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Small Business Employee Benefits and HR Blog

Health Reform Aftermath - What Employers and Individuals Should Do Now

health reform next stepsEmployers Can Now Use Their Existing Payroll System to Save 20%-50% on the Health Care

While everyone was focused on Washington’s now-failed grandiose plan for total U.S. health care reform, a number of significant federal reforms took effect that allow employers (and employees) to use their payroll system to save on their health benefits. These reforms went unnoticed when many employers and employees adopted a wait-and-see approach toward changing their health benefits in 2009. 

These reforms affect the following three different types of employers and their employees:
    1. Employers with Group Health Benefits Plans 
    2. Employers with Group Health Benefits Plans Unable to Afford the Increasing Price 
    3. Employers with No Health Benefits Plans and No Ability to Afford One 
A. Employers with Group Health Benefits Plans 
 
Increase the annual deductible, saving up to 50% on your next month’s premium. This can be done anytime during your plan year. Then use your payroll system to automatically reimburse employees for increases in medical expenses that employees incur due to the higher annual deductible. Overall savings should be 20% or more after paying reimbursements. 

Employers may now use their existing payroll system to reimburse employees tax-free for medical expenses as incurred by the employee versus having to prepay such amounts up-front via mandatory contributions to a TPA, an HSA, or to higher group health insurance premiums. 

Employers with group health benefits plans can save up to 50% on their monthly premium, starting next month, by increasing the annual deductible and using their existing payroll system to reimburse employees tax-free for their higher expenses due to the increased annual deductible. This typically saves employers about 20% overall after paying reimbursements. Employers can also customize their supplemental reimbursements by class of employee and add important categories of coverage such as wellness benefits. 

Payroll-administered reimbursement plans, powered by Section 105 HRAs (Health Reimbursement Arrangements), are now offered by the leading payroll companies and by thousands of innovative health insurance agencies. Employers should avoid carrier-supplied HRAs because (1) they keep the employer from easily changing insurance carriers when prices are increased at renewal time, and (2) carrier-supplied HRAs offer very limited benefits. 

Employers should also avoid setting up a separate third-party debit card system for reimbursements and simply reimburse employees using their existing payroll. There is no better incentive for employees to comparison shop than having them lay out their own funds, even if such funds are later reimbursed 100% by the company. 

If your company has a group health insurance plan, speak to your agent about increasing the annual deductible and using your payroll to selectively reimburse employees for their out-of-pocket medical expenses. 

B. Employers with Group Health Benefits Plans Unable to Afford the Increasing Price 

Cancel your group plan, but don’t cancel your health benefits. In place of your old group plan, give employees tax-free monthly allowances to purchase their own personal health insurance policies. 

This is the biggest change in U.S. health benefits since WWII affecting employers and employees wanting lower cost and/or portability. Employers without a group plan, or those terminating their group plan, may now simply give employees tax-free allowances to purchase their own personal (sometimes called individual or family) health insurance plans. 

Personal health insurance plans have risen from covering 12 million Americans in 2002 to covering 30-40 million Americans in 2010. This is because: (1) They cost about 1/2 the price of similar-benefit group plans in 45 states; and (2) They are portable—employees may keep their personal health plan if they quit, are fired, or retire before becoming eligible for Medicare at age 65. My wife and I have had a personal health plan for our family since 1999. 

But the big savings here comes from more than just switching from group to personal policies. The big savings comes from transferring the cost, and/or the risk, of an employee’s catastrophic illness from the bottom line of your company to the state and federal government. 

I’m a big believer that the cost, for example, of a child with leukemia should be borne by all of us through our government, rather than forcing a small employer to either go out of business or terminate its health benefits for everyone. 

Federal law now requires all states to provide guaranteed-issue personal policies to employees (called “HIPAA-eligibles) whose group plan is terminated by their employer. While terminating a group plan can create turmoil for some employees with preexisting medical conditions, it is also a blessing for such employees since they now become eligible for state-guaranteed personal policies that they can be renewed indefinitely independent of their employment. Employees with preexisting medical conditions are the most likely to lose their job, and their group health benefits, because of illness. 

Moreover, new payroll-based technology allows employers to offer extra allowances to employees with preexisting medical conditions, or all employees, to insure that the coverage they receive from the government, which is provided in most states by Blue Cross Blue Shield, is the same or equivalent to what each employee used to receive with their group plan. 

Today’s payroll-based administration platforms allow employees direct access to designated licensed professionals to help employees choose the best personal policy for their family—while providing reporting back to the employer on an aggregated, de-identified basis. When your company switches from group to personal policies, make sure you choose an agent who has a HIPAA- and ERISA-compliant online software platform to distribute personal policies to individual employees. 

If your company has a group health insurance plan it can no longer afford, speak to your agent or payroll provider about switching a health benefit plan that gives employees tax-free monthly allowances to purchase their own personal policies. Such payroll-administered allowances are only funded by employers when premiums are incurred, can be customized for each class of employee, and unspent funds stay with the employer when an employee is terminated for any reason. 

C. Employers with No Health Benefits Plans and No Ability to Afford One

Allow individual employees to pay for personal health policies with pre-tax salary. This immediately saves employees up to 40% (in wage taxes) of the cost of their personal policy premium, helps employees budget household expenses, and also saves employers hundreds of dollars per employee (7.65%) in reduced FICA expenses. 

Employees participating in group employer plans have always been allowed to pay their share through reductions in the pre-tax salary. And now, a new 2009 U.S. Treasury regulation allows employees to make similar elections to pay for their personal health policies. New payroll administration platforms allow employees to self-enroll in salary reduction/reimbursement programs, and allow employees direct online access to licensed agents with online quoting engines for all carriers offering personal policies in their states. 

More than 50% of U.S. employers offer no health benefits plan at all. Their managers and owners have typically purchased personal health policies with hard-earned, after-tax dollars. Now, these 30-40 million Americans can save 20%-40% in taxes on their personal health policy premium by reimbursing themselves with pre-tax salary reductions. This 20%-40% savings should also allow millions more Americans without health insurance to afford personal health policies. 

This new regulation also affects employees who have group employer coverage but are unable to afford the cost of adding their spouse or dependents to the company group plan. If your spouse or dependents are healthy, you can typically obtain for them a similar-benefit personal policy for 1/2 the cost of your group plan and now pay your premium through pre-tax salary reductions 

And, similar to #2 above, new administration platforms allow employees direct access to designated licensed professionals to help employees choose the best personal policy for their family—with full reporting back to the employer on an aggregated, de-identified basis. 

If your company, like the majority of U.S. employers, does not offer any health benefits at all, speak to your licensed agent or payroll provider about allowing employees to reimburse themselves for the cost of personal health policies with pre-tax salary reductions. Such payroll-administered reimbursements can save employees up to 40% of the cost of their personal policies, and also save employers many times the nominal administration costs in permanent FICA savings. 

Every American citizen and resident who is medically eligible should get their own personal health insurance policy directly from a major insurance carrier. Personal policies cost 1/2 the price of similar-benefit employer group policies in 45 states, and can be generally renewed until age 65 without an increase in premium based on your claims history or your health—premiums do increase each year with overall medical inflation and age. But, there is a catch: You can only obtain a personal policy when you are healthy. That’s why it is so important to get all your healthy individual family members a personal policy now before they develop a medical condition. 

No one knows if, or when, we will get U.S. health care reform. But, all roads for reform seem to lead to the guaranteed issue of personal policies regardless of employment. This could be the death knell for group employer health benefits. 


If you want more on health care reform, you should read today's post on my personal blog, The Entrepreneurial Challenge: U.S. Health Care Reform Update: The Coming Opportunity for Entrepreneurs.

Disclaimer: My company (Zane Benefits) does not sell health insurance.  We make the software platform (ZaneHRA) that is distributed by the world’s leading health insurance agencies and 
payroll providers to reimburse employees for medical expenses and facilitate the distribution of personal policies at the workplace. Contact your local health insurance agent or payroll provider for more information.
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