Businesses Can Offset Rises in Health Insurance Costs Without Trimming Benefits
Patricia A. Schultz, Esq., Eckert Seamans Cherin & Mellott, LLC
Health insurance costs are expected to rise an average 16 percent in 2003. While employers have little control over these costs, they may be able to offset all or part of this increase by adjusting their overall benefits packages -- without diminishing the benefits they offer or significantly increasing plan administration costs.
Here are five ways employers can make their benefits packages more cost-effective:
- Enable employees to pay certain benefits with pre-tax dollars.
This tactic is not new, but few businesses make full use of it. Deducting employee-paid benefits from pre-tax income saves both employer and employee money. The employer does not have to pay matching Social Security and Medicare (7.65 percent) and federal unemployment taxes on the value of the benefit. Employees reduce their taxable income, saving as much as 35 percent of the value of the benefit depending on their tax bracket.
Three common vehicles for shifting benefits to pretax income are:
Premium-only plans, which allow employees to pay their contributions to their health, dental, vision and disability insurance costs with pretax dollars.
- Flexible Spending Accounts: Medical Expense Accounts allow employees to pre-fund expected and uncovered medical expenses with pretax dollars.
- Dependent Care Plans allow employees to pay family daycare expenses with pretax dollars. Dependent care plans can cover childcare or elder care expenses.
- Transportation reimbursement benefits, which allow employees to pay up to $100 per month in mass transit and commuter vehicle expenses and up to $185 per month in parking fees from pretax income.
All three benefits require Plan documentation and adherence to IRS regulation to qualify as pre-tax benefits.
Voluntary benefits are plans that the employee pays for in full, often with pretax dollars, under a plan offered at their place of employment. This allows employers to add important benefits with the convenience of payroll deduction, without incurring additional costs to their business. Voluntary benefits may include vision and dental coverage, short and long term disability, supplemental and dependent life coverage, long-term care insurance and even automobile insurance. Voluntary benefit programs enable employees to choose the benefits that are important to them at a reduced group cost. The benefits are portable from one job to another and may be extended to cover family members.
Employers considering the addition of voluntary benefits should first determine whether they will simply provide access to worksite marketers or wish to endorse the plans. Their choice can determine whether their voluntary plans fall under ERISA disclosure requirements and preemption protections.
Switching to a healthcare plan that offers a smaller network of hospitals and doctors, but still allows employees to go outside the network at a reduced reimbursement rate, can shave as much as 10 percent off an employer's health insurance costs. After choosing an in-network primary care physician, few people venture outside their provider network. The premium savings in an objective cost/benefit analysis usually outweigh the perceived desirability of wider networks with large numbers of participating physicians.
National studies have shown that employees want to take a more active role in their own health care choices. Consumer-directed Health Care plans combine a high-deductible health plan with an employer-funded account that workers use to pay out-of-pocket medical expenses.
Unlike the purchase of other consumer goods and services, employees haven't been able to choose the scope and level of benefits in their plans, which doctors and hospitals are part of the network offered, or alternative healthcare services they may wish to access. On the other hand, they only minimally experience the direct cost of the healthcare they utilize because, if they stay "in network," most services are fully covered. By increasing employees' stake in spending decisions as educated direct purchasers, consumer-directed health care plans are intended to promote a more judicious use of health care services by employees.
Recognizing the importance of this emerging trend, the Treasury and IRS have recently provided guidance establishing tax qualification and carry forward provisions for Health Reimbursement Accounts (HRAs), the vehicles for these plans. Balances in these employer-funded accounts may be carried over from one year to the next without tax consequences for employers or employees. Employees can use the accounts to cover "substantiated" medical expenses and/or accident and health insurance premiums for themselves, their spouse and dependents. The Plan can define the maximum dollar amount and period of coverage provided. HRAs can be part of a consumer-directed health care plan or a stand-alone benefit.
The action by the Treasury and the IRS is expected to boost employer interest in the growing consumer-directed approach, where employees become the direct purchasers of health care and the employer's role is eventually reduced to that of financial contributor and administrative steward of the company's health plan.
A recent telephone survey of American workers found that they lose an average of 115 productive hours a year because of health problems, either because they called off sick or were performing at a substandard level because they were ill on the job. A company-sponsored wellness program can substantially reduce that number.
Under an employee wellness program, a business offers its employees on-site access to health services such as blood pressure monitoring, cholesterol screening, smoking cessation programs and nutrition counseling. The benefit to employers generally comes from improved employee morale, fewer employee sick days, reduced use of healthcare benefits and increased productivity.
Even a small business can offer a wellness program. A local hospital or physicians practice, chiropractor, fitness center or health food store will often provide free or low cost assistance in exchange for the opportunity to raise awareness of their products and services.
Some employers reward employees for participation in the wellness plan through reduced employee contributions to their health care premiums or lower co-pays and deductibles. Employers choosing this route should be aware that the IRS and Departments of Labor and Health and Human Services last year issued proposed rules establishing "Bonafide Wellness Plan" requirements for plans that apply discounts or surcharges tied to participation standards.
Employers trying to control healthcare costs have few good alternatives. But they may be able to lessen the impact of those costs by looking for savings outside their traditional choice of healthcare plans. There could be ample opportunities within the overall benefits package to trim costs without trimming the benefits they offer.
Patricia A. Schultz is an attorney with Eckert Seamans Cherin and Mellott, LLC focusing her practice on employee benefits and insurance law. Before her admission to the bar, Ms. Schultz was an executive with Aetna Life & Casualty and Highmark Life & Casualty. Telephone: 412.566.2918.