Outsourcing payroll and its effect on voluntary healthcare benefits

Sally Hamilton looks at how voluntary healthcare benefits are affected when payroll is outsourced and whether it is easier for companies to offer benefits as standard instead

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Outsourcing payroll can trigger plans to refresh a voluntary benefits package.

Healthcare plan providers view it as a sales opportunity.

The payroll company will probably ask for a fee to collect premiums by payroll.

Employers can avoid hassle and save money by encouraging staff to pay by Direct Debit.

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Outsourcing payroll is commonplace in many organisations, but those taking the step for the first time may have questions about how it will affect their voluntary benefits scheme.

Healthcare benefits, such as cash plans, dental plans, private medical insurance and critical illness cover, may be of particular concern because the amount being collected by way of premium from each employee will vary according to their personal circumstances and the benefits they have opted into.

Where employers run the payroll internally, they will deduct employees’ premiums from their salary and pass these as a lump sum to the relevant healthcare provider. This can be an awkward and time-consuming process, therefore employers normally charge the plan provider a fee for carrying out this task for them, or they might try to negotiate a cheaper deal on premiums for their workforce instead.†

Paul Moulton, director of corporate sales at private medical insurer AXA PPP healthcare, says that where employers run their own payroll, it can be particularly tricky for them to keep up with changes. "There can be a long-winded reconciliation process to make sure any changes are updated, such as when people leave or join the company, or have dependants added to policies and so on."

When an employer outsources its payroll, the outsourcing firm collects and forwards premiums to the relevant insurer, but is likely to charge the employer a fee for its efforts.

Peter Lauris, sales and marketing director at cash plan provider Medicash, explains: "When a payroll is outsourced, employers are charged on a percentage basis for the collection of premiums."

One way around the issue, whether payroll is outsourced or not, is to ask employees to pay premiums straight to the provider, therefore cutting out payroll collection altogether.

Russ Piper, sales director at cash plan provider HSA Healthcare, says: "Direct Debit removes the burden of administration as well as the cost because [the employer doesn’t] have to reconcile the payroll and manage people who leave the company and the scheme."

Providers also prefer Direct Debits because it means they can retain customers more easily if an employee leaves the company concerned. "We try and make sure all new business is Direct Debit as it allows us to track individual members," explains Lauris.

When employers outsource payroll, some take the opportunity to refresh their voluntary benefits package. For this reason, healthcare providers see it as a good time to send their sales force in, because they might be able to pick up extra customers or get a product included in a voluntary benefits scheme for the first time.

However, healthcare providers say that dealing with voluntary benefits when payroll has been outsourced isn’t a big enough administrative hassle and the charges are not so expensive as to encourage employers to offer optional healthcare benefits as core perks instead.

John Keegan, sales and marketing manager at Capita HR and Payroll Services, says: "As far as the administration is concerned it’s relatively simple. There will be a code for each type or band of cover which, once in the payroll system, will continue the deductions. The only new work will be when someone joins or leaves the organisation. It’ll be a trickle of admin whether the payroll is outsourced or not."