Small-Sized and Medium-Sized
Business Employers
Group Coverage and Common Types
of Health Plans
What type of health care coverage will work best for
your business? Your decision will depend on such factors as cost, provider
choice, and the types of health care services offered in the health plan
product.
From a practical standpoint, the cost factor likely
will be very important to you and your employees. Health plan costs vary
greatly. Make sure you understand the costs of the various plans that are
available and compare them. There may be significant cost differences between
small group plans and high deductible plans or between
health savings or reimbursement accounts. See the
Typical Plan Costs and Cost Sharing to learn
more.
Managed Care Health Plans
There are three types of major
managed
care health plans that most employers who purchase group health plans buy
in today's health insurance market. Employers' financial contributions to the
premiums for these health plans are all tax
deductible
and can significantly reduce the overall cost of
health
insurance.
These health plans generally provide comprehensive
health services to their participants and offer financial incentives for
patients to use the providers who belong to the plan. Employees often are
required to pay a low-cost
co-payment for
each medical service received. Often a member's health coverage is paid in
advance (pre-paid care). Fees and reimbursement for health care provider and
hospital services are negotiated by the employer when purchasing the health
plan.
Health Maintenance Organizations
(HMOs)
Health maintenance organizations
(HMOs) generally
provide participants access to a fairly strict
network of
health care providers for services such as,
preventive
care and medical treatments. While participants do not have to pay a
deductible, employers and employees usually share the monthly
premium costs,
and participants usually need to pay only a small fee (co-pay) at the time the
medical service is delivered and for prescriptions.
The
HMO covers 100% of
the medical services provided. Participants are often required to select a
primary care
physician, who coordinates a participant's treatment and who can refer him
or her to specialists within the
HMO
network as
needed. If a participant selects health care services out of the "network," he
or she usually will be responsible for 100% of the medical care costs.
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Preferred Provider Organizations
(PPOs)
Preferred provider organizations
(PPO) are similar
to health maintenance
organizations (HMOs) in that they offer
participants a network of health care providers and require participants to pay
a co-payment for individual medical services. Unlike
HMOs, in
PPOs participants
are allowed to seek care outside the
network. Using
an out-of-network
provider, however, typically increases the required co-payment. Also unlike
HMOs, in
PPOs participants
are not required to have a
primary care
physician and do not need a
referral to
be treated by a specialist.
PPOs often require
deductibles and have higher co-payments than
HMOs, but they
also offer a broader choice of health care providers and services.
Point-of-Service Plan (POS)
The
point-of-service
plan (POS) is a
combination of HMOs and PPOS. They aim
to offer participants more freedom to choose their own health care providers
and services combined with the lower cost of an
HMO.
As with an
HMO,
POS participants
must select a primary care physician within a defined health care
network. This
physician can make
referrals to
specialists within and outside of the
network.
Similar to an HMO,
there is no deductible for
in-network
care, and participants are only required to pay a small
co-payment at
the time of service.
If medical care is provided outside of the
network, the
participant will be responsible for first meeting a
deductible
and then paying for either a percentage of the incurred expenses not covered by
the POS or the
difference between what the health care provider charges and what the health
plan deems to be a "reasonable and customary" cost for the service.
High-Deductible Health Plans
(HDHPs)
A
high-deductible
health plan (HDHP) is sometimes referred to as a "catastrophic" health
plan. HDHPs must be established to open a health savings
account (HSA). For employers, it is a less-expensive health plan benefit to
offer employees than are traditional
managed
care health plans (i.e., POSs or HMOs) because the employee/individual generally pays the first
several thousands of dollars of health care expenses (i.e., the
deductible). After the
employee/individual meets the deductible, the health plan pays the additional
health care costs incurred.
HSAs are often used in conjunction
with HDHPs and can be used to help pay for health care expenses that the HDHP
does not cover. For 2006, in order for an employer or individual to open an
HSA, an HDHP's
minimum deductible needs to be
$1,050 for individual coverage and $2,100 for family coverage. With this plan,
the annual out-of-pocket costs (including deductibles and co-pays) for 2006
could not exceed $5,250 for individuals and $10,500 for families.
Health Savings Accounts
(HSAs)
A health savings account (HSA) is an alternative to
traditional
health
insurance. HSAs allow employees and/or
employers to set aside pre-tax income to cover out-of-pocket costs such as
deductibles, co-pays, or coinsurance.
HSAs must be
combined with a qualified
high-deductible
health plan (HDHP) with a minimum
deductible
of $1,050 for an individual or $2,100 for a family. Although there is no
maximum deductible for an HDHP,
total costs to the insured cannot exceed $5,250 for an individual or $10,500
for a family. HSAs
are owned by the employee and go with the employee if he/she changes jobs.
Unspent money in an HSA rolls over from year to
year.
What HSAs Offer Employers
HSAs offer companies of any size
an alternative to traditional health care. Businesses may deduct contributions
to HSAs and their
accompanying HDHP, just like traditional
health
insurance.
- HSAs offer employers
with limited funds the ability to purchase an HDHP for
employees and encourage them to make regular tax-free contributions to an
HSA to fund their
health care costs up to the deductible.
- Even though an employer is not required to
contribute to an employee's
HSA, if the
employer does make an HSA contribution, it must make the
same contribution for all employees.
- Provided the money is spent on qualified medical
expenses, defined in section 213(d) of the Internal Revenue Code, there are
federal and state income tax savings and payroll tax savings (FICA) for an
employer.
What HSAs Offer Employees and
Self-Insured Individuals
HSAs offer employees or purchasers
of individual health plan policies:
- Affordability—HSAs generally cost less than
traditional health plans because the underlying HDHPs often cost less. Even
with employees contributing to their HAS, the overall cost of an
HSA/HDHP plan will
often be less than a traditional
health
insurance plan.
- Flexibility—An indivdual can use the
money in his or her HSA to pay for current medical
expenses (including those not covered by insurance) or save the funds for
future needs such as:
- health insurance or
medical expenses if the person becomes unemployed
- Medical expenses after retirement (but before
Medicare)
- Out-of-pocket costs when covered by Medicare
- Long-term care expenses and insurance
- Savings—The money contributed to the
account can be invested to increase the individual's earnings.
- Control—The individual decides:
- How much money to put into the
HSA
- Whether to save the
HSA funds for
future expenses or use them to pay current medical expenses
- Which medical expenses to pay from the account
- Which company will house the account
- Whether to invest any of the money in the
HSA
- Which investments to make
- Tax Benefits—HSAs provide triple tax savings:
- Contributions to the account are tax deductible
- Earnings through investments are tax-free
- Withdrawals for qualified medical expenses are
tax-free
- Portability—The individual keeps the
HSA even if he or
she:
- Switches jobs
- Changes medical coverage
- Moves to another state
- Becomes unemployed
- Changes marital status
- Ownership—Money contributed to the
HSA belongs to the
account holder.
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Health Reimbursement Accounts
(HRAs)
Though similar in some ways to an
HSA, a health
reimbursement arrangement (HRA) can only be funded by
employers—allowing a company to set aside pre-tax dollars to cover
employees' out-of-pocket medical expenses, such as co-pays, deductibles, and
co-insurance. However, with
HRAs the
deductible
is not set in law as it is with
HSAs.
HRAs are
frequently paired with high-deductible
health
insurance plans (HDHPs), of which the contribution is tax deductible. As
with HSAs,
HRAs offer
employers federal and state income tax savings and payroll tax savings.
What HRAs Offer Employers
Employers own
HRAs and have
flexibility in designing the plan. Employers determine:
- The amount contributed to the
HRA
- The amount that can be rolled over year-to-year
- What happens to unused funds when an employee
leaves the company
- The timetable for the company's contribution
- Whether to and at what amount to cap
contributions
- The number of
HRA plans offered
(different plan designs can be established for different classes of employees)
Companies of any size are eligible for
HRAs, though
owners of S corporations, limited liability companies, and the self-employed
can fund HRAs for
their employees but not for themselves. Owners of C corporations may fund
HRAs for both
themselves and their employees.
What HRAs Offer Employees
As an alternative to traditional
health
insurance, HRAs provide employees with tax
advantages for out-of-pocket spending on medical expenses, including
co-insurance, co-pays, and the
deductible
of an HDHP, if used. In addition, employees save on the cost of HDHPs, which
typically have lower premiums that traditional
health
insurance plans.
Flexible Spending Accounts
Flexible spending accounts
(FSAs) are commonly used to supplement traditional
health
insurance—not replace it. FSAs typically are funded by the employee
from pre-tax dollars and are used to pay for qualified medical expenses. Unlike
health savings accounts (HSAs) and health reimbursement
arrangements (HRAs), FSAs expire at the end of
the year and any unspent funds revert to the employer.
What FSAs Offer Employers
- Companies of any size can offer FSAs to employees
- FSAs can be used with traditional
health
insurance or high-deductible health plans
(HDHPs)
- Provided the money is spent on qualified medical
expenses (defined in section 213(d) of the Internal Revenue Code), the employer
benefits from federal and state income tax savings and payroll tax savings
(FICA)
- Companies can set the contribution limit to a FSA
After an employee has designated a contribution amount
for the year, that amount must be made available to the employee at the start
of the year. Although unspent balances are generally forfeited at termination,
if an employee leaves mid-year and has already spent the entire account, the
employer is liable for the balance.
What FSAs Offer Employees
FSAs provide employees with the chance to lower their
taxable income by setting aside money from pre-tax dollars to pay for
out-of-pocket medical expenses such as co-payments, prescriptions, and
deductibles. However, because FSAs work on a "use it or lose it"
basis—meaning that unspent funds at the end of the year are returned to
the employer—employees should estimate their eligible expenses
carefully.
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