Insurance issues

Employee benefits: the term conjures up images of blue chip Fortune 500 corporations with glass doors and teak wood conference tables. Well, I'm here to tell you that YOU have access to the same tax code, the same benefit plans and the same advantages that the BIG BOYS have.

In this article, I'm going to talk about health benefits and how you can get in on this too. That's one of the wonderful things about our country – if the big guys get a "bone," the little guy usually gets his version of it too. Employee benefits are no exception to this rule.

Now, you will have to do your own local regulatory homework on this one. Insurance laws are still state specific, and though they are getting better, they are not uniform across the country. The general framework should still hold.

The Holy Grail: Health Insurance

For the purpose of this discussion when I talk about health insurance, I'll be referring to either Group Health Insurance or Health Savings/ Reimbursement Accounts (HSA or HRA). These are really slick items and provide some real flexibility and potential cost savings.

Now, before your roll your eyes and say that you can't possibly afford this, suspend your disbelief and read on. One noteworthy development is the conclusion of a health benefit program for members of the Pizza Trade Association. Any time there is a "group" benefit or offer you simply must check it out. You can check out this resource at www.pizzatrade.org. I spent some time on the phone with the program administrator in preparation for this article, and I was impressed with what they have available.

So then, group health insurance. No doubt, you've noticed that the cost has increased almost geometrically in recent years. Any idea why? Well, as usual it has a lot to do with government regulation. Now, that's not all bad. Right now, group health insurance is available on a guarantee to issue basis in every state per health reform laws that were passed in 1996 – Health Insurance Portability and Accountability Act (HIPAA).

HIPAA and You

According to HIPPA, a small employer is a company (or a non-federal governmental employer) that has at least two but not more than 50 employees. Some states, however, may consider a business with only one employee a small employer. HIPAA mandates some key provisions in all plans — for example:

  • Plans may not exclude coverage for any pre-existing condition for more than 12 months after an individual's enrollment date.
  • Plans must be "portable." The simple explanation: Once an individual has health coverage, if they move to another job and are continuously insured, the pre-existing condition restriction is waived.
  • Plans must be renewed by insurance companies. If you purchase health insurance coverage for your employees, the issuer must renew or continue in force that coverage at your option unless you did some specific things like:
  1. Failed to pay premiums.
  2. Committed fraud.
  3. Terminated coverage.
  4. Ended membership in association.

You can see that HIPAA puts restrictions on insurance companies – restrictions that I think are good for the small employer and his workers. But of course, they drive up price. Here's a list of some of the other regulations that apply:

  • The Newborns' and Mothers' Health Protection Act of 1996 (the Newborns' Act) — This law requires insurance contracts to pay for a minimum number of days in the hospital following childbirth.
  • The Mental Health Parity Act of 1996 (MHPA) — The MHPA requires some health plans to provide coverage for mental conditions that is more in line with coverage for physical conditions.
  • The State Children's Health Insurance Program of 1997 (SCHIP) — This law provides for federal grants to states in order to insure children in families that do not qualify for Medicaid.
  • The Women's Health and Cancer Rights Act of 1998 (WHCRA) — This law requires insurance plans offering mastectomy coverage to also provide coverage for reconstructive surgery in a manner determined in consultation with the attending physician and the patient.
  • Do they keep you from the "tender mercies" of insurance companies and impose some degree of standardization? Yes!  Do they push up costs? You bet your assets.

The Carrot and the Stick:  How the Feds Get into the Act

So just how does the federal government get into this in the first place? The answer is simple — taxes. They offer tax benefits if you comply and tax consequences if you don't.

The Carrot: As long as you comply with the regulations, you as an employer can deduct 100 percent of the health insurance cost you pay for employees on your federal tax return. So, if the insurance costs you $12,000, that's $12,000 you don't pay taxes on. Guess who is the first one on the plan? Surprise! – The owner and his family.

The Stick: Some of the basics.

  • You can't discriminate — All employees (subject to work hour restrictions) must be offered the same plan.
  • There are minimum participation requirements –If you goof it up, intentionally or not, they will take back all the tax benefits you got, and you may be subject to penalties, too.

What about cost participation by the employees?

That's up to state specifics, but by and large, you can require employees to contribute to the cost of health insurance. The problem is that younger, single workers may refuse to contribute and thereby refuse to participate in the plan. If enough people refuse to participate, it can kill the whole deal! I've seen entire plans get "86'd" because they were one person short of the participation requirements. So, you can't be too heavy on the employee contribution, or they simply won't go for it.

Enter the HSA (Health Savings Accounts)

Congress passed a regulation that I like (never thought I'd say that in public). Here's the gist of it. You buy a "high deductible" health insurance plan. The plan functions almost identically to the "traditional" plans we have been talking about. The difference is that you are responsible for a deductible amount. The deductible is typically $1,000 for an individual and $5,000 for a family. The insurance company pays nothing until the deductible is paid out. Statistically, the cost of the insurance goes down because there's nothing paid out in a good number of the cases.

Now, you have to fund the deductible you choose. So, you (or the employee or both of you) put deductible money into the HSA. Any covered medical expenses during the year are paid out of the HSA until the deductible is used up. At that point, the insurance plan pays the rest on a 100 percent basis (of course — the deductible has been paid!) up to the plan limits.

Let's look at some of the benefits:

The Employer

  • Up front cost savings on insurance premiums can be substantial.
  • Easier to get employees to participate because of lower cost.
  • Can contribute some or all of the deductible cost and it's tax deductible.

The Employee

  • Employee owns the deductible fund. If it's not used it rolls over to the next term.
  • Deductible money can be invested in things like mutual funds.
  • If you pay for it, it's tax deductible.
  • If you invest it, the interest earned is tax-free.

IMPORTANT:  The money in the HSA is treated like the funds in an Individual Retirement Account (IRA). That means that:

  1. They can be withdrawn for any reason, but if you use the money for anything but a qualified medical expense by a person under age 65 you get a double "whammy." You get a 10 percent penalty off the top and it's taxed as ordinary income in the year you take it.
  2. After age 65 there is no penalty for non-qualified withdrawals, you pay only the tax as ordinary income in the year you take it.

Could that be a nice "chunk of change" at the end of the road? You bet it could! And any investment income accumulated tax-free. You could even use the accumulated HSA funds to pay for qualified long-term care insurance! Did you catch that?  You can actually pay for long term care with tax deductible, tax free money!

Read This Next Section Very Carefully

Okay folks — hold on and read this really carefully. It's not confusing, it's just really easy to get the wrong idea. With that warning in place, let's go.

What if you just cannot afford health insurance? What if there's no way you can slice the pie any thinner and get some more bucks out for benefits? What do you do? Pay retail for health care costs? Well, that's what a lot of people do, and it's scary and expensive.

Here's an alternative, and it is not insurance. It  is a way to get health care at the same price that major insurance providers pay. You pay a small fee, usually no more than $450 for a family for a year. In return, you get to use the PPO (Preferred Provided Organization) that major insurance companies use. So, when you go for the X-Ray or some such treatment, you don't get billed for the retail rate — you get the insurance company rate.

You are still responsible for 100 percent of the billed amount, but the services are billed at a much better rate. It is not insurance, just a better way to buy health care services if you can't afford insurance.

Some good points —

  • It's available to anyone.
  • There are no pre-existing condition limitations.
  • It's totally discriminatory.
  • There's usually no residency requirements.

But hey, if you really cannot afford insurance for you and/or your employees, you can certainly find a way to come up with the money for this. The biggest drawback is it's not insurance. You are responsible for all your bills, you just get billed at a better rate.

Summary

There are tax breaks galore for you if you get involved with group health insurance. There are even more if you get involved with a health savings account or health reimbursement account. You may even be able to accumulate a pot of cash that accumulates tax-free at the end of the line — cash that you can use for a veritable smorgasbord of really cool stuff. Forgive me, I think long-term care insurance is really cool.

You've got to talk to two people on this. First, talk to the insurance guys. (I know it's repetitive, but look at the Pizza Trade Association folks — they are in 40 states and they will do this stuff over the Internet and on the phone). Second, talk to your CPA. The CPA has got to know what you are doing if they are going to make sense of it all at tax time. The insurance guys and the CPA speak the same language on this one.
Finally, if there is no other way — look into the non-insurance alternative. It isn't much — but I would never want to be billed retail for health care services!   

My standing offer — If you have any questions, feel free to call me at 201-945-3100 or e-mail pj@pizzasure.com. I'll do my best to help you or get state specific help where needed. 

P.J. Giannini is an author, national seminar speaker, consultant and licensed insurance agent. PJ is founder of Association Agency, Inc. and has spent over 15 years as a commercial insurance niche marketer.