How to set up your cafeteria plan for pretax employee benefits

It’s common for employers to require employees to pay a share of premiums for many employee benefits. To take a bite of this cost-sharing requirement, many employers permit employees to pay for their premium share of contributions on a pretax basis through cafeteria plans, which provide a special exception to general federal income tax rules applicable to an employee’s income.

“Generally, this choice takes the form of allowing employees to purchase benefits, such as health insurance, with pretax dollars. This allows employees to have more take-home pay,” says Frances Horn, employee benefits compliance officer at JRG Advisors.

But when providing this, there are requirements that must be met.

Smart Business spoke with Horn about the rules that govern these cafeteria plans.

How do cafeteria plans work?

Section 125 of the Internal Revenue Code (IRC) governs cafeteria plans. Thus, regardless of whether the cafeteria plan is from a private, government, church or nonprofit employer, it remains subject to the cafeteria plan rules.

Although all cafeteria plans must satisfy key Section 125 provisions, not all plans are the same. The simplest form is a premium-only-plan (POP), which permits employees to pay premiums with pretax dollars. An employer can also combine the premium payment feature with account-based plans to create a more robust plan. Account-based plans, or spending accounts, permit employees to set aside part of their salary on a pretax basis for unreimbursed expenses.

Cafeteria plans are often referenced by other names — most notably, POP, section 125, pretax plan and flexible benefits plan. Regardless of what employers call it, if they provide pretax benefits to employees, the plan must adhere to the IRC 125 rules.

What do employers need to understand about the IRC 125 rules?

The IRC rules governing 125 plans are numerous, but the most important one is that the cafeteria plan must be established pursuant to a written plan instrument, known as a plan document. Any changes made to the plan also must be set out in writing. This establishes the terms as to how the plan must be governed and any failure to operate in accordance with the terms or the IRC requirements will disqualify the plan.

The rules specifically define what must be included in the plan document:

  • Specific description of the available benefits and when they are provided.
  • Participation rules.
  • Employee election procedures — when they can be made, effective date and that elections are irrevocable except for IRS permissible midyear election changes.
  • The manner in which employer contributions may be made.
  • Maximum amount of employer contributions available through the plan.
  • The plan year.
  • Provisions for complying with spending account arrangements, if offered.
  • If the plan provides for any grace periods or carry-overs when permitted.

Without a plan document, the IRS takes the position that the employer has under-withheld the taxes for participating employees. Such under-withholding could lead to payroll tax underpayments and IRS penalties for an employer.

How does this differ from Employee Retirement Income Security Act (ERISA) plan documents?

This requirement shouldn’t be confused with the requirement that a benefit subject to ERISA is required to have a written plan document. Whether the cafeteria plan must meet ERISA’s plan document requirement depends on whether the plan contains an ERISA benefit. For example, this would occur if the cafeteria plan permits pretax salary reductions for a health flexible spending account, because it is a self-insured group health plan and subject to ERISA.

What else would you like to share?

If there is no cafeteria plan document, if the document doesn’t satisfy the plan document requirements or if the plan fails to operate in accordance with the terms of the plan or Section 125 rules, the plan isn’t a cafeteria plan and an employee’s election between taxable and non-taxable benefits results in gross income to the employee.

Make sure you discuss the proper establishment of cafeteria plans with your employee benefit advisors.

 

Insights Employee Benefits is brought to you by JRG Advisors

Cost containment strategies that can control your health care costs

Despite the distractions the Affordable Care Act has caused, employers of all sizes haven’t lost sight of the fact that rising health care costs remain a significant issue that needs to be constantly addressed.

“Employers continue to seek comprehensive medical benefits at a competitive price. Being prepared for your annual renewal means knowing what alternatives exist and selecting the best plan for your company and your employees,” says Craig Pritts, senior sales executive at JRG Advisors.

Smart Business spoke with Pritts about a variety of available solutions that may be implemented alone or in conjunction with other programs to control or reduce costs.

What are some benefit trends that are being used to contain costs?

A survey conducted by the National Business Group on Health indicates full replacement Consumer-Directed Health Plans (CDHP) as the primary cost containment strategy being implemented by employers. A CDHP integrates a high deductible health plan with a health savings vehicle.

Replacing all other plans with a CDHP is a big step for many employers, and requires employee education and understanding in order to reap the full rewards of this type of plan design.

Another benefit trend that is expected to gain momentum is defined contribution strategy. With this approach, the employer contributes a set amount of premium for employees to spend on benefits.

The defined contribution strategy is often combined with two additional trends:

  • Voluntary benefits offer employees the ability to fill gaps in coverage from high deductibles and also offer additional benefits the employer may not offer, such as disability, accident coverage, cancer insurance, pet insurance, etc. Voluntary benefits are most often paid on a pretax basis through the convenience of payroll deduction.
  • Private Exchanges, developed as a result of the changing health care marketplace, act as the vehicle for the defined contribution strategy. They provide ‘one stop shopping’ for employees to purchase plans from a full menu of insurance and non-insurance options.

How does self-funding fit into the cost containment strategies of employers?

There was a time when only the largest of businesses would consider self-funding their health insurance plan, but today employers of all sizes are benefiting from a self-insurance model.

The willingness of an insurance company to administer a self-funded plan to smaller size companies, along with stop-loss insurance options, make this option one that should be discussed.

What other strategies are organizations implementing?

Adding or expanding wellness programs is becoming another popular strategy for employers. Nearly 75 percent of all health care costs are preventable, because they are a direct result of individual choices. These costs can be reduced when employees take more responsibility to manage their own health.

Incentives or disincentives are integrated with employee premium contributions and directly related to participation in wellness initiatives, often including biometric screenings.

An additional cost containment strategy is reducing spousal subsidies or implementing spousal surcharges. Studies indicate that in 2016, 29 percent of employers will have a surcharge in place for spouses who can obtain coverage through their own employers, with an additional 3 percent completely excluding spouses if their employer offers coverage.

What do these trends say about the health care environment today?

All of the trends identified share the underlying theme of helping employees become better health care consumers. Educational support on the part of the employer is critical when implementing any of these strategies.

Also, it is very important to have conversations with your advisor throughout the year about all of the options available so you can be prepared. A good strategy can help a business control costs in the current year and beyond.

Insights Employee Benefits is brought to you by JRG Advisors

How to offset escalating health care costs with gap insurance

Escalating health care costs continue to be an issue for employers of all sizes in all industries. Higher out-of-pocket costs for employees in the form of deductibles, copayments and premium contributions are inevitable.

“Gap insurance is proving to be a tried-and-true solution,” says Amy Broadbent, vice president of Client Services at JRG Advisors.

“This coverage is not new but it is gaining popularity as a solution to offset out-of-pockets costs,” Broadbent says. “Traditional gap plans are structured much like an old-fashioned major medical plan, paying expenses up to an annual maximum, which typically coincides with the benefit plan’s deductible.”

Smart Business spoke with Broadbent about the benefits of gap insurance and how to successfully implement it.

Why is gap insurance becoming more popular?

The Affordable Care Act outlines what employers are required to offer in terms of essential health coverage, which includes four plan design levels — platinum, gold, silver and bronze. Each plan requires higher cost-shifting to participants, with the lowest level (the bronze level) plans shifting as much as 40 percent of total costs to the participant.

Many employees today are now responsible for a portion of their health care costs. They may be responsible for meeting a deductible before their health insurance kicks in, or covering copays and coinsurance out of their own pocket. These expenses may cause concern among employees. This is where a well-designed gap plan comes into play.

How does the coverage typically work?

Gap insurance can help guard against financial risk, by reimbursing certain out-of-pocket medical expenses for inpatient and outpatient benefits. Coverage can be designed to provide a first dollar benefit that fills the gap if a covered event, such as a hospitalization, occurs.

It is important to note that gap coverage does not replace health insurance but rather helps fill the gaps and offset medical expenses that may occur.

By providing benefits for unexpected events, the plan design can diminish the financial impact of a high deductible. The goal is not to cover every gap, but to cover those that may have a larger and more immediate impact on participants. In today’s economic climate, this is a meaningful benefit to employees who may not have savings or funds readily available to cover their otherwise out-of-pocket health care expenses.

Coverage can be designed to retain some of the out-of-pocket costs for the participant. This can help reinforce the cost-containment aspects of the high deductible plan and be provided only for non-elective events. The value in this approach is twofold — the premium of the gap plan will be lower since it does not include coverage for elective services; and by not covering elective services, the plan encourages consumer-driven attitudes with participants.

What’s important to know about submitting claims?

Claims submission is a simple process. Upon receiving a service that is covered under the policy, the participant submits an Explanation of Benefits from the medical insurance company showing the expenses — deductibles, coinsurance and/or copayments — they are responsible for paying out-of-pocket.

Participants can choose if the claim is paid to the insured (reimbursed directly from the gap insurer), or if they wish to have payment go directly to the provider (they can request to have benefits assigned this way at the time of service from the provider).

Premium efficiency is the key to a successful gap strategy. Ideally, the combined cost of the higher deductible medical plan and the gap insurance is equal to or less than the renewal offer on a lower deductible plan.

Talk with your advisor to determine if gap is a solution for you.

Insights Employee Benefits is brought to you by JRG Advisors

How to navigate the individual open enrollment period of the ACA

Open enrollment for individual plans, under the Affordable Care Act (ACA) is here. Deductibles and out-of-pocket maximums will be resetting and rates will be changing — hopefully for the good.

“This is the time when people have a lot of decisions to make about their health care benefits for the 2016 calendar year,” says Craig Pritts, senior sales executive at JRG Advisors. “Decisions about the network, plan design and whether to use healthcare.gov are just some of the choices.”

Smart Business spoke with Pritts about what you need to know regarding the ACA’s individual open enrollment period.

When is open enrollment and why is so important?

Not making a decision by the deadline can be costly. The individual mandate requires most people to have insurance or pay a penalty. There are only a few exceptions.

The penalty for 2016 was increased to be the greater of 2.5 percent of yearly income, or $695 per adult person and $347.50 per child under 18 years old. The penalties are expected to increase in future years, based on cost of living adjustments.

This year the open enrollment period started on Nov. 1 and runs until Jan. 31, 2016. After Jan. 1, only people that qualify for a Special Enrollment Period will be allowed to enroll in an individual plan. This is true of plans direct with insurance companies and on the marketplace (healthcare.gov). Special enrollment may be due to involuntary loss of other coverage, marriage, divorce, birth, adoption, death, change of residence or released from incarceration (not escaped).

What’s the difference between the enrollment choices?

A person may enroll in an individual non-group health plan directly with an insurance company or with an insurance company through the marketplace. The biggest difference between the two can be the potential for a reduced premium and/or reduced out of pocket costs on the marketplace.

The Advanced Premium Tax Credit, also referred to as a subsidy, is a reduction in what a person pays monthly for their coverage. The subsidy is based on factors like household income and size and is determined by the marketplace.

Some people also qualify for a Cost Share Reduction, which lowers the out-of-pocket expenses on Silver Level Plans. There are three reductions available based on the household income. Those that qualify may see a plan that normally provides about 70 percent coverage increased to cover 73 percent, 87 percent or even 94 percent of the out-of-pocket costs. This means the deductible, copayments and coinsurance are lower as a result of the cost share reduction.

The subsidy and reductions are only available on the marketplace.

How does plan design play a part in this?

It is very important to be aware of plan design in the post ACA world. As insurance companies face more costs, they are finding ways to deliver plans at an affordable cost. One way the insurance companies are doing this is shifting more of the out-of-pocket costs to the members. A thorough review of the plan and the cost for the services will help you make a better decision.

This is true of the plan network as well. Insurance companies are offering plans with a smaller network or no out-of-network coverage as a way to control premiums. Tiered networks are also becoming more popular options. These have different costs when using providers in different networks. A person may have one deductible for a certain hospital and a different deductible for other hospitals. This allows an insurance company to offer a plan at a lower cost and have the member pay more if he or she uses a facility that charges the carrier more.

At the end of the day, everyone needs coverage and the process has become more difficult to navigate, so you should work with a broker. The plans and rates don’t change and a broker shouldn’t charge you for their help.

As an employer, if you don’t offer coverage, send your employees to someone you can trust to help them. If you do offer coverage, you should be helping your part-time and seasonal employees by referring them to a trusted advisor.

Insights Employee Benefits is brought to you by JRG Advisors

It’s time to review your Medicare plan. Here’s what you need to know.

Medicare open enrollment for the 2016 plan year occurs between Oct. 15, 2015, and Dec. 7, 2016. More than 50 million Medicare recipients will review or change their policies due to alterations insurance companies may make to co-pays, premiums and maximum out-of-pocket costs for the 2016 plan year.

Recipients will also have the opportunity to change their Part D prescriptions drug plan and switch between original Medicare and a Medicare Advantage plan.

“Even if you are satisfied with your current coverage, it is important to compare your current plan to what will be offered in 2016 and to what other alternative plans will offer to ensure you have the best coverage for your situation,” says Crystal Manning, Medicare specialist at JRG Advisors.

Smart Business spoke with Manning to find out what this may mean to you, or your employees and dependents.

Why do you need to review Medicare plans every year?

Alternative plans may offer better health and/or prescription drug coverage at a more affordable price. A simple switch to a competing plan can save thousands of dollars in out-of-pocket costs, including prescription drug co-payments.

What is the Annual Notice of Change?

If you have a Medicare Advantage plan or a stand-alone Part D plan, you should receive an Annual Notice of Change and/or Evidence of Coverage from your current plan. Review these notices for cost, benefit and rule changes for the upcoming year.

If you’re dissatisfied with any change, you can choose a different plan during open enrollment. Changes made to your coverage will take effect Jan. 1 of the next year.

What’s a Medicare Advantage Plan or Part C?

The Balanced Budget Act of 1997 authorized the use of alternative health care plans to provide Medicare benefits, in order to give beneficiaries more options and help control costs. The new program was known as Medicare+Choice or Medicare Part C.

In 2003, the Medicare Prescription Drug, Improvement, and Modernization Act made additional refinements to the program and renamed it Medicare Advantage.
Plans available under the Medicare Advantage program include Private Fee-for-Service Plans, Health Maintenance Organizations, Preferred Provider Organizations, Special Needs Plans and Medical Savings Accounts. Medicare approves Medicare Advantage plans, but private insurance companies run them.

These plans must take the place of Medicare, rather than function as a supplement. Medicare Advantage plans provide Part A (hospital insurance) and Part B (medical insurance) coverage and must cover at least all of the ‘medically necessary’ services that the original Medicare Plan provides. This coverage can include Medicare Part D prescription drug coverage and extra benefits such as dental and vision coverage as well as health club memberships.

So, what do you need to do now?

Start the review process early.

If you are enrolled in a Medicare Supplement plan, you don’t need to do anything during the Medicare open enrollment, you have guaranteed coverage for life, as long as your premiums are paid. Medicare is the primary payer and your supplement is the secondary. Any provider that accepts Medicare will honor your supplement product.

If you are enrolled in a Medicare Advantage plan, research your options and make sure you understand what you’ll receive and how much you’ll pay out of pocket.

This includes checking your deductibles, which can change from year to year. Also, make sure the doctors and hospitals you use are still in the plan network and prescriptions are covered.

If you are still working or have retiree benefits, make sure you understand how those benefits coordinate with Medicare.

Finding the right Medicare plan, figuring out deductibles and worrying about the prescription drug ‘doughnut hole’ can be confusing. Some Medicare plans during the past year may have been altered or premiums may have risen or fallen. Don’t ignore your opportunity to compare plans, and don’t assume your plan will not change.

Discuss your Medicare options with an experienced Medicare specialist to avoid any penalties and confusion and to make the best choice for you.

Insights Employee Benefits is brought to you by JRG Advisors

Cost containment strategies that can control your health care costs

Despite the distractions the Affordable Care Act has caused, employers of all sizes haven’t lost sight of the fact that rising health care costs remain a significant issue that needs to be constantly addressed.

“Employers continue to seek comprehensive medical benefits at a competitive price. Being prepared for your annual renewal means knowing what alternatives exist and selecting the best plan for your company and your employees,” says Craig Pritts, senior sales executive at JRG Advisors.

Smart Business spoke with Pritts about a variety of available solutions that may be implemented alone or in conjunction with other programs to control or reduce costs.

What are some benefit trends that are being used to contain costs?

A survey conducted by the National Business Group on Health indicates full replacement Consumer-Directed Health Plans (CDHP) as the primary cost containment strategy being implemented by employers. A CDHP integrates a high deductible health plan with a health savings vehicle.

Replacing all other plans with a CDHP is a big step for many employers, and requires employee education and understanding in order to reap the full rewards of this type of plan design.

Another benefit trend that is expected to gain momentum is defined contribution strategy. With this approach, the employer contributes a set amount of premium for employees to spend on benefits.

The defined contribution strategy is often combined with two additional trends:

  • Voluntary benefits offer employees the ability to fill gaps in coverage from high deductibles and also offer additional benefits the employer may not offer, such as disability, accident coverage, cancer insurance, pet insurance, etc. Voluntary benefits are most often paid on a pretax basis through the convenience of payroll deduction.
  • Private Exchanges, developed as a result of the changing health care marketplace, act as the vehicle for the defined contribution strategy. They provide ‘one stop shopping’ for employees to purchase plans from a full menu of insurance and non-insurance options.

How does self-funding fit into the cost containment strategies of employers?

There was a time when only the largest of businesses would consider self-funding their health insurance plan, but today employers of all sizes are benefiting from a self-insurance model.

The willingness of an insurance company to administer a self-funded plan to smaller size companies, along with stop-loss insurance options, make this option one that should be discussed.

What other strategies are organizations implementing?

Adding or expanding wellness programs is becoming another popular strategy for employers. Nearly 75 percent of all health care costs are preventable, because they are a direct result of individual choices. These costs can be reduced when employees take more responsibility to manage their own health.

Incentives or disincentives are integrated with employee premium contributions and directly related to participation in wellness initiatives, often including biometric screenings.

An additional cost containment strategy is reducing spousal subsidies or implementing spousal surcharges. Studies indicate that in 2016, 29 percent of employers will have a surcharge in place for spouses who can obtain coverage through their own employers, with an additional 3 percent completely excluding spouses if their employer offers coverage.

What do these trends say about the health care environment today?

All of the trends identified share the underlying theme of helping employees become better health care consumers. Educational support on the part of the employer is critical when implementing any of these strategies.

Also, it is very important to have conversations with your advisor throughout the year about all of the options available so you can be prepared. A good strategy can help a business control costs in the current year and beyond.

Insights Employee Benefits is brought to you by JRG Advisors

How to use incentives to maximize your workplace wellness program

The Centers for Disease Control and Prevention indicates the U.S. is in the midst of a “lifestyle disease” epidemic. The burden of chronic disease is growing as rising rates of obesity, physical inactivity, poor nutrition and tobacco use are resulting in increased cases of diabetes, cardiovascular disease and chronic pulmonary conditions.

In addition, the onset of these chronic conditions is shifting to the younger-age population who are still participating in the workforce. This is causing increased concern among employers regarding the impact on the cost of employer-sponsored health benefits and employee productivity.

Smart Business spoke with Amy Broadbent, vice president of Client Services at JRG Advisors, about how to break the poor health habits of your employees.

What are employers doing to counter poor health habits?

According to the National Business Group on Health, 67 percent of employers have identified ‘employee’s poor health habits’ as one of their top three challenges to maintaining affordable health coverage.

To counter this trend, employers are adopting health promotion and disease prevention strategies, taking advantage of their access to employees at the workplace at an age when intervention geared toward healthy behaviors can still have an impact on long-term health as well as long-term costs.

Survey data indicates that 92 percent of employers with 200 or more employees offer wellness based programs and initiatives at the workplace. Yet, while the availability of lifestyle and behavior modification tools are accessible and promoted, actual participation of employees in such programs remains limited.

Achieving adequate participation is essential for employers to realize the full value of their investment in workplace health promotion. Incentives, therefore, become an integral component of workplace wellness.

How can incentives increase participation in wellness programs?

A commonly incentivized program is the completion of a Health Risk Assessment (HRA). The HRA is a confidential HIPAA-compliant questionnaire that obtains information from employees regarding nutrition, physical activity, tobacco use, weight, blood pressure, cholesterol, etc.

Employers commonly offer a financial incentive or reward for employees who complete the HRA, with the objective of using aggregate HRA reporting to identify specific areas of concern among the employee population so these can be incorporated into workplace wellness programs and initiatives.

While the HRA can offer some insight as to the overall health of a group of employees, there is no true measurement of lifestyle or behavior improvements from year-to-year and, therefore, no way for employers to gauge program effectiveness.

In addition, biometric screenings are growing in popularity — not only as an alternate way to incentivize but also as an effective employee health risk management approach to workplace wellness.

These screenings, which can be conducted on-site at the workplace, measure height, weight, blood pressure, glucose levels, body mass index and more to identify common risk factors and conditions. The goal is not only to identify employees who are at risk, but ensure those with known risk factors or health conditions are adhering to their prescribed medications and/or course of treatment.

Employees are initially incentivized based on their participation in these screenings, typically related to their financial contribution toward the cost of health care premiums. In subsequent years, the incentive is based on the level of improvement over the prior year’s biometric screening results. For example, an improvement in overall score from year one to year two would result in a lower employee health insurance premium contribution.

Despite the increased awareness and workplace promotion, there is often insufficient evidence for employers to objectively measure the true financial impact or return on their investment as a result of workplace wellness efforts.

Biometric screenings, combined with an employee health risk management approach to wellness, enable employers to maintain costs and measure results. Talk to an advisor to learn how this approach to workplace wellness can work for you.

Insights Employee Benefits is brought to you by JRG Advisors

Part 3: Should your company consider a self-insured health care plan?

Almost every employer that offers a group health benefit program is searching for methods to lower their company’s spending.

There are several ways to cut health insurance spending that are probably familiar, such as modifying plan designs, changing insurance companies and shifting more costs to employees. What many employers don’t consider is shifting from offering an insured health plan to self-insurance, says Aaron Ochs, consultant and project manager at JRG Advisors.

“The market is rapidly changing. Because of the effects of the Accountable Care Act and ever escalating costs, self-insurance — normally considered a funding method only available to large employers — is becoming a viable option for employers as small as 25 employees or less,” Ochs says.

Smart Business spoke with Ochs about who should consider getting a self-insured plan.

How does self-funding work?

As the term implies, in a self-insured, or self-funded, health plan, the employer takes on direct financial responsibility for employees’ health care costs. Rather than being pooled into a larger risk pool, the self-funding employer takes on the risk for its own employee group.

Some customization can be applied to the structure of these contracts. For example, all of a health plan may be self-funded, or a contract might be purchased to cover certain types of claims. Most self-funded employers buy stop-loss insurance to cover catastrophic claims, capping the financial risk exposure.

Self-insured health plans are exempt from most state insurance laws and mandates, and not having to pay regular premiums to an insurance company can result in substantial savings. An employer also only pays for the claims that actually occur, not the claims an insurance company projects may occur.

Despite these advantages, many employers, especially smaller ones, tend to avoid self-funding — perceiving it as too risky. According to a recent Kaiser Foundation survey, among employers with 200 or more workers, 82 percent of employees are self-insured. Conversely, only 13 percent of employees in firms with three to 199 employees are in a self-insured plan.

What do employers need to know before starting a self-insured plan?

Self-insurance is not the right approach for every employer. Some companies will benefit from such an arrangement, others will not. An employer should consider that:

  • Self-funding can provide more control over your health plan. Coverage can be customized since you are not purchasing a pre-packaged product. Self-insured plans are subject to ERISA but aren’t bound by state insurance laws and state coverage requirements. You can truly meet employee health care needs with a plan that makes sense.
  • A self-insured company pays health claims as they incur, rather than paying a monthly premium regardless of actual claims activity. This can be attractive, especially during periods where health claims are low. On the other hand, the reverse is also true in that you will have to handle large claims as they come in. Remember, however, that stop-loss insurance limits this exposure and there are other methods to minimize payment swings, such as level funding.
  • When you pay a premium to an insurance company, you pay for more than just claims. The premium takes into account the insurer’s overhead costs, including advertising, technology, legal, etc., some allowance against their own financial risk and a profit margin. Self-insured employers don’t have to pay these hidden costs, but they do incur other expenses like third-party administration of claims and the premium for stop-loss insurance.

In addition, workforce demographics can make a self-insured solution either more or less attractive. Young and healthy employees do not necessarily guarantee a less expensive self-insured solution. Nor will older and unhealthy employees always break the bank. Always remember that self-funding means your company bears the risk associated with your employees, along with the protection of a stop-loss carrier.

It’s worth closely analyzing this risk with a professional who can give you well thought out estimates of your company’s potential liability. Only then will you be able to intelligently decide whether self-insurance is for you.

Insights Employee Benefits is brought to you by JRG Advisors

Part 2: The Defined Contribution model and how it can help you

The concept of Defined Contribution is not a new one, but it is newer for small and midsized businesses. Defined Contribution models have helped large businesses control their costs and provide more choices for their employees.

For small and midsized businesses, this was not an option in the past due to insurance company restrictions on the number of plans a business could offer to employees. The larger the business, the more options the insurance companies allowed them to offer.

As the cost of providing health care increased, there became a need for a new way to offer insurance that made sense for both the employer and the employees.

“The truth is the best plan for the business and the best plan for the employees are usually two very different things,” says Craig Pritts, senior sales executive at JRG Advisors. “The best plan for the business is usually the most cost-effective plan and the plan that most employees would prefer to have is usually the most expensive plan.”

Smart Business spoke with Pritts on how Defined Contribution can work for both employers and employees.

What is the basic model for a Defined Contribution plan?

The model allows a business to establish its contribution to the employees’ benefits and provides a menu of choices for the employees to select from. The menu may only include medical coverage or may include a long list of benefits such as dental, vision, life, disability and even pet insurance in some cases.

Some insurance companies offer this on a private exchange or an electronic platform. The private exchange is built specifically for business. The employers’ contribution is pre-populated and the plans are loaded on the website. The employees are then provided a login to the website where they can shop for the plans that are best for their needs.

Some insurance companies do not use a website at this time, but simply allow the employer to offer more than the traditional one or two plans.

What are some of the benefits for employers and employees?

There are a lot of benefits to both the employer and employees when using a Defined Contribution platform. Business owners find great benefit by controlling their costs, budgeting for future years and reducing the time spent trying to determine the best option for both the business and employees.

Employees love the choice and flexibility of deciding how their money will be spent by selecting the plan that is best for their coverage needs. Experience shows that most employees, when given a choice, will select a different plan than the one the employer provided when the same plan and employer contribution are provided.

The number of businesses using this model has been increasing every year and experts predict that most insurance plans will be offered on an exchange in the next few years.

What else should employers know about Defined Contribution?

The concept of Defined Contribution is also used by the marketplace on the Small Business Health Options Program (SHOP). There are guidelines a business must meet to use the SHOP based on number of employees, average wages and employer contribution.

The SHOP also may provide a business tax credit for groups that meet guidelines set by the Affordable Care Act. In 2015, an employer may only select one plan for the employees, but in 2016 an employer will be able to define its contribution, select the metal level it wishes to offer, and the employees will be able to select a plan from multiple insurance companies within the selected metal level.

Over the last few years, the health insurance industry has seen a lot of changes that have resulted in most businesses waiting and reacting to the changes. This concept gives employers a tool to be proactive in controlling their health care costs.

Insights Employee Benefits is brought to you by JRG Advisors

Part 1: The consumer driven health care approach — HSAs, FSAs and HRAs

Consumer driven health plans are plans designed to lower monthly premiums while engaging employees to manage more of their health care and make smarter decisions.

“Typically these plans have higher deductibles resulting in lower monthly premiums and are partnered with a savings account or a funding arrangement that provides a benefit to the employee,” says Doug Fleisner, a sales executive at JRG Advisors.

The three main types of accounts used with a consumer driven health plan are a Health Savings Account (HSA), Flexible Savings Account (FSA) and Health Reimbursement Account (HRA).

All three are designed to get employees more involved with heath care decisions.

Smart Business spoke with Fleisner about these creative funding strategies.

What are HSAs?

HSAs started in 2004 to replace Medical Savings Accounts and have increased in number ever since. An HSA is only available to individuals enrolled in a qualified high-deductible health plan that is approved by and meets the standards set by the IRS.

If the plan is qualified, whether it is through an employer or purchased as an individual, an HSA may be set up. The account may be funded by anyone, but the insureds’ funds are deposited into the account pre-tax. The IRS will allow a single insured person to deposit up to $3,350 in 2015 and anyone enrolled with a spouse or dependents up to $6,650 in 2015.

Individuals 55 years old and over can contribute an extra $1,000 per year as a ‘catch-up’ contribution. These amounts are reviewed and adjusted for cost of living from time to time. The money in the account can earn interest and grow through a savings account or investment options.

There are sometimes minimum balance requirements for the investment option. Any interest or gains earned are tax-free, in that a person will not pay income tax on that money and if the money is used to pay for qualified medical expenses there is no tax paid on the money when used either. This is often referred to as a triple tax advantage.

Qualified plans with an HSA promote and encourage engagement by placing more of the upfront costs on the employee. This in part has resulted in more people shopping for the best costs and outcomes before using their insurance when they can.

What are FSAs?

FSAs are similar to HSAs in that an employee can use pre-tax dollars to pay for qualified medical expenses. There are even options to use the account for certain dependent day care and transportation costs. The account is set up through an employer and is only funded by the employee or the employer. An employee may choose how much to deposit in the account pre-tax from their paycheck and what qualified items to use the money for.

These plans have a maximum that may be deposited in the account. For 2015, the maximum is $2,550 and a maximum of $500 may carry over. It is important to consider what the FSA will be used for to avoid overfunding the account and losing money. These accounts do not offer investment options and do not earn interest, but they do allow a person use pre-tax dollars for medical and non-medical items and services. It is also important to verify items approved by the IRS for purchase with an FSA.

What are HRAs?

With HRAs, an employer will select a plan with a higher deductible and a lower monthly premium. The savings generated by the lower premium can be used to reimburse the employee for some portion of the deductible and out-of-pocket costs. The account is owned by the employer and typically administered by the insurance company or a third party administrator.

There are more restrictions on this type of funding arrangement now due to the Affordable Care Act (ACA). There may be limits on how much an employer may contribute. Those interested in this option should work closely with their benefits advisor to be sure to remain in compliance with the ACA and the insurance company’s guidelines.

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