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This is a series of educational articles on Flexible Benefit Plans for Employers sponsored by Innovative Benefits.

A flexible benefit plan is a tax advantaged insurance coverage that allows employees to select from a pool of choices. Potential choices include cash, retirement plan contributions, vacation days, and insurance.

It represents a way to help employees gain access to individual insurance products that they might not otherwise be able to afford.   Many employees do not have access to individual insurance products outside the workplace as most insurance agents selling to the general public focus on high income/net worth individuals.Flexible benefit packages offer convenience and value to employees by offering better packages than they could purchase on their own in the retail market.  By offering these plans and educating employees on the benefits employers can create tremendous goodwill with their employees.

Fully employed individuals purchasing through the employers program find that this program offers convenience and value far above what they could purchase on their own.Since “group” plans offer more volume, insurance companiees can offer better and more competitive rates than are available in the retail market.

A further advantage of this program is the benefit of communication and education that an employer can bring to employees during the enrollment process.Communicating the features of a flexible benefit plan is an excellent way to create a dialogue with an employee to help them understand what they are getting for the mone, and why there is an advantage for them to pay for the additonal coverage.

There are 3 basic types of plans:
1.    Flexible Spending Account
2.    Health Reimbursement Arrangements
3.    Health Savings Account

Flexible Spending Account:  Health care flexible spending accounts are employer-established benefit plans that reimburse employees for specified medical expenses as they are incurred.

There is no statutory limit on the amount of money that can be contributed to health care flexible spending accounts. However, some companies place a limit of $2,000 to $3,000 on flexible spending accounts. Once the amount of contribution has been designated during the open enrollment period that occurs once each year, the employee is not allowed to change the amount or drop out of the plan during the year unless he or she experiences a change of family status.

Health Reimbursement Accounts:Health reimbursement arrangements, also known as “health reimbursement accounts” or “personal care accounts,” are a type of health insurance plan that reimburses employees for qualified medical expenses.
Health reimbursement accounts consist of funds set aside by employers to reimburse employees for qualified medical expenses, just as an insurance plan will reimburse covered individuals for the cost of services incurred.

Health Savings Accounts:Health savings accounts are savings accounts used to pay for unreimbursed health care expenses. These accounts can accumulate tax-deferred interest similar to individual retirement accounts (IRAs). Authorized by Title III of the Health Insurance Portability and Accountability Act of 1996, medical savings accounts became available starting on January 1, 1997.
Funds are controlled and owned by the account holder. The employee or the employer–never both–makes contributions.

There are many options available for creating a flexible benefit plan that works for you employees and your business.

Business owners now have a low cost option available when considering benefits for their hourly employees.

Voluntary benefit packages are 100%paid by the employee with no employer contribution required. The plans are guaranteed issue, meaning there are no pre-existing condition limitations barring an applicant from policy acceptance. There are no deductibles, and unlike major medical insurance, voluntary limited benefit health plan premiums are not age banded.Employees pay the same monthly premium regardless of health or age.

The primary reason for evaluating one of these plans is, of course, the low monthly premium. Medical expense indemnity plans are offered by many “A” rated insurance carriers, such as Transamerica and Pan-American Life, and start as low as $9 per week (for a bare bones package).

The impact of this type of insurance strategy can prove substantial:

• Imagine the reduction in turnover if hourly employees feared a loss of benefits; and the advantage in recruiting full and part time help.
• Franchisors will have an opportunity to gain a competitive edge by adding a zero contribution benefit package to the service offerings sold to prospective Franchisees.
• Individual business owners who are uninsurable or can’t afford major medical insurance now have a low cost option for basic coverage.

Although the positive aspects of this approach are considerable, it is important to understand the drawbacks as well.

Major medical insurance is generally designed to pay expenses after a deductible, and many plans require an additional payment of up to 50% of the medical expenses after the deductible is satisfied. Limited benefit health insurance is just that…limited.

A fixed dollar amount is paid up front, based on a written fee schedule for doctor’s office visits, diagnostic tests, outpatient surgery, etc. If the provider charges more than the scheduled fee payment, the policyholder must pay the difference out of pocket; for example:

The limited benefit health plan pays $75 for a doctors office visit. The patient visits a specialist who charges $150.The patient will receive a bill for $75.

This difference is particularly acute in the event of a major hospitalization. The limited benefit plans pay a flat amount per day, however this amount can be cumulative due to the number of services on the fee schedule that are provided during a hospital stay; for example:

The plan pays $1000 per day for hospitalization, plus $75 for x-rays, plus $2500 for surgery, plus $500 for the anesthesiologist, etc.

The patient is responsible for balances exceeding the scheduled payments.

Why assume this financial risk?

The general weakness of the major medical insurance model is that it requires deductibles and coinsurance. For many, the only way to afford a policy is to take on a huge deductible, which results in paying thousands of dollars per year in premiums and still having to pay out of pocket for doctor’s office visits, diagnostic and lab tests, etc., until the annual deductible amount is met.

The result is that individuals enrolled in PPO plans are visiting their doctor less often, and not scheduling wellness tests on a regular basis in order to save money.

Since limited benefit plans cover the first dollar with no deductible or coinsurance, policyholders can take advantage of discounted cash rates through the PPO network and be proactive with their preventive heath diagnostic exams. Early detection can potentially prevent a hospitalization and the financial disaster awaiting the uninsured.

What happens if you don’t get sick, but are injured in an accident, or have a heart attack or stroke?

A common strategy is to use a combination of an extremely high deductible major medical plan and a limited benefit health plan. These types of plans are called catastrophic health plans, and at the highest deductible level are very low priced. The result of this approach is that the policyholder receives financial assistance up front to the limits of the policy, then uses the catastrophic coverage if the expenses exceed the deductible amount. This limits the potential financial loss; for example:

Hospitalized 6 days, the total bill is $200,000.
The limited benefit plan pays $10,000 up front.
The catastrophic policy has a $25,000 deductible, covers 100% of costs, and has a policy limit of $6 million.
The financial exposure for the policy holder is $15,000 ($25,000 deductible less $10,000 benefit payment).

One caveat. Before this strategy is implemented, make sure that the catastrophic policy does not prohibit the use of secondary coverage to pay your deductible expenses.

This is an excellent way for married or domestic couples to lower their health insurance expenses. One partner buys the limited benefit family plan offered by their part time employer, the other partner increases the deductible on the family major medical plan in their salaried benefit package.

Limited benefit health plans are not the perfect solution, but can provide critical financial support when it is needed most. A $12/hour employee can not afford to miss a day of work while sitting in an urgent care waiting room, or the county medical clinic. Limited benefit health insurance gives lower wage workers access to private doctors and the facilities of their choice.

Carroll Hooks, JD is the President of Sunrise Financial Group, LLC. Please contact cjhooks@sunrisefinancialcorp.com for more information.