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Ease Health Care Pain with Tax-Advantage Plans
As employers prepare to comply with new requirements per the health care reform bill, now is a good time for businesses to assess how to make the best use of the benefits they currently offer.
Many companies offer a variety of benefits through a “cafeteria” plan, so named because employees choose from a menu of qualified benefits and cash (or cash equivalent). This type of plan includes special tax treatments for both employers and employees.
Employers like cafeteria plans because they don’t have to pay FICA or federal unemployment tax on employee contributions to the plan—making it worthwhile because the tax savings often exceed the cost of administering the plan. Also, any employer contributions are generally tax deductible. Smaller businesses like the way cafeteria plans allow employees to choose from multiple benefits at minimal cost, and they’re easy to set up so administration coincides with payroll processing.
Employees like the flexibility in choosing benefits, as well as the fact that their contributions to the plan are made on a pre-tax basis, so their take-home pay is greater. In addition, some states, including Delaware, Maryland, Pennsylvania and New Jersey, exclude pre-tax contributions from state income taxation, further increasing take-home pay.
The most common options within cafeteria plans include group medical, prescription, dental and vision plans. A relatively new addition is the high-deductible health plan (HDHP), which typically is offered in tandem with a health savings account (HSA).
Medical insurance plans fall into two general categories: traditional and managed care.
Traditional plans, often referred to as “fee for service” plans, either pay the provider directly or reimburse employees upon receipt of proof that an out-of-pocket medical expense has been incurred. With traditional plans, employees usually have to meet a deductible before reimbursements kick in.
Managed care plans include Health Maintenance Organization (HMO), Preferred Provider Organization, Point of Service and Physician Hospital Organization plans—all of which strive to better control medical costs. HMO plans require members to use only participating doctors and hospitals, except in emergencies. The other plans typically charge higher fees for out-of-network care. With managed care plans, providers receive a payment for each employee under their care and agree to accept discounted fees for service. Employees make a small co-payment for each visit or service. HMOs typically don’t have an annual deductible, but the other plans often do.
When employers offer medical insurance as part of a cafeteria plan, the related costs are generally tax deductible. While employees can’t deduct their share of the insurance premiums on personal tax returns (premiums are being paid with pre-tax dollars), they can take an itemized deduction for covered out-of-pocket costs that exceed 7.5 percent of adjusted gross income.
Prescription benefits usually are included in medical coverage, but sometimes are offered as a standalone plan. With some plans, employees make a co-payment for each prescription and the insurer pays the balance to the pharmacy. With others, employees pay the full cost (which is applied to their deductible); once the deductible has been met, they receive a reimbursement for a portion of the cost (often 80 percent).
Dental and vision services may be provided within a major medical plan or as a standalone option. Most dental plans cover preventive care, diagnostics, restorations, endodontics, periodontics and, usually on a limited basis, orthodontics. Vision plans cover eye exams, glasses and contact lenses. Dental and vision surgery is usually covered by the medical plan. Prescription, dental and vision plans are subject to the same rules as medical plans for employers and employees.
The HDHP-HSA combination has steadily gained popularity since being authorized by Congress in 2003. For 2010, a high-deductible plan is one that has a deductible of at least $1,200 for an individual or $2,400 for a family. Maximum out-of-pocket expenses under these plans for 2010 are $5,950 for individuals and $11,900 for families.
Because HDHP plans offer less coverage, premiums are lower. More importantly, participation in an HDHP qualifies the employee for an HSA. For 2010, participants covered by an individual HDHP can contribute $3,050 to an HSA; if the employee has family coverage, the contribution limit is $6,150. Participants age 55 and over can make an additional $1,000 catch-up contribution.
HSA deposits, whether by employer or employee, are considered pre-tax contributions and can remain in the account year after year, earning tax-free interest, until needed to pay medical bills. This works well for people who are in good health and for those who are careful about which health care services they choose. Also, the HSA is portable, so employees keep the account after a job change.
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Wednesday, February 8, 2012