Comparisons of Other Health Benefit Options

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1 Comparisons of Other Health Benefit Options COMPARISONS OF OTHER HEALTH BENEFIT OPTIONS QUESTION HEALTH SAVINGS ACCOUNT (HSA) HEALTH REIMBURSEMENT ARRANGEMENT (HRA) FLEXIBLE SPENDING ACCOUNT (FSA) WHO IS ELIGIBLE? Individuals and firms of any size. Firms of any size. Owners of S corporations, limited liability companies and the selfemployed can fund HRAs for their employees but not for themselves. Owners of C corporations can fund HRAs for themselves and their employees. Firms of any size. MUST IT BE USED WITH A HIGH- DEDUCTIBLE HEALTH PLAN? Yes. It must be coupled with a health insurance policy with a minimum deductible of $1,000 for an individual or $2,000 for a family. There is no maximum deductible, but total costs to the insured cannot exceed $5,000 for an individual or $10,000 for a family. No, but it usually is. The deductible is not set in law as it is with HSAs. No. WHAT ARE THE TAX ADVANTAGES? As long as funds are spent on qualified medical expenses, there are federal and state income tax savings and payroll tax savings (FICA) for employee and employer. Qualified medical expenses are defined in section 21(d) of the Internal Revenue Code. 1 As long as funds are spent on qualified medical expenses, there are federal and state income tax savings and payroll tax savings (FICA) for employee and employer. Qualified medical expenses are defined by the employer. As long as funds are spent on qualified medical expenses, there are federal and state income tax savings and payroll tax savings (FICA) for employee and employer. Qualified medical expenses are defined in section 21(d) of the Internal Revenue Code. WHO FUNDS IT? Employer and/or employee. If the employer contributes to the employee s account, the contribution must be the same for all employees. Employer. Typically, the employee. WHO OWNS IT? Employee. Employer. Employee. WHAT HAPPENS TO UNUSED FUNDS AT THE END OF THE YEAR? Rollover is allowed. Rollover is allowed at the employer s discretion. Forfeited to the employer. EMPLOYER FLEXIBILITY? Federal legislation sets minimum deductible and maximum out-of-pocket amounts. The full amount of the deductible can be funded through the account. The employer has substantial flexibility in designing an HRA. 2 The employer can set the contribution limit. WHAT IF THE EMPLOYEE LEAVES THE FIRM? The account is owned by the employee and therefore the balance is portable. The account is owned by the employer and therefore portability of funds is at the discretion of the employer. Balances are generally forfeited at termination. However, if an employee leaves mid-year and has already spent the entire account, the employer is liable for the balance. NOTE: For more information on HSAs, see 1 Consult a tax adviser to determine the savings that would occur in your specific case. As a general illustration, assume an HSA is funded at $1,000. If the employer funds the entire account, the $1,000 is deductible as a business expense by the employer. The $1,000 is excluded from determining employment or FICA taxes for the employer and employee, and is excluded from the employee s income taxes. Alternatively, assume the employee takes $1,000 out of their wages and funds an HSA. In this case, the employee can claim the $1,000 as an income tax deduction. Neither the employer nor employee would save FICA taxes on the $1,000 since it is included as income. 2 The employer can determine the amount the firm contributes to the HRA; the amount that can be rolled over to the next year; what happens to unused funds when an employee leaves; the timetable for the firm s contribution; whether to place a cap on the amount that can be accumulated over time and the amount of the cap; and the number of HRA plans to be offered (employers can establish different plan designs for different classes of employees). 5

2 Important Facts About Health Insurance As a small business owner, you might think that offering health insurance coverage to your employees is beyond your reach, but it may be easier than you realize. This overview is intended as a reference to accompany the more detailed National Guide to Health Insurance Options available at 1 Businesses may benefit economically by providing health coverage for workers and their families. Health insurance may help employers: Recruit high-quality workers; Reduce staff turnover; Reduce the cost of absenteeism; and Limit disability and workers compensation claims. 4 Health insurance payments are excluded from base payroll when calculating an employer s Medicare and Social Security payments. An equivalent amount paid in wages would be subject to Medicare and Social Security taxes. Typically, health insurance costs substantially less when you buy it as a member of a group rather than on your own. 2 Employees consider health insurance to be, by far, the most important fringe benefit. There are tax benefits when you offer health insurance to your workers: The health insurance premiums your company pays are fully tax-deductible as a business expense. This tax deduction may be thought of as a discount to the cost of health insurance. 5 6 Health insurance coverage gives you access to the price reductions that health insurance companies negotiate with doctors and other health care providers. Even if an employee or dependent is in poor health, federal law prohibits insurers from denying coverage to the company, the employee or the dependent based on health status, although the cost of insurance may be higher depending on your state of residence. Employees may make their premium contributions on a pre-tax basis through payroll deductions, which makes coverage more affordable for workers. 7 s Children s Health Insurance Program, New Mexikids, offers no cost or low cost health coverage for children under 19 years old. Self-employed persons may deduct 100 percent of the cost of their health insurance premiums from their adjusted gross income. 8 Alternatives to traditional health insurance include health savings accounts (HSAs), health reimbursement arrangements (HRAs), and association-sponsored plans. HSAs and HRAs have added tax advantages. 6

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4 Health Plan Comparisons Chart (page ) The Health Plan Comparisons chart on page of this Overview underscores that plan type and employee cost sharing choices have important implications for premium cost and provider choice. In general, plans with more cost sharing have lower premiums, and plans with more provider choice have higher premiums. For more information visit The chart illustrates a range of plans that are currently available in. For illustrative purposes, we selected plans that differ markedly with respect to premium costs, employee cost sharing and provider choice. The far left column indicates the name of the health plan and plan type. Plan types are described in detail on page 4 of the National Guide at The next three columns present monthly premiums for three firms, from two to fifteen employees. The next column, with horizontal bars, provides a general indication of employee cost sharing. The final column, also with horizontal bars, indicates the degree of enrollees choice of providers. To create this chart, three companies were described to insurance brokers so they could provide details on real insurance plans that are available to small employers in : A two-person dry cleaning business, composed of a man, age 7 and an unrelated woman, age 4, and her two dependent children. An eight-person building maintenance firm, composed of seven males, ages 20-54; one 4-year old female; and seven dependents, including one spouse and six children. A 15-person construction company, including two females, age 4; 1 males, ages 20-54; and 14 dependents, including two spouses and 12 children. Employee Cost Sharing Chart (page 4) The Employee Cost Sharing chart on page 4 of this Overview provides details on enrollees potential financial responsibilities (in addition to premiums) for medical services, supplies and prescription drugs. These costs are considered potential because if no health care is consumed then no cost sharing is incurred. The components of cost sharing co-payments, deductibles, coinsurance and maximum out-of-pocket limits are described on page 5 of the National Guide. Health care utilization and cost sharing (plus premium contributions) combine to determine an enrollee s out-of-pocket costs. The out-of-pocket maximum (in the far right column of the chart) defines the limit of an enrollee s financial obligation to pay for health care in a single year. Only a small percentage of people incur very high health care costs in a single year, but this limit to financial loss protects all insured persons from catastrophic health events that require expensive medical treatment. For further information: The Insurance Division provides consumer and contact information at or Information about s Children s Health Insurance Program, New Mexikids, is available at or Information about s Medicaid program is available at or The Trade Adjustment Assistance (TAA) program provides aid including health insurance assistance to trade displaced workers who lose their jobs or whose hours of work and wages are reduced. Health care benefits include a 65% advanceable and refundable tax credit that can be used for health insurance coverage such as COBRA, continuing individual market coverage, or pooling options thorough Blue Cross Blue Shield. More information on s Medical Insurance Pool is available at or State Coverage Insurance (SCI) is a public/private partnership that offers affordable health care coverage to eligible low-income working adults, primarily through an employer-based system. It is available to uninsured adults ages 19 through 64, with countable family incomes of up to 200 percent of the federal poverty level. For more information visit or Health Insurance Alliance (NMHIA) is an alliance of independent health insurers who have agreed to offer similar health plans to companies with 50 or fewer eligible employees, including the self-employed and individuals who have lost group health coverage. The NMHIA is subsidized through a premium tax on all health insurance carriers in the state. For more information visit or Small Employer Insurance Program (SEIP) is specifically tailored towards helping small employers and non-profits with 50 or fewer employees to buy into a comprehensive health insurance program similar to what is now offered to state employees, teachers and retirees of state government, giving small employers the same benefits that larger organizations have through volume buying that can significantly reduce the cost of individual employee's health insurance. For more information visit or

5 Health Plan Comparisons in Las Cruces, (rates effective 11/1/2006) KEY: VL = very low; L = low; M = medium; H = high; VH = very high NOTE: These premiums take into account the age, gender, family composition, and geographic location of the firms described on page 2 of this Overview. For more information, see the National Guide to Health Insurance Options for Small Businesses at The selected plans are not all inclusive of all available options. For additional options contact a local insurance broker or visit online comparison websites such as: insure.com, allquotesinsurance.com or ehealthinsurance.com. 1 PPO is a preferred provider organization. HMO is a health maintenance organization. 2 The premium is the monthly cost of the insurance policy for the entire firm plus dependents. "Before medical underwriting" means that these premiums do not take into account the health status of the group. Good health is assumed; poor health would result in higher premiums than presented here. Typically, the employer pays part of the premium and the employee pays part of the premium. An employer's costs are a fully deductible business expense. Moreover, the cost of this benefit is excluded from employees' taxable income (for Social Security and Medicare payroll taxes). Employees' cost sharing is an "average" estimated by considering plans' unique combinations of office and prescription co- pays, deductibles, coinsurance, and maximum out-of-pocket limits. Utilization will affect the amount of employee cost sharing, up to the maximum out-of-pocket limit. For employees with very different levels of health care use, the relative rating of the cost sharing associated with different plans could be different from what is shown here. 4 At one extreme, patients can see virtually any provider of their choosing; whereas at the other, patients' access to care is limited to in-network providers and they typically must seek a referral to a specialist.

6 Employee Cost Sharing in Las Cruces, (in addition to the employee s share of the insurance premium) Product Type Office Co-pay (In-Network/ Non-Network) 1 Rx Co-pay (In-Network Coverage Only) Deductible per person(unless noted) In-Network Non-Network Coinsurance (after deductible is met) In-Network Non-Network Maximum Outof-Pocket Expenditures, including deductible (In-Network/ Non-Network) Blue Net 750 Option C Blue PPO Plus 1000 Blue PPO 500 New Mexico HMO Blue Plan 25 $0 after deductible/ NA After deductible: 20%/40% After deductible: 20%/40% $10/$5/$75/15% $10/$5/$75/15% $750 individual $2,250 family $1,000 individual $,000 family $500 individual $1,000 individual $10/$5/$75/15% 20% 40% $1,500 family $,000 family NA $2,000 individual $6,000 family $2,000 individual 0% NA $6,000 family 20% 40% $5,000/$10,000 individual $1,000/$26,000 family $2,500/$5,000 individual $6,500/$1,000 family None, but $25 $10/$5/$75/15% $750 hospital None Two times NA NA annual premium admission copay PPO Options 20 $20/0% after deductible $10/$5/$75/15% None, but $500 hospital admission copay $1,000 per person $20 copay for most services 0% $2,000/$4,000 per person New Mexico HMO Blue Plan 5 None, but $100 hospital NA $5 $10/$5/$75/15% None Two times NA annual premium admission copay NOTE: For more information, see the National Guide to Health Insurance Options for Small Businesses at The selected plans are not all-inclusive of all available options. For additional options, contact a local insurance broker or visit online comparison websites such as: insure.com, allquotes insurance.com, or ehealthinsurance.com. 1 Office co-pay amounts are for primary care provided "in" and "out" of network. Traditional HMOs do not cover care received out of net work, thus only one co-pay is listed. 2 Rx co-pays are listed as generic/preferred brand/non-preferred brand/specialty drugs (15% coinsurance, up to a $250 maximum). Traditionally, HMOs do not cover non-network services. 4 Where only one limit is noted, either no non-network services are covered or the limit applies to both in- and out-of-network services. 4