds or tech funds along with small caps and value funds. Risk is reduced, for example, since if stocks go down then they will typically be offset by the bond market going up.

Dollar Cost Averaging:
A system of buying securities at regular intervals with a fixed dollar amount. Under this system investors buy by the dollars’ worth rather than by the number of shares.

Cliff Vesting:
A vesting schedule under which an employee is zero percent vested, for matching contributions, until satisfying the requisite number of years of service, at which time he or she becomes immediately 100% vested. This is usually a 5 year timetable.

Eligibility Requirements:
This term refers to (1) the conditions which an employee must satisfy in order to participate in a retirement plan, such as the completion of from 1 to 3 years of service with the employer, and/or the attainment of a specified age, such as 21, or (2) conditions which an employee must satisfy to obtain a retirement benefit, such as the completion of 15 years of service or the attainment of age 65.

Employee Retirement Income Security Act (ERISA):
Legislation passed in 1974 applying to most private pension and welfare plans that require certain minimum standards to protect participating employees.

A person or organization that holds, manages and has discretionary authority and control over money belonging to another person or organization, or who renders investment advice in exchange for compensation. When an insurance company manages pension funds, the insurance company is acting as a fiduciary.

Graduated Vesting:
A vesting schedule through which a participant is vested over time in a percentage of his or her account balance, for matching contributions, until 100% vested. This is usually a 7-year period, which begins with 20% vesting beginning in year 3, 40% in year 4 until 100% vesting occurs in year 7.

Highly Compensated Employees:
As defined by IRC Sec. 414(q). For 1997 plan years and later, includes those employees who were 5% owners in the current or prior year or who had compensation exceeding $80,000 (indexed) in the prior year and, if the employer so elects, also were in the top 20% of employees by pay.

Individual Retirement Account (IRA):
An account to which an individual can save for retirement on a tax-favored basis. Contributions to a standard IRA are tax deductible for many workers; contributions to a Roth IRA are made with after-tax dollars but can be withdrawn tax-free at retirement.

Matching Contribution:
A contribution made by the employer, in accordance with a formula described in the plan, that matches or corresponds to the participant’s elective contributions. For example, a typical matching formula requires the employer to contribute 50 cents for each dollar of elective contribution contributed by a participant, provided that the employer’s matching contribution shall not exceed 3% of the participant’s compensation.

Mutual Fund:
A fund operated by an investment company that raises money from shareholders and invests it in stocks, bonds, options, futures, currencies or money market securities. Mutual funds offer investors the advantages of diversification and professional management.

Non-qualified Plan:
Generally, these are investments that do not have the tax-favored treatment that a qualified plan would have. For example the money is not in an IRA or a 401(k).

Price Earnings Ratio (P/E):
Stock price divided by last year’s earnings. The P/E indicates how much the stockowner pays per dollar of earnings that is generated by the firm on each share. The rule of thumb is: the higher the P/E the higher the risk.

Profit Sharing Contributions:
Also referred to as "employer" or "discretionary" contributions, these are contributions made by the employer, which are separate from elective contributions or matching contributions.

A document that describes the financial details about a new issue, and is required to be distributed to all investors prior to at the time of initial investment.

Qualified Plan:
Also referred to as a "tax-qualified plan." This is a plan that meets requirements under code 401(a) and receives special tax benefits. These tax benefits include the employer’s ability to contribute to a tax-exempt trust on behalf of employees, and claim a deduction for the contribution, without the employees having to include the contributions in current taxable income.

A process by which a participant, or beneficiary, transfers a distribution from a qualified plan to another qualified plan or IRA, thereby avoiding taxes on the distribution.

Roth IRA:
A special type of individual retirement account to which an individual can make contributions with after-tax dollars. Funds can be withdrawn tax-free at retirement.

Securities and Exchange Commission (SEC):
The federal agency that regulates and supervises the selling of securities to prevent fraud & unfair practices and strives to maintain fair and orderly markets.

Self-Administered (Trusteed or Directly Invested) Plan:
A plan funded through a fiduciary, generally a bank, but sometimes a group of individuals, which directly invests the accumulated funds. Retirement payments are made from the fund as they fall due.

Separate Account:
A fund held by a life insurance company, which is separate and apart from its general assets and is generally used for investment of pension assets in common stocks.

Stock Exchange:
An organization that provides a facility for buyers and sellers of listed securities to come together to make grades in those securities.

Third Party Administrator (TPA) (Financial definition):
A Third Party Administrator is an individual or business entity hired by the plan or plan sponsor to perform annual testing, record keeping, and other administrative functions. A TPA is responsible for making sure these plans remain compliant and ensures that they file their form 5500 in a timely manner. A TPA records participant data and performs year-end testing for their participant clients. Some offer Internet access for employees to have online access to their pension plans.

Top Heavy Plan:
A plan in which the aggregate value of the accounts of "key employees" exceeds 60% of the aggregate of all plan accounts. The consequence of being top-heavy is the plan must meet more restrictive vesting requirements and make the minimum contribution on behalf of non-key employees.

The process by which a participant’s account balance for the employer’s matching portion becomes non-forfeitable with the passage of years of service for the employee.

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