Exploring Health Insurance Options
Escalating health insurance costs are a major concern for many governmental operations. Don't think that your entity is immune to the trend. Is your current health plan the most cost-effective plan?
Action idea: Consider various options to traditional health insurance arrangements. You don’t necessarily have to stick with the plan you have been using for the past few years.
The following are several methods for reducing health insurance costs.
Premium Only Plans (POP): Employees pay a portion of the group health insurance premiums through regular payroll withholding. Since employees are paying for coverage with pretax dollars, this reduces their overall tax liability. Similarly, the contributions made by the employees reduce the FICA tax owed by the employer.
The plan must have a written document and cannot discriminate in favor of highly compensated employees. Furthermore, the tax-free benefits provided to key employees under the POP cannot exceed 25% of the tax-free benefits provided to all employees.
Flexible Spending Arrangement (FSA): Each employee may elect to withhold an amount to be contributed to his or her personal account. The FSA is then used to pay qualified health care costs, including the employee's deductibles and co-insurance amounts, with pretax dollars.
Caution: Under the "use–it–or–lose–it" rule, any FSA amounts not withdrawn for medical expenses at the end of the plan year revert to the employer. However, the employer may allow a 2½–month "grace period." In effect, employees have until March 15 to exhaust the funds.
Health Savings Account (HSA): An HSA works like an IRA used to pay for medical expenses. Contributions to an HSA, which must be set up in conjunction with a high deductible health insurance plan, are tax deductible and accumulate in the account without any current tax erosion. Furthermore, distributions are tax-free as long as the funds are used to pay for qualified medical expenses. Unlike an FSA, funds in the account may be carried over from year to year.
Health Reimbursement Arrangement (HRA): An individual health care reimbursement account is established with a fixed annual amount for each eligible employee. The basic concept is similar to an FSA with two significant differences:
- While an FSA is funded with an employee's pretax dollars, an HRA is funded solely with employer contributions.
- Funds in the account that are not spent by the end of the year can be carried over, so there is no "use–it–or–lose–it" feature.
By combining an HRA with a high deductible health insurance plan, an employer can spend less money overall than with a traditional health insurance plan for employees.
These are just a few possibilities to consider as the health insurance marketplace continues to expand.
Action idea: Appoint a staff member to conduct a thorough investigation of health insurance plans. Then you should carefully analyze the results. Your organization may have more options at your disposal than you think.
At Lewis, Hooper & Dick, LLC, we offer comprehensive services in human resources. Please contact David Lunzmann at (620) 275-9267.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax related matter.