Employee Benefits Barometer: SMB Perspectives and Priorities in an Era of Disruption

Employee Benefits Barometer: SMB Perspectives and Priorities in an Era of Disruption A HUB International study #LetsDoSomething hubemployeebenefits.com

Contents Executive Summary 3 Employee HR’s Top Benefits Priorities 4 Benefits Barometer: Managing Costs: Missed Opportunities 5 SMB Focusing on Healthier Employees for a Healthier Business 7 Perspectives Confidence in ACA Reporting Could be Misplaced 8 and Priorities in an Era of What Finance Thinks of HR 10 Disruption Technology’s Role in Managing Complex Benefits Needs 12 A HUB International study Strategic Alignment, Partnership is Key to Success 13 Research Report | Employee Benefits Barometer: SMB Perspectives and Priorities in an Era of Disruption 2

HUB International undertook a study of over 400 senior level Human Resource and Finance executives at companies with 50 to 1,000 employees across the U.S. to understand their concerns about employee benefits. The study reveals the mindset of small to mid-sized companies on issues such as benefits cost management, employee wellness, and ACA compliance. Executive HR leaders are operating in an era of unprecedented disruption brought on by ACA, rising health care costs and the increasing demands of a multi-generational workforce. A research study by HUB International, Summary Employee Benefits Barometer: SMB Perspectives and Priorities in an Era of Disruption, captures decision-maker opinions, concerns and self-assessments on how well their employee benefit strategies are performing. Among the key findings: Ȋ Employee wellness and productivity is a top priority and two thirds of respondents are seeing a return on investment in their programs, specifically in improved employee productivity and morale. Ȋ Respondents are reaping the benefits of their cost-cutting initiatives, but there appears to be many missed opportunities to deploy proven cost management strategies. Ȋ Employers perceive themselves to be on top of ACA reporting issues but nearly two-thirds say that their business will struggle to stay afloat despite efforts to optimize plan designs and operations, an indication that employers are exhausted by ACA compliance. Ȋ Despite a solid working relationship and common ground on major benefits issues, there are some troubling disconnects between HR and Finance leaders that could hinder their ability to achieve organizational goals. Research Report | Employee Benefits Barometer: SMB Perspectives and Priorities in an Era of Disruption 3

HR’s Top Employee wellness & productivity, managing benefit costs and ACA compliance are dominant priorities for companies with 50-1000 Benefits employees. When asked to identify their top benefits priorities, HR respondents Priorities ranked improving employee wellness and productivity (83 percent), and managing benefit costs (76 percent) as top priorities. The more immediate issue of Affordable Care Act reporting, audits and general compliance was of lesser concern – only 58 percent ranked it a top priority. (See Figure 1) It’s the smaller organizations in the study, however, that appear to be feeling more pressure around these issues. Among those employing between 50-99 employees, 82 percent ranked managing employee benefits costs as a top priority, while only 66 percent of respondents from organizations with 500-1,000 employees consider it the top priority. Similarly, ACA compliance seems to be more worrisome to HR leaders in smaller organizations. It was ranked as a top concern by 69 percent of employers with 50-99 employees versus only 51 percent of those with 500-1000 employees. While the issues of cost management and ACA compliance varied based on organizational size, all three groups were united in their view of the importance of employee wellness and productivity: It was a top concern of 90 percent of the largest organizations with 500-1,000 employees; 81 percent of those with 100-499 employees, and ranked by 78 percent of the smallest organizations with 50-99 employees as the top priority. Figure 1. Top Employee Benefit Priorities Which of the following are top employee benefits priorities for your company in 2016? 90% IMPROVE EMPLOYEE WELLNESS & PRODUCTIVITY 81% 78% 66% MANAGE EMPLOYEE BENEFIT COSTS 79% 82% 51% COMPLY WITH AFFORDABLE CARE ACT (ACA) 57% 69% 50% EMPLOYEES ALIGN HR WITH BUSINESS AND OPERATIONAL STRATEGIES 41% 42% 500-1000 IMPLEMENT NEW OR IMPROVE EXISTING BENEFITS ADMINISTRATION 43% 100-499 TECHNOLOGY PLATFORM OR SOFTWARE SOLUTION 42% 50-99 29% Research Report | Employee Benefits Barometer: SMB Perspectives and Priorities in an Era of Disruption 4

Managing While the majority of employers believe they are doing everything they can to manage costs, in reality, they could be more proactive in Costs: leveraging proven solutions. HR leaders are increasingly under pressure to achieve the seemingly Missed impossible task of reining in rising health care costs while minimizing disruption to employees. Opportunities Employers are shifting from a reactionary, tactical approach, to implementing longer-term strategic solutions. Plan changes and other cost-cutting tactics are being evaluated in the context of a multi-year planning process, which a resounding majority – 86 percent – have put in place. Are their efforts paying off? Sixty-five percent agree that they are doing all they can to contain rising benefits costs; 70 percent note that their strategies are successfully reining in costs. (See Figure 2) In fact, a significant percentage of the HR respondents indicated they have revamped their plan designs to reduce costs. Leading that change, 51 percent have implemented voluntary benefits for the first time as part of their cost savings strategy. However, adoption of other proven approaches to manage benefit costs is lagging in both small to mid- sized companies. (See Figure 3) Figure 2. Adequacy of Benefit Strategies and Programs How much do you agree or disagree with each of the following statements? (5=Agree strongly, 4= Agree, 3=Neither, 2= Disagree, 1=Strongly Disagree) AGREE AVERAGE RESPONSE OUR HR TECHNOLOGY PLATFORM IS WELL-INTEGRATED 80% 4 ACROSS BENEFITS ADMINISTRATION AND PAYROLL WE ARE PURSUING A DEFINED MEDICAL CONTRIBUTION 79% 4 STRATEGY TO CONTAIN BENEFITS COSTS OUR HR TECHNOLOGY PLATFORM (OR 73% 3.9 SOFTWARE) MEETS OUR CURRENT NEEDS OUR PLAN DESIGN COST MANAGEMENT 70% 3.9 STRATEGIES ARE REINING IN BENEFIT COSTS OUR WELLNESS/HEALTH MANAGEMENT 66% 3.8 STRATEGIES ARE DELIVERING AN ROI WE HAVE DONE ALL THAT WE CAN REASONABLY 65% 3.8 DO TO CONTROL RISING MEDICAL COSTS Research Report | Employee Benefits Barometer: SMB Perspectives and Priorities in an Era of Disruption 5

Where else can savings be found? Trailing at the bottom of adoption are other cost management strategies such as reference-based pricing, self-funding, telehealth, and narrow networks that are being implemented by less than 25 percent of respondents but could deliver significant annual savings. (See Figure 3) 65% of survey respondents believe they are doing all they can to contain costs. How do your cost management strategies measure up? Cost Savings Strategy: Projected Annual Cost Savings* 9% 17% 8% 20% Self-Funded Narrow High deductible Reference- networks plans based pricing 8% 20% 6% $5 for every Voluntary Pharma Defined $1 invested benefits contract Medical Telemedicine renegotiation Contribution Metallic spectrum plans: 5% and Avoid the $3,000 IRS penalty for not offering an affordable plan under ACA guidelines. *Based on HUB International client results Figure 3. New Cost Strategies Implementing for the First Time Which cost management strategies are you implementing for the first time in the next 12-18 months? (5=Agree strongly, 4= Agree, 3=Neither, 2= Disagree, 1=Strongly Disagree) VOLUNTARY BENEFITS - SUCH AS CRITICAL ILLNESS, HOSPITAL CONFINEMENT OR ACCIDENT 51% MULTIPLE PLAN OPTIONS OR METAL SPECTRUM OF PLANS - ADDING ADDITIONAL 39% PLANS BRONZE, SILVER OR GOLD METALLIC PLANS HIGH DEDUCTIBLE HEALTH PLAN 39% DEFINED MEDICAL CONTRIBUTION PLAN 36% PHARMACY BENEFITS MANAGEMENT CARVE OUT 31% REFERENCE BASED PRICING 23% CHANGING TO SELF FUNDING 18% TELEHEALTH BENEFIT 17% NARROW NETWORKS 16% Research Report | Employee Benefits Barometer: SMB Perspectives and Priorities in an Era of Disruption 6

Focusing Employers who implement wellness programs are reporting improvements in employee productivity and morale. on Healthier Middle market employers are starting to put more effort in longer term benefits initiatives that support the connection between healthy employees Employees and business performance. These programs are the cornerstone of a long-term benefit strategy that supports a healthier and more engaged for a workforce. There’s a reason health and performance initiatives have gained traction Healthier among middle market benefits decision-makers. These strategies are delivering a return on investment, according to 66 percent of respondents. Business How has it been evidenced? More than a third of respondents cite improved employee productivity (35 percent) and morale (34 percent). This is especially true among the larger firms, at 40 percent and 38 percent respectively. (See Figure 4) 65% of respondents are getting a return on investment in their health & perfomance programs. Is your program delivering for you? Figure 4. Most Improved Metrics After Wellness Program Implementation Areas of improvement after implementing a wellness or health and performance program for your employees. EMPLOYEE PRODUCTIVITY 35% EMPLOYEE MORALE 34% MEDICAL/RX CLAIMS 29% EMPLOYEE RETENTION 29% WORKERS’ COMPENSATION COSTS 28% EMPLOYEE STRESS REDUCTION 26% DISABILITY CLAIMS 22% EMPLOYEE TURNOVER 21% ABSENTEEISM 18% CHRONIC DISEASE MANAGEMENT 16% RECRUITMENT 14% PRESENTEEISM 8% DON’T HAVE A WELLNESS, HEALTH AND PERFORMANCE PROGRAM 7% Research Report | Employee Benefits Barometer: SMB Perspectives and Priorities in an Era of Disruption 7

Confidence Employers did not rate ACA reporting as their top concern, but since the survey took place prior to completing year-one reporting deadlines, it may be an indication that employers don’t know where in ACA they are most vulnerable. Reporting Most respondents ranked cost management and health and performance issues as bigger priorities over ACA reporting. This may be an indication Could be that employers have under-estimated the complexity of ACA reporting. Just over half of the HR leaders (57 percent) cited accuracy in calculating Misplaced and reporting the affordability of benefits as their top concern for ACA compliance. While 55 percent of mid-sized and 56 percent of the largest middle market companies ranked this as their top concern, it was especially an issue among the smallest players (66 percent). Close behind, at 53 percent, were concerns over how employee subsidy eligibility and employer liability are tracked and reported. (See Figure 5) Only two out of five respondents expressed concern about accurately calculating and reporting full-time versus full-time-equivalent employees (45 percent). How well do you know how to classify employees? Figure 5. Top Concerns Regarding ACA Reporting Requirements 2016 The following are areas of concern regarding the Affordable Care Act (ACA) reporting requirements in 2016. ACCURATELY CALCULATING AND REPORTING AFFORDABILITY OF BENEFITS 57% TRACKING AND REPORTING EMPLOYEE SUBSIDY ELIGIBILITY AND EMPLOYER LIABILITY 53% ACCURATELY CALCULATING AND REPORTING FULL TIME 45% EMPLOYEES VS. FULL TIME EQUIVALENTS COMPLETING AND SUBMITTING IRS 1094 AND 1095 FORMS 41% MEASURING AND DEFINING HOURS WORKED AMONG VARIABLE 38% WORKERS AND REPORTING ON VARIABLE EMPLOYEES ACCURATELY REPORTING DECLINATIONS OF COVERAGE 34% ACCRUING A COMPREHENSIVE SET OF SOCIAL SECURITY NUMBERS FOR 31% EMPLOYEES AND DEPENDENTS BY WHICH TO REPORT ACCURATELY Research Report | Employee Benefits Barometer: SMB Perspectives and Priorities in an Era of Disruption 8

The lowest ranking concerns – at about a third of respondents – centered on reporting declinations of coverage (34 percent) and accruing a comprehensive set of Social Security numbers for employees and dependents by which to report accurately (31 percent). Waivers are a critical proof point of an employer’s good faith efforts to comply with ACA. It’s a commonly neglected best practice. Employers can protect themselves by inserting a waiver notification of an employee’s inaction as a declination of coverage in open enrollment materials. Not surprisingly, given their apparent readiness for the ACA test, HR leaders are poised to respond as necessary for whatever the outcomes of the audits. A majority (69 percent) said they are ready to change their benefit plan structures and/or operations as a means of avoiding fines, and 61 percent expect any potential IRS fines to be negligible. Still, a significant proportion, or 64 percent, said they will struggle to stay in business as a result of ACA compliance. (See Figure 6) Due to the potential audit implications of ACA reporting, organizations need to be able to defend and manage the decisions they made and reported on. Unfortunately, there may be confusion on who is responsible if the IRS chooses to audit an organization’s ACA reporting. Sixty percent of respondents said it is primarily an HR issue and 54 percent said it is primarily a finance issue. HR and Finance need to share the responsibility for ACA reporting and audit response, along with other key stakeholders. Despite having optimized design and operation strategies to eliminate ACA fines and penalties, 64 percent of respondents said they will struggle to stay in business. Figure 6. Employer Expectations Regarding ACA How much do you agree or disagree with each of the following statements? (5=Agree strongly, 4= Agree, 3=Neither, 2= Disagree, 1=Strongly Disagree) AGREE AVERAGE RESPONSE WE WILL CHANGE OUR BENEFIT PLAN STRUCTURE AND/OR 69% 3.8 OPERATIONS TO AVOID ACA REPORTING FINES AND PENALTIES WE EXPECT THE IRS FINES FOR AFFORDABLE CARE ACT (ACA) 61% 3.7 REPORTING TO BE NEGLIGIBLE TO OUR BOTTOM LINE IN 2016 AFFORDABLE CARE ACT (ACA) REPORTING IS AN HR ISSUE PRIMARILY 60% 3.7 WE HAVE OPTIMIZED DESIGN AND OPERATIONS STRATEGIES TO ELIMINATE 64% 3.6 THE FINES/PENALTIES BUT WILL STRUGGLE TO STAY IN BUSINESS AFFORDABLE CARE ACT (ACA) REPORTING IS A FINANCE ISSUE PRIMARILY 54% 3.6 Research Report | Employee Benefits Barometer: SMB Perspectives and Priorities in an Era of Disruption 9

What Despite a solid working relationship and common ground on major issues, there are some disconnects between HR and Finance that Finance could hinder the organization. Because benefit decisions are a shared responsibility, we explored Thinks of HR the perspectives of decision makers from the Finance department. The survey also captured the perceptions of middle market finance executives on HR and employee benefits issues, which provided additional insights as to their mindsets and concerns going forward. When asked about their financial priorities, Finance ranked more precise cash forecasting (29 percent) and avoiding a cyber breach (22 percent) over reducing the cost of employee benefits (19 percent). Considering that benefits are a top five business expense in most organizations, these findings suggest that decision makers need to rethink employee benefits as a strategic imperative. The majority of Finance executives polled (78 percent) said they consider HR a strategic partner, with 83 percent noting that HR keeps them apprised of potentially budget-busting developments. (See Figure 7) That view might have contributed to the group’s apparent confidence in their organizations’ ACA compliance readiness: Only 56 percent ranked it as a top HR priority. In fact, only 15 percent ranked ACA compliance as the top priority compared to 18 percent of HR leaders. Figure 7. Finance Perspectives on Human Resources How much do you agree or disagree with the following statements? (5=Agree strongly, 4= Agree, 3=Neither, 2= Disagree, 1=Strongly Disagree) AGREE AVERAGE RESPONSE MY HR DEPARTMENT KEEPS ME APPRISED OF EVERYTHING I 83% 4.1 NEED TO KNOW IN FINANCE THAT COULD IMPACT MY BUDGET I SUPPORT THE FUNDING OF NEW HR TECHNOLOGY/SOFTWARE 79% 4 TO MANAGE/REDUCE COMPLIANCE WITH ACA REPORTING I THINK OF OUR HR DEPARTMENT AS A STRATEGIC PARTNER 78% 4.1 I SUPPORT THE FUNDING OF NEW HR TECHNOLOGY/ 70% 3.9 SOFTWARE TO ENSURE COMPLIANCE WITH ACA REPORTING I DON’T EXPECT TO PAY ANY FINES/PENALTIES TO THE IRS DUE TO 70% 3.9 ACA REPORTING NON-COMPLIANCE FOR OUR FILING THIS YEAR AS A COST CENTER MY HR DEPARTMENT HAS COME IN ON BUDGET 70% 3.8 Research Report | Employee Benefits Barometer: SMB Perspectives and Priorities in an Era of Disruption 10

Despite the characterizations of HR as a strategic partner, the findings suggest that faith in HR may be only skin deep. Most of the surveyed financial executives indicated some level of deeper concern over various benefits issues. These include HR’s long-term benefits cost management strategies (97 percent), ACA reporting fines (89 percent), audits for noncompliance with ACA reporting (88 percent), and other potential missteps that might result in executive liability claims (93 percent). (See Figure 8) The study further revealed skepticism by a significant proportion – albeit not a majority – of finance respondents over the repercussions of ACA compliance audits. For example, 32 percent expect their HR departments to go over budget as 34 percent of them believe their HR teams are not on top of the ACA reporting challenge. And over a third (35 percent) of the finance executives are expecting IRS audits of their ACA reporting and to pay considerable penalties for non-compliance. Figure 8. Finance Concerns About Human Resources How much do the following concern you when thinking about your company’s Human Resources department? (5=Extremely concerned, 4= Very concerned, 3= Somewhat concerned, 2= A little concerned, 1=Not at all concerned) CONCERNED AVERAGE RESPONSE ESCALATING COSTS OF PROVIDING BENEFITS 97% 4 HR MISSTEPS THAT MAY AFFECT EXECUTIVE LIABILITY 93% 3.4 HR MISSTEPS THAT MAY AFFECT CYBER 91% 3.4 LIABILITY FOR THE COMPANY AND EMPLOYEES AFFORDABLE CARE ACT (ACA) REPORTING FINES AND PENALTIES 89% 3.3 AFFORDABLE CARE ACT (ACA) CADILLAC TAX 88% 3.3 BEING APPLIED TO PLANS FOR ALL EXECUTIVES AUDITS TO BE CONDUCTED FOR NONCOMPLIANCE 88% 3.3 WITH AFFORDABLE CARE ACT (ACA) REPORTING Research Report | Employee Benefits Barometer: SMB Perspectives and Priorities in an Era of Disruption 11

And beyond ACA, there appeared to be a lack of alignment on the importance of long-term benefit strategies. That disconnect might hinder the organization’s ability to effectively manage the financial burdens of the changing benefits environment. Clearly, there is a significant opportunity to grow the relationship between HR and Finance and elevate it to a true strategic partnership. Improving benefits cost and compliance will require closer alignment and improved communication between Finance and HR. Technology’s Technology’s impact on today’s HR environment has yet to be fully realized, as HR and Finance look to new funding to better manage Role in benefits costs. HR executives don’t believe the issues they face with ACA reporting Managing and benefits administration are necessarily compounded by a lack of technology support. A majority of respondents, or nearly three-fourths Complex (73 percent), said their HR technology platforms meet current needs. Finance executives, however, were not so sure. Nearly half (49 percent) Benefits of finance participants say new or improved benefits administration systems are needed. Further, 79 percent would support funding new Needs technology to reduce benefits costs and 70% would supporting technology funding for ACA reporting. Research Report | Employee Benefits Barometer: SMB Perspectives and Priorities in an Era of Disruption 12

Strategic Middle market HR managers have made significant strides advancing their organizations on a more strategic benefits continuum that supports Alignment, the well-being of employees as well as the business. This will go a long way toward ensuring they are well-positioned to anticipate the Partnership implications of the evolving health care environment and have the agility to respond effectively to emerging trends. is Key to That’s not to say to say there are no roadblocks. ACA compliance Success may be more worrisome than anyone wants to admit. Further, there’s substantial room for improvement in adopting a wider range of cost- savings tactics, many of which can be put in place without disrupting employees. Improving benefits cost and compliance will require closer alignment and improved communication between Finance and HR. And given the impact on organizational performance and employee satisfaction, employee benefits must be viewed as a strategic imperative with clear alignment on short and long-term priorities. Additional Resources from HUB International Ebook: The Employee Benefits Cost Management Challenge: Nine strategies to help you get benefits costs under control. Ebook: From Wellness to Peak Performance: Create a culture of health to boost employee health and productivity. Now’s the Time to Act Let’s work together to create an employee benefits strategy that meets your short and long-term goals. #LetsDoSomething Contact a HUB Employee Benefits advisor today Research Report | Employee Benefits Barometer: SMB Perspectives and Priorities in an Era of Disruption 13

Looking out for you. Looking ahead for you. As a leading broker and advisor for employee benefits, HUB International is committed to delivering solutions with thoughtful strategic planning, valuable professional services and technology-based solutions that enhance our clients’ financial performance and position them as an employer of choice. Together, we’ll tailor employee benefits solution to address the big issues you’re facing today - and those that will affect you in the future. hubemployeebenefits.com #LetsDoSomething This information is provided for general information purposes only. HUB International makes no warranties, express, implied or statutory, as to the adequacy, timeliness, completeness or accuracy of information in this document. This document does not constitute advice and does not create a broker-client relationship. Please consult a HUB International advisor about your specific needs before taking any action. Statements concerning legal matters should be understood to be general observations and should not be relied upon as legal advice, which we are not authorized to provide. © 2016 HUB International Limited. All rights reserved