Report Prepared by: Maggie Lemos, Risk Analyst
Title
SUBJECT: Approval of the 2026 Cafeteria Plan Renewal Regarding Employees’ and Retirees’ Health and Welfare Benefits Including Medical, Dental, Vision, Disability, Life and Flexible Spending
REPORT IN BRIEF
Considers approving the renewal of the 2026 Cafeteria Plan regarding employees’ and retirees’ health and welfare benefits.
RECOMMENDATION
City Council - Adopt a motion:
A. Approving the employees’ health and welfare benefits cafeteria plan renewal for calendar year 2026; and,
B. Authorizing the City Manager to execute the necessary documents.
Body
ALTERNATIVES
1. Approve, as recommended by staff; or,
2. Direct staff to develop other options; or,
3. Deny; or,
4. Take no action.
AUTHORITY
Charter of the City of Merced, Article XI, Fiscal Administration. Memoranda of Understanding (MOU) with recognized labor bargaining units and Management Compensation Plan. “The plans shall be selected solely by the City following review of proposals by the Employee Benefits Committee, whose role is advisory to the City Council.”
CITY COUNCIL PRIORITIES
As provided for in the 2025-26 Adopted Budget.
DISCUSSION
The City of Merced provides five (5) forms of core insurance coverage as benefits to City employees: medical, dental, vision, disability, and life insurance. These are provided through an implemented IRS Section 125 Cafeteria Plan where employees can select from two (2) options in each coverage category. The insurance plans are selected solely by the City (City Council) upon review and recommendation of the proposal by the Employee Benefits Committee. The MOUs state that the role of the Employee Benefits Committee is advisory to the City Council.
History and Past Actions
The Employee Benefits Committee (Committee) met with Alliant Insurance Services (broker of record) on August 20, 2025, to review group benefits. The informational meeting was held to bring the Committee up to date with benefit plan offerings and to review premium renewal for medical coverage as well as review annual premium summary for all lines of benefit coverage for plan year 2026.
The Committee was encouraged to speak with their respective units and respond with a recommendation. Both staff and the Employee Benefits Committee are not recommending any plan design changes for 2026. The Employee Benefits Committee has requested to look at additional plan designs for Major Medical for year 2027.
The healthcare benefit plans are final and locked for 2026. While the costs for the plans cannot be changed for 2026, any changes to employee and City contributions are subject to re-opening labor negotiations. For 2027, union and association representatives agreed to participate with investigating other insurance plans to determine if a lower cost plan with similar or better coverage are available.
Description
Major Medical Plan
The major medical plan with Anthem has been provided through a self-funded pool with PRISM. The program provides members an alternative to group health insurance plans using the concept of pooling to reduce insurance premiums through consolidating the fixed costs over a larger population of members.
The City’s major medical plan is offered to active employees and eligible early retirees. The major medical plan received an 14.6% rate increase for plan year 2026 compared to 1.1% decrease in year 2025, and a 12.5% increase in 2024. There are several market trends that are driving higher costs.
First, Healthcare provider cost pressures. Providers are seeking double-digit increases from insurance carriers for reimbursement demands. This is partially driven by labor shortages as well as continuing to recoup pandemic-related losses. Second, the new reality is million dollar claims which have risen 8% in the past year alone and are up 50% over the past 4 years. Third, the growing and costly challenge of cancer is on the rise with younger patients, advanced therapies, and late diagnosis which leads to more complex and expensive treatment. Finally, the prescription drug utilization has exploded by 34.6% due to the increase in GLP-1 prescriptions for non-diabetes conditions, gene-therapy, and specialty medications.
The annual premium for health insurance is estimated to be $11,809,044 based on the number active employees (479 active employee) and (75 eligible early retirees) currently enrolled in the medical plan. The estimated premium may change depending on the number of enrollees and their level of enrollments (Core or Buy-up Plan).
The Fiscal Year 2025-26 budget included a 6% increase to the health benefit plan.
Retiree Group Medicare Advantage Plan
Effective January 1, 2016, the City moved Medicare eligible retirees to a group Medicare Advantage Plan sponsored by United HealthCare (UHC). Working closely with our broker of record (Alliant Insurance Service), the City found an alternative Medicare retiree medical and prescription benefit platform that delivers premium cost savings to both the City and the retiree while providing essentially the same benefits as provided to full-time employees. United HealthCare has a group Medicare Advantage PPO plan underwritten by United Healthcare Insurance Company that delivers all the benefits of Original Medicare Parts A, B and D as well as additional benefits and features.
The Retirees’ medical plan received a 21.5% rate increase for plan year 2026 compared to year 2025. The rate increase is due to Congress and CMS (Center for Medicare & Medicaid Services) making some significant changes impacting funding of Medicare Advantage and Part D plans over the next several years. The annual premium for Medicare retiree health insurance estimated to be $1,705,010. This amount of premium is based on 247 eligible retirees over the age of 65 enrollees. The rate increase will impact the City fiscally for retirees that retired before 2003-2009 depending on the applicable MOU. Retirees in that category have a zero contribution. For retirees that have retired after the respective retirement date according to the MOU have no fiscal impact to the City due to the fact that there is currently a maximum contribution by the City which does not change with premium increases or decreases. The premium may change depending on the number of eligible enrollees.
The Fiscal Year 2025-26 budget included a 4% increase to the retiree health benefit plan.
Flexible Spending Account (FSA)
The City’s Flexible Spending Account (FSA) has been offered to employees as of January 1, 2009. The third-party administrator for the benefit is Benefit Coordinators Corporation (BCC). The FSA is a benefit that allows individuals to contribute pre-tax dollars from their paycheck to a spending account that can be used for eligible expenses as outlined in Section 125 of the Internal Revenue Service (IRS) regulations. The IRS maximum contribution is $3,200 for out-of-pocket medical expenses and $7,500 for dependent care expenses, the Employee’s maximum contribution is $3,200 for out-of-pocket medical expenses and $7,500 for dependent care expenses.
An enhancement to the benefit was added at the start of plan year 2015 with debit cards issued by the FSA administrator. The debit cards allow participating individuals to pay for eligible FSA expenses at the point of service; therefore, avoiding the submission of claim form(s) or waiting for reimbursement. FSA debit cards may be used at any eligible location wherever MasterCard is accepted.
The FSA debit cards are good for a three (3)-year period. Participants are encouraged to retain their card after exhausting all available funds for reuse next program year after re-enrolling during the open enrollment period. FSA debit cards are valid for future plan years until the expiration date printed on the front of the card is reached. There is no additional cost to the City, or employees, for the benefit enhancement.
Dental Plan
The dental plan with Delta Dental of California is provided through a self-funded dental program with PRISM (formerly CSAC EIA) effective January 1, 2011. The current core dental plan provides for benefits at 100% up to a maximum per patient amount of $1,500 per plan year. The dental plan received a 1.3% rate decrease for plan year 2026. The rate decrease is based on a review of the City of Merced’s group dental experience and projected changes in dental trend. The annual premium for dental insurance estimated to be $754,478 based on the number active employees (464 active employee) and (54) eligible retirees currently enrolled in the dental plan. The premium may change depending on the number of enrollees and their level of enrollments.
The Fiscal Year 2025-26 budget included a 2.5% increase to the dental benefit plan.
Vision Plan
The vision benefit is provided through Vision Service Plan (VSP) effective July 1, 1998 and is a fully insured plan. The vision plan received a 5.0% rate decrease for plan year 2026. The annual premium for vision insurance estimated to be $82,565 based on the number active employees (477 active employee) and (51) eligible retirees currently enrolled in the vision plan. The premium may change depending on the number of enrollees and their level of enrollments.
The Fiscal Year 2025-26 budget included a 2.5% increase to the vision benefit plan.
Disability Plan
The group disability plan is provided by VOYA through PRISM effective March 1, 2011. The disability plan has a rate guarantee through December 31, 2027. The annual premium for group disability insurance is estimated to be $67,125. The premium rate is based on the number of active employees and their annual salary rate.
The Fiscal Year 2025-26 budget included a 2.5% increase to the disability benefit plan.
Life Insurance
The group life insurance plan is provided by VOYA through PRISM effective March 1, 2011. The life insurance plan renewal has a three-year rate guarantee through December 31, 2027. The life insurance plan rate is based on the overall annual salary rate for employees. There is not an expected plan design change for plan year 2025. The annual premium for group life insurance is estimated to be $31,363. The premium rate is based on the number of active employees and their annual salary rate.
The Fiscal Year 2025-26 budget included a 2.5% increase to the life insurance benefit plan.
PRISM Overview
The City of Merced is currently enrolled in is Medical, Dental, Vision, Life and Disability coverages through PRISM Employee Benefits.
PRISM (Public Risk Innovation, Solutions, and Management) is a risk sharing pool dedicated to controlling losses and providing effective risk management solutions. PRISM is a member direct pool, serving California public agencies.
The Purpose of PRISM is to provide Members with cost-effective health insurance coverage for their eligible employees, retirees and their dependents. Each member entity maintains their own benefits coverage programs, while participating in a pooled premium cost sharing arrangement.
The PRISMHealth Program was created in 2003 to provide members with a cost-effective alternative to their current healthcare coverage options. The PRISMHealth Program capitalizes on the concept of risk share pooling in order to reduce healthcare premiums and ensure that all members are afforded equitable participation based on their benefit plans and specific claims performance.
The pooling approach creates value and long-term stability for the entity by securing the lowest possible fixed costs from premier carrier partners and combining similar risk profiles in a financially stable pool. With the PRISMHealth program, you have the flexibility to match current plan designs and implement product offerings to contain costs for both active and retired employees.
Member Entities are assessed an annual premium for the purpose of funding the PRISMHealth Program. The annual pooled premium volume represents the total premium volume required for the renewal year for which it is approved. The pool renews as a whole, based on the review and analysis conducted by the program underwriting consultants and Actuary. The annual pool premium is then allocated to all program members based on their Claims Performance Risk Adjustment (CPRA) as outlined in the most recently approved PRISMHealth Underwriting Guidelines. The CPRA is the Committee approved underwriting methodology used to determine each Program Member’s unique premium share of the entire pooled premium renewal using their member specific loss ratio, loss ratio variance and member size.
As the second largest public sector healthcare purchasing program in California, PRISM Medical covers 46 member groups which is more than 45,400 employee /retiree primary subscribers. Dental covers 179 member groups, 95,500 employee /retiree primary subscribers. Vision covers 118 member groups, 55,000 employee /retiree primary subscribers. Life and Disability covers 127 member groups, 85,500 employee /retiree primary subscribers.
Advantages of PRISM Membership
• Positioning: The City has been with PRISM since 2007, gaining access to pooled purchasing power, stability, and added programs that aren’t available in the direct marketplace.
• Historical Results: Lower than market trend for over a decade. The average increase for the City of Merced as members of PRISM since 2011 is 5.4%. For the same period the average for the overall PRISM pool was 6.2%, PERS was 7.3% and the CA PPO trend was 8.7%. As you can see we received a much lower average rate increase than the medical trend, which demonstrates the pool’s long-term stability.
• Volatility Avoidance: The market is volatile, especially with large claims and specialty drugs. PRISM smooths that volatility through its pool.
• Unique Value: If the City contracted directly with Anthem or another carrier, it would lose access to PRISM-specific analytics (like the Merced claims data) and bundled programs (pharmacy management (Express Scripts), third paty administrator for billing and benefit enrollment and management (BCC), Live Health online (On-demand virtual access to physicians), Carrum Health (Surgical concierge care), Livongo (Digital chronic condition such as diabetes and hypertension management), Hinge Health (Digital physical therapy program), RxNGo (Mail-order generic RX at zero cost program), *New* Digbi Health (Personalized obesity and metabolic health management program), *New* Navigator PPO (Concierge member navigation) these would otherwise need to be purchased separately.
Overview of Benefit Costs
The City contributes an amount per bi-weekly pay period (based on twenty-six pay periods annually) as the Cafeteria Allowance. Each bargaining unit has a specific contribution by the City according to each MOU.
Health and welfare plan costs increases and decreases will be shared by both the
City and the employee. Any increase in the sum of core premiums necessary to purchase coverages will be shared (55/45) between the City and the employee with
the City paying 55% of the increase and the employee paying 45% of the increase. Any decrease will be shared (55/45) between the City and the employee with 55% of the decrease credited to the City's contribution and 45% of the decrease credited to the
employee's contribution.
Below is a chart of 2026 rates compared to 2025 rates for each MOU for a full Family Core Plan on all benefits:
|
AFSCME and Management Biweekly Benefits |
|
|
Biweekly Premium |
City Biweekly Contribution |
Employee Biweekly Out-of-Pocket Cost |
|
Medical |
2026 |
$1,169.31 |
$922.44 |
$246.87 |
|
2025 |
$1,020.69 |
$840.70 |
$179.99 |
|
Dental, Vision, Life, Disability |
2026 |
$81.46 |
$74.61 |
$6.85 |
|
2025 |
$82.41 |
$74.40 |
$8.01 |
|
|
Medical |
$148.62 |
$81.74 |
$66.88 |
|
Comparison-2026 to 2025 |
Dental,Vision,Life,Disability |
-$0.95 |
-$0.21 |
-$1.16 |
|
|
Total |
$147.67 |
$81.53 |
$65.72 |
|
MACE and MPOA Biweekly Benefits |
|
|
Biweekly Premium |
City Biweekly Contribution |
Employee Biweekly Out-of-Pocket Cost |
|
Medical |
2026 |
$1,169.31 |
$926.40 |
$242.91 |
|
2025 |
$1,020.69 |
$844.66 |
$176.02 |
|
Dental, Vision, Life, Disability |
2026 |
$81.46 |
$73.44 |
$8.02 |
|
2025 |
$82.41 |
$73.23 |
$9.18 |
|
|
Medical |
$148.62 |
$81.74 |
$66.89 |
|
Comparison-2026 to 2025 |
Dental,Vision,Life,Disability |
-$0.95 |
-$0.21 |
-$1.16 |
|
|
Total |
$147.67 |
$81.53 |
$65.73 |
|
Fire Biweekly Benefits |
|
|
Biweekly Premium |
City Biweekly Contribution |
Employee Biweekly Out-of-Pocket Cost |
|
Medical |
2026 |
$1,169.31 |
$886.73 |
$282.58 |
|
2025 |
$1,020.69 |
$804.99 |
$215.70 |
|
Dental, Vision, Life, Disability |
2026 |
$81.46 |
$72.29 |
$16.81 |
|
2025 |
$82.41 |
$72.08 |
$18.10 |
|
|
Medical |
$148.62 |
$81.74 |
$66.88 |
|
Comparison-2026 to 2025 |
Dental,Vision,Life,Disability |
-$0.95 |
-$0.21 |
-$1.29 |
|
|
Total |
$147.67 |
$81.53 |
$65.59 |
IMPACT ON CITY RESOURCES
No additional appropriation is needed at this time. Since the City typically has several vacancies throughout the year, it is anticipated that there will be sufficient funding appropriated to absorb the increase over the estimate. If during the course of the year it is determined that smaller department budgets will have a challenge we will discuss and request the necessary funding during the Mid-Year Budget review.
ATTACHMENTS
None.