Employee Benefits Glossary

Employee Benefits Terms and Definitions

Accrued Benefit: The amount of retirement benefit an employee has earned based on years of service and compensation history under a defined benefit pension plan. The accrued benefit represents the employer's obligation to the employee and increases with each additional year of qualifying service.

Actuarial Value: A measure of the percentage of average overall health care costs that a health plan covers. Under the ACA, metal tier plans are categorized by actuarial value: Bronze plans cover approximately 60 percent, Silver 70 percent, Gold 80 percent, and Platinum 90 percent of expected costs for a standard population.

Adjusted Community Rating: A health insurance pricing methodology where premiums vary based on limited factors such as age, geographic region, family size, and tobacco use, but cannot vary based on health status, claims history, or gender. The ACA requires adjusted community rating for individual and small group markets.

Affordable Care Act (ACA): Federal legislation enacted in 2010 that established health insurance marketplace exchanges, expanded Medicaid, imposed employer shared responsibility requirements on large employers, prohibited pre-existing condition exclusions, and mandated essential health benefits in individual and small group plans.

Allowable Charge: The maximum amount a health plan will pay for a specific medical service or procedure. Also referred to as the allowed amount, eligible charge, or maximum allowable. Providers who accept assignment agree to accept the allowable charge as payment in full, while out-of-network providers may bill the patient for amounts exceeding the allowable charge.

Applicable Large Employer (ALE): An employer that employed an average of at least 50 full-time equivalent employees during the prior calendar year. ALEs are subject to the ACA employer shared responsibility provisions and annual information reporting requirements under Internal Revenue Code Sections 4980H, 6055, and 6056.

Balance Billing: The practice of a healthcare provider billing a patient for the difference between the provider's full charge and the amount paid by the health plan. Balance billing most commonly occurs when patients receive care from out-of-network providers. The No Surprises Act restricts balance billing in certain emergency and non-emergency situations.

Beneficiary: An individual designated to receive benefits under an insurance policy or retirement plan upon the death of the covered person or plan participant. Beneficiary designations should be reviewed and updated following major life events such as marriage, divorce, or the birth of a child.

Carve-Out: A benefits arrangement where a specific category of services is separated from the main health plan and administered by a specialty vendor. Common carve-outs include pharmacy benefits, behavioral health, dental, vision, and disease management programs. Carve-outs can improve specialized management but may create coordination challenges.

Claim: A request for payment submitted to a health plan or insurance carrier by a healthcare provider or covered individual for services rendered. Claims contain diagnostic codes, procedure codes, dates of service, and provider information used by the plan to determine benefit eligibility and payment amounts.

COBRA (Consolidated Omnibus Budget Reconciliation Act): Federal law requiring employers with 20 or more employees to offer continuation of group health coverage to qualified beneficiaries who would otherwise lose coverage due to qualifying events such as termination, reduction in hours, divorce, or death of the covered employee.

Coinsurance: The percentage of covered medical expenses that the insured person must pay after meeting the deductible. For example, in an 80/20 coinsurance arrangement, the plan pays 80 percent of covered expenses and the insured pays 20 percent until the out-of-pocket maximum is reached.

Copayment (Copay): A fixed dollar amount the insured person pays for a specific covered service at the time the service is rendered. Common copayments include amounts for office visits, specialist visits, urgent care, emergency room visits, and prescription drugs. Copayments are separate from and in addition to any deductible requirements.

Coordination of Benefits (COB): Rules that determine the order of payment when an individual is covered by more than one health plan. COB provisions prevent duplicate payments and ensure that combined payments from all plans do not exceed the total cost of covered services. The primary plan pays first, and the secondary plan may cover remaining eligible expenses.

Deductible: The amount of covered medical expenses the insured person must pay out of pocket each plan year before the health plan begins paying benefits. Individual deductibles apply to each covered person separately, while family deductibles apply to the combined expenses of all covered family members. Plans may have separate deductibles for in-network and out-of-network services.

Defined Benefit Plan: A retirement plan in which the employer promises a specified monthly benefit at retirement, typically calculated using a formula based on years of service and compensation history. The employer bears the investment risk and is responsible for funding the plan sufficiently to meet its benefit obligations.

Defined Contribution Plan: A retirement plan in which the employer, employee, or both make contributions to individual accounts. The retirement benefit depends on the amount contributed and investment performance over time. Common defined contribution plans include 401(k) plans, 403(b) plans, and profit-sharing plans. The employee bears the investment risk.

Dependent: An individual who is eligible for coverage under another person's health plan or insurance policy. Dependents typically include the employee's legal spouse and children up to age 26 under the ACA. Some plans also cover domestic partners and other qualifying family members as defined by the plan document.

Disability Insurance: Insurance that replaces a portion of income when an employee is unable to work due to illness or injury. Short-term disability typically covers the first 90 to 180 days of a qualifying disability, while long-term disability begins after the short-term period ends and can continue for years or until retirement age depending on the policy terms.

Elimination Period: The waiting period between the onset of a disability and the date disability insurance benefits begin. Short-term disability elimination periods are typically 0 to 14 days for accidents and 7 to 14 days for illness. Long-term disability elimination periods commonly range from 90 to 180 days.

Employee Assistance Program (EAP): An employer-sponsored program providing confidential short-term counseling, referral services, and resources to help employees address personal issues that may affect job performance. Common EAP services include mental health counseling, substance abuse support, financial counseling, legal consultation, and work-life balance resources.

Employer Shared Responsibility (ESR): The ACA requirement that Applicable Large Employers offer affordable, minimum-value health coverage to at least 95 percent of full-time employees or face potential penalty assessments under Internal Revenue Code Section 4980H.

EOB (Explanation of Benefits): A statement from a health plan to a covered individual explaining how a claim was processed, including the services rendered, amounts billed, amounts allowed, plan payments, and the patient's financial responsibility. An EOB is not a bill but provides information needed to verify that claims were processed correctly.

ERISA (Employee Retirement Income Security Act): Federal law governing employee benefit plans offered by private-sector employers. ERISA establishes minimum standards for plan administration, fiduciary responsibilities, reporting and disclosure requirements, and participant rights. ERISA preempts state insurance laws for self-funded health plans but not for fully insured plans.

Evidence of Insurability (EOI): A health questionnaire or medical examination required by an insurance carrier when an individual applies for coverage outside of the initial enrollment period, during late enrollment, or for coverage amounts exceeding the guaranteed issue level. EOI requirements are common for life insurance and voluntary disability coverage.

Exclusion: A specific condition, treatment, or circumstance that a health plan or insurance policy does not cover. Common exclusions include cosmetic surgery, experimental treatments, and services not deemed medically necessary. Plan documents specify all applicable exclusions, and the ACA prohibits exclusions for pre-existing conditions in the individual and group markets.

Fiduciary: A person or entity with the authority and responsibility to manage plan assets or make decisions affecting plan participants. Under ERISA, fiduciaries must act solely in the interest of plan participants and beneficiaries, with the care, skill, prudence, and diligence of a prudent person, diversify plan investments, and follow plan documents.

Flexible Spending Account (FSA): A tax-advantaged account established under a Section 125 cafeteria plan that allows employees to set aside pre-tax dollars for eligible medical expenses or dependent care expenses. Health FSAs have annual contribution limits set by the IRS and are subject to use-it-or-lose-it rules with limited carryover or grace period options.

Formulary: A list of prescription drugs covered by a health plan, typically organized into tiers with different cost-sharing levels. Tier 1 usually includes generic drugs at the lowest copay, Tier 2 includes preferred brand-name drugs, Tier 3 includes non-preferred brands, and Tier 4 covers specialty medications. Plans may require prior authorization or step therapy for certain formulary drugs.

Guaranteed Issue: Insurance coverage that is offered without requiring evidence of insurability or medical underwriting. Under the ACA, all individual and group health plans must be offered on a guaranteed issue basis. For employer-sponsored life and disability insurance, guaranteed issue amounts are the coverage levels available without EOI during the initial enrollment period.

Health Maintenance Organization (HMO): A type of health plan that provides coverage through a defined network of providers. HMO members typically select a primary care physician who coordinates their care and provides referrals to specialists. HMOs generally do not cover out-of-network care except in emergencies.

Health Reimbursement Arrangement (HRA): An employer-funded account that reimburses employees for qualified medical expenses and, in some cases, individual health insurance premiums. HRAs are funded solely by employer contributions, are not funded through salary reduction, and unused balances may carry over from year to year at the employer's discretion.

Health Savings Account (HSA): A tax-advantaged savings account available to individuals enrolled in a qualified high-deductible health plan. Contributions are made pre-tax, investment earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. HSAs are individually owned, fully portable, and unused balances carry over indefinitely.

High-Deductible Health Plan (HDHP): A health plan with a minimum deductible amount and a maximum out-of-pocket limit as defined annually by the IRS. HDHPs are a prerequisite for HSA eligibility. Despite higher deductibles, HDHPs typically have lower monthly premiums than traditional plans, and the combination of an HDHP with employer HSA contributions can provide comprehensive coverage at a lower total cost.

ICHRA (Individual Coverage Health Reimbursement Arrangement): A type of HRA that allows employers to reimburse employees for individual health insurance premiums and qualified medical expenses on a tax-free basis. ICHRAs can be offered to employees of any class size, but employers cannot offer both an ICHRA and a traditional group health plan to the same class of employees.

In-Network Provider: A healthcare provider who has contracted with a health plan's network to provide services at negotiated rates. In-network providers accept the plan's allowed amount as payment in full and cannot balance bill the patient for covered services, resulting in lower out-of-pocket costs compared to out-of-network providers.

Level-Funded Plan: A self-funded health plan arrangement where the employer makes fixed monthly payments covering expected claims, stop-loss premiums, and administrative fees. If actual claims are lower than expected, the employer may receive a surplus refund. Level-funding provides the cost transparency of self-funding with the cash flow predictability of fully insured coverage.

Life Insurance (Group Term): Employer-sponsored life insurance that provides a death benefit to the designated beneficiary. The IRS allows employers to provide up to $50,000 of group term life insurance on a tax-free basis to employees. Coverage amounts above $50,000 result in imputed income to the employee based on IRS Table I rates.

Maximum Out-of-Pocket (MOOP): The most a covered individual or family must pay for covered in-network services during a plan year. Once the MOOP is reached, the plan pays 100 percent of covered services for the remainder of the plan year. The ACA sets annual MOOP limits for non-grandfathered plans, adjusted for inflation each year.

Medical Loss Ratio (MLR): The percentage of premium revenue that a health insurance carrier spends on medical claims and quality improvement activities versus administrative costs, marketing, and profit. The ACA requires carriers to meet minimum MLR standards: 80 percent for individual and small group markets and 85 percent for the large group market. Carriers that fail to meet these standards must issue premium rebates to policyholders.

Minimum Essential Coverage (MEC): Coverage that satisfies the ACA requirement for individuals to have health insurance. MEC includes employer-sponsored plans, individual market plans, Medicare, Medicaid, CHIP, TRICARE, and certain other government-sponsored programs. Employers must offer MEC to full-time employees to avoid Section 4980H(a) penalties.

Minimum Value: A health plan meets minimum value if it covers at least 60 percent of the total allowed costs for a standard population. Employers can determine minimum value using the IRS minimum value calculator, an actuarial certification, or by meeting certain safe harbor plan designs. Plans that do not provide minimum value may expose the employer to Section 4980H(b) penalties.

Network: The group of healthcare providers, hospitals, pharmacies, and other facilities that have contracted with a health plan to provide services at negotiated rates. Network adequacy requirements ensure that plans provide reasonable access to providers in terms of geographic proximity, specialty availability, and appointment wait times.

Open Enrollment: The annual period during which employees can enroll in, change, or cancel their benefits elections for the upcoming plan year. Outside of open enrollment, changes are generally only permitted following qualifying life events. ACA marketplace open enrollment occurs during a separate window for individuals purchasing coverage through the public exchange.

Out-of-Pocket Maximum: See Maximum Out-of-Pocket.

Plan Document: The legal document that establishes and governs an employee benefit plan. The plan document specifies eligibility requirements, covered benefits, exclusions, cost-sharing provisions, claims procedures, and plan administration details. ERISA requires that participants receive a Summary Plan Description, a simplified version of the plan document written in plain language.

Plan Year: The 12-month period designated as the coverage period for a benefits plan. Most employer plans use a calendar-year plan year running from January 1 through December 31, but some employers use a non-calendar fiscal year. Deductibles, out-of-pocket maximums, and FSA elections reset at the start of each plan year.

Preferred Provider Organization (PPO): A type of health plan that contracts with a network of preferred providers offering discounted rates. PPO members can receive care from both in-network and out-of-network providers, though out-of-network care is subject to higher cost-sharing. PPOs typically do not require referrals to see specialists.

Premium: The amount charged by an insurance carrier or collected by a self-funded plan to provide health coverage. For employer-sponsored plans, the premium is typically shared between the employer and the employee, with the employee's portion deducted from payroll. Premium rates may vary by coverage tier (single, employee plus spouse, employee plus children, family).

Prior Authorization: A requirement that a healthcare provider obtain approval from the health plan before providing certain services, procedures, or medications. Prior authorization is used as a utilization management tool to ensure that the proposed treatment is medically necessary and appropriate. Failure to obtain prior authorization may result in denied claims or reduced benefits.

Qualified Beneficiary: Under COBRA, an individual who is entitled to elect continuation coverage due to a qualifying event. Qualified beneficiaries include the covered employee, the spouse of the covered employee, and dependent children of the covered employee who were covered under the group health plan on the day before the qualifying event.

QSEHRA (Qualified Small Employer Health Reimbursement Arrangement): A type of HRA available to employers with fewer than 50 full-time equivalent employees that do not offer a group health plan. QSEHRAs allow eligible employers to reimburse employees for qualified medical expenses, including individual health insurance premiums, up to annual limits set by the IRS.

Self-Funded Plan: A health plan in which the employer directly assumes the financial risk for paying medical claims rather than purchasing fully insured coverage from a carrier. Self-funded plans are regulated under ERISA at the federal level and are exempt from state insurance mandates and premium taxes. Most self-funded employers purchase stop-loss insurance to limit catastrophic claims exposure.

Section 125 Plan: See Cafeteria Plan. A benefits plan authorized under Internal Revenue Code Section 125 that allows employees to choose among cash and qualified benefits on a pre-tax basis. Section 125 plans are the mechanism through which premium-only plans, health FSAs, dependent care FSAs, and HSA contributions are offered on a pre-tax basis through payroll deduction.

Stop-Loss Insurance: Insurance purchased by self-funded employers to cap their financial exposure to claims. Specific stop-loss limits the employer's liability for claims attributable to any single covered individual. Aggregate stop-loss limits the employer's total claims liability for the entire group over the plan year. Stop-loss coverage is essential for managing the financial risk of self-funding.

Summary of Benefits and Coverage (SBC): A standardized document required by the ACA that provides a clear, consistent comparison of health plan features and costs. All health plans must provide SBCs to eligible individuals at enrollment and upon request. The SBC uses a uniform format with defined terms and coverage examples to help consumers compare plans.

Summary Plan Description (SPD): A document required by ERISA that describes the key features of an employee benefit plan in plain language. The SPD must include information about eligibility, benefits, claims procedures, participant rights, and plan administration. Employers must provide SPDs to all plan participants and update them when material changes occur.

Third-Party Administrator (TPA): An organization that processes claims, manages networks, handles member services, and performs other administrative functions for self-funded health plans on behalf of the employer. TPAs do not assume insurance risk; they provide administrative services only. The employer retains fiduciary responsibility for the plan.

Vesting: The process by which an employee earns a nonforfeitable right to employer contributions in a retirement plan. Cliff vesting provides 100 percent ownership after a specified number of years, while graded vesting increases the vested percentage incrementally over a period of years. Employee contributions to defined contribution plans are always 100 percent vested immediately.

Voluntary Benefits: Employee-paid insurance products offered through the employer at group rates, typically on an after-tax or pre-tax basis through payroll deduction. Common voluntary benefits include supplemental life insurance, accident insurance, critical illness insurance, hospital indemnity insurance, pet insurance, and identity theft protection. Voluntary benefits enhance the total benefits package at little or no cost to the employer.

Waiting Period: The period of time an employee must wait after their date of hire before becoming eligible for benefits. The ACA limits waiting periods for health coverage to a maximum of 90 days. Plans may also impose an orientation period of up to one month in addition to the waiting period, but coverage must begin no later than the first day of the calendar month following 90 days of employment.

Wellness Program: An employer-sponsored program designed to support and encourage healthy behaviors among employees. Wellness programs may include health risk assessments, biometric screenings, smoking cessation programs, fitness incentives, nutrition counseling, and chronic disease management. The ACA and HIPAA regulations govern the design and administration of wellness programs, particularly those that provide incentives or impose penalties based on health status factors.