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Small-Sized and Medium-Sized Business Employers

Small 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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