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Keys to Providing Health Insurance Benefits


Friday, October 31, 2008
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Employee benefits play an increasingly important role in the lives of employees and their families, and have a significant financial and administrative impact on a business. Most companies operate in an environment in which an educated work force has come to expect a comprehensive benefits program.

Indeed, the absence of a program or an inadequate program can seriously hinder a company’s ability to attract and keep good personnel. Employers must be aware of these issues and be ready to make informed decisions when they select employee benefits.

Designing the right benefit plan for your employees is a complex task. There are many issues to consider, including tax and legal aspects, funding, and finding the right vendors or administrators.

TIP: You may want to contact your insurance carrier, broker, or benefits consultant for assistance in designing and implementing your benefit plan.

What Is An Employee Benefit Plan?

An employee benefit plan protects employees and their families from economic hardship brought about by sickness, disability, death or unemployment. It also provides retirement income to employees and their families. And it provides a system of leave or time off from work.

Mandated Benefits
The employer must pay in whole or in part for certain legally mandated benefits and insurance coverage:
•    Social Security.
•    Unemployment insurance.
•    Workers’ compensation.

Funding for the Social Security program comes from payments by employers, employees and self-employed persons into an insurance fund that provides income during retirement years. Full retirement benefits normally become available at age 65. For younger individuals the date for maximum benefits is being adjusted to age 67. Other aspects of Social Security deal with survivor, dependent and disability benefits, Medicare, Supplemental Security Income and Medicaid.

Unemployment insurance benefits are payable under the laws of individual states from the Federal-State Unemployment Compensation Program. Employers contribute to the program based on total payroll.

Workers’ compensation provides benefits to workers disabled by occupational illness or injury. Each state mandates coverage and provides benefits. In most states, private insurance or an employer self-insurance arrangement provides the coverage. Some states mandate short-term disability benefits as well.

Note: Workers’ compensation is offered, but not mandated in Texas. However, it’s important for employers in all states to have workers’ compensation coverage because it limits a business’ liability for job-related injuries.

Optional Benefits

A comprehensive benefit plan can include the following elements:
•    Health insurance.
•    Disability insurance.
•    Life insurance.
•    A retirement plan.
•    Flexible compensation (cafeteria plans).
•    Leave.

A benefit plan can also include bonuses, service awards, reimbursement of employee educational expenses and prerequisites appropriate to employee responsibility.

In this article, we will cover the topics of Health and Dental Insurance only.

Medical and Dental Plans
A serious illness or injury can be devastating to an employee and his or her family. It can threaten their emotional and economic well-being. Thus, adequate health insurance is important to employees and is part of a solid group plan.

Group health plans help attract and keep employees who can make your business a success. They relieve your employees of the anxiety of health care costs by providing the care they need before illness becomes disabling, thus helping you avoid costly employee sick days.

Group health plans usually cost less than purchasing several individual policies with comparable coverage. Moreover, there are tax advantages to offering health care benefits: your contribution as an employer may be deductible and the insurance is not taxable income to your employees.

As an employer, you can choose either an insured (also known as an indemnity or fee-for-service plan) or a pre-paid plan (also known as a health maintenance organization).

Traditional Indemnity Plans. An indemnity plan allows the employee to choose his or her own physician. The employee typically pays for the medical care and then files a claim form with the insurance company for reimbursement. These plans use deductibles and coinsurance as well.

A deductible is a fixed amount of medical expenses an employee pays before the insurance plan reimburses any more expenses. The deductible can range from $100 to $1,000 a year. (High Deductible Health Plans, known as HDHP, are covered under Health Savings Accounts.) Coinsurance is a percentage of medical expenses the employee pays, with the plan paying the remaining portion. A typical coinsurance amount is 20%, with the plan paying 80% of approved medical expenses. Listed below are the most common types of insurance arrangements (indemnity plans) providing health care to groups of employees.

•    A basic health insurance plan, covering hospitalization, surgery and physicians’ care in the hospital.
•    A major medical insurance plan, usually supplementing a basic plan by reimbursing charges not paid by that plan.
•    A comprehensive plan, covering both hospital and medical care with one common deductible and coinsurance feature.

Health Maintenance Organizations

Health maintenance organizations (HMOs) provide health care for their members through a network of hospitals and physicians. Comprehensive benefits typically include preventive care, such as physical examinations, well baby care and immunizations, and stop-smoking and weight control programs.

The main characteristics of HMOs are as follows:
•    The choice of primary care providers is limited to one physician within a network; however, there is frequently a wide choice for the primary care physician.
•    There is no coverage outside the HMO network of hospitals and physicians.
•    Costs are lower, due to limited choice. Physicians are encouraged to keep patients healthy; accordingly, they often are paid on a per capita basis, regardless of how much care the patient needs.
•    The employer prepays HMO premiums on a fixed, per-employee basis.
•    Employees do not have to apply for reimbursement of charges, but they may have small co-payments for medical services.

Preferred Provider Organizations.

Preferred provider organizations (PPOs) fall between the conventional insurance and health maintenance organizations, and are offered by conventional insurance underwriters. A PPO is a network of physicians and/or hospitals that contracts with a health insurer or employer to provide health care to employees at predetermined discounted rates.
Some of the key elements of a PPO are:
•    It offers a broad choice of health care providers. Because of the broader choice of providers, PPOs are more expensive than HMOs.
•    It may have less comprehensive benefits than HMOs, but the benefits usually can meet almost any need.
•    PPO providers usually collect payments directly from insurers.

Although there is no requirement for employees to use the PPO providers, there are strong financial reasons to do so.

Dental Benefits. Medical insurance frequently includes dental plans. Most plans cover all or portions of the cost for the following services:
•    Cleaning, x-rays and oral examinations.
•    Fillings.
•    Crowns and dentures.
•    Root canals.
•    Oral surgery.
•    Orthodontia (these portion of the cost covered here are generally quite limited, if at all)

Health Savings Accounts

The Health Savings Account(HSA) is considered an alternative to traditional health insurance. It is a savings account that offers consumers a way to pay for medical expenses. You own and control the money in the HSA and can determine how to spend the money.
You must be covered by a High Deductible Health Plan (HDHP) to take advantage of HSAs. For 2008, to qualify for the HSA, your minimum deductible in your HDHP must be at least $1,100 (single coverage) or $2,200 (family). These minimum deductibles increase to $1,150 (single) and $2,300 (family) for 2009.

The HSA allows employees to deduct contributions to the HSA even if they do not itemize deductions. For 2008, the maximum annual HSA contribution for an individual is $2,900 and for a family, it is $5,800. (These contribution limits increase in 2009 to $3,000 and $5,950, respectively.) The HSA plan allows employees who are covered by a high-deductible health plan to contribute pre-tax amounts that will be used to cover medical expenses or used later for retirement. Qualified amounts contributed to an employee’s HSA by an employer can be excluded by the employee. Distributions from the HSA are not taxable as long as they are used for medical expenses.

Balancing Cost, Quality And Accessibility
In summary, when deciding on a health plan, consider what you and your workers want in a plan. Determine all costs associated with the plan. Investigate the quality of potential insurance carriers.
•    Examine the quality of each plan, including the benefits and restrictions.
•    Hospital coverage (inpatient care).
•    Outpatient services.
•    Physical coverage.
•    Substance abuse treatment.
•    Prescriptions.

Check on underwriting and other restrictions that may exclude you from the health plan:
•    Employee medical histories.
•    Minimum employer contribution.
•    Minimum participation by eligible employees and dependents.

Waiting periods.
•    Proof of employee status.
•    Purchase of other benefits.
•    Other limitations – what isn’t covered.

Check on the extent to which your company can control costs. This might include prior review of hospital admissions to determine necessity of hospitalization. Or it could mean concurrent review of hospital stays to confirm continuing need of hospitalization.

Management programs for catastrophic cases might be used. These programs arrange for the most cost-effective care.

Planning Pointers
Before you implement any benefit plan, you should ask yourself some questions:
•    How much are you willing to pay for this coverage?
•    What kinds of benefits interest your employees? Do you want employee input?
•    What do you think a benefits plan should accomplish? Do you think it is more important to protect your employees from economic hardship now or in the future?
•    Do you want to administer the benefits plan, or do you want the administration done by an insurance carrier?
•    What is your employee group like today? Can you project what it might look like in the future?

You now have some basic benefits information as well as the basic questions that need answers before you go benefit shopping for your employees.

An adequate benefit program has become essential to today’s successful business, large or small. With careful planning you and your employees can enjoy good health and financial protection at a cost your business can afford.

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About Chuck Chuckuemeka

Chuck is managing partner of Chuckuemeka & Associates, a nationally focused CPA firm specializing in Accounting, Auditing, Consulting and Tax Advising.

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