By: Michael S. Fawcett
The most valuable asset of any small businesses is, undoubtedly, its workforce – and in particular, its key employees who strategize and drive the company’s vision, growth and success. Not surprisingly, top hires today make employment decisions based not only on salary, but also on health insurance benefits – the number-one workforce expense for businesses behind salaries.
Yet in today’s turbulent health insurance environment of ever-increasing premiums and diminishing benefits, it’s difficult – if not cost-prohibitive – for small businesses to provide the level and scope of healthcare coverage and benefits that top talent seeks. This, in turn, affects a company’s ability to recruit, retain and reward top talent.
According to a 2020 survey by the independent, non-profit Kaiser Family Foundation (KFF), average premium rates for employer-sponsored health plans rose 4% in 2019 for individuals and 5% for families, continuing the past decade’s upward trend. The KFF study reported average annual premium costs for company-sponsored health plans in 2020 as $7,470 for single coverage, and $21,342 for family coverage – with employees contributing an average of 17% and 27% to those costs respectively.
To bend the cost curve of rising health insurance costs, small businesses are increasingly choosing high deductible health plans (HDHPs) for employee coverage. KFF reports that 31% of workers with health insurance were enrolled in a HDHP in 2019. These plans afford employers with significantly lower premium costs than HMOs, PPOs, POSs and other major group plans – but employees pay considerably higher deductibles and other upfront costs before actual insurance coverage kicks in. Average annual out-of-pocket employee costs for such employer-sponsored health plans tops $7,000 for individuals and $14,000 for families.
Some businesses help with employee out-of-pocket costs by offering a company-funded HSA or HRA. But the total IRS-allowed annual contributions (employer + employee) to these accounts make, at best, only a 50% dent in those costs. While this scenario might benefit the employer’s bottom line, it offers little compensation allure for top talent searching for optimal health benefits.
There’s another solution to this dilemma that benefits small businesses and their key employees alike: key employee health cost reimbursement plans. These fully insured, excepted benefits plans are also referred to as “select” or “executive” healthcare or medical cost reimbursement plans. They offer employers an affordable, cost-effective way to boost their underlying health insurance benefits for key employees, while also differentiating their total compensation packages from competitors.
These types of plans are not subject to the requirements of the Affordable Care Act. So unlike HSAs and HRAs, they can be offered to select (versus all) employees at the employer’s discretion, with plan participation, in general, of at least three employees. And unlike HSAs and HRAs, these plans provide true health insurance benefits and value.
Basically, these plans provide direct, typically tax-exempt reimbursement to key employees and their eligible dependents for healthcare expenses not covered by their employer’s primary health plan, including deductibles, co-pays and co-insurance. Plus, they cover a broad range of medical expenses rarely covered by most employer base plans – such as dental/orthodontic, vision, hearing loss, in-home nursing, psychiatric care, speech therapy, infertility treatment, substance abuse treatment and facilities, and a multitude of other medical services. Generally, if an expense is medically necessary and qualifies under Section 213(d) of the IRS Code, it is eligible for reimbursement.
With these plans, all fixed and variable premium costs are tax-deductible for employers. Fixed premium costs per employee vary by plan provider – but the best of those offer a reasonable annual versus monthly premiums. Variable premiums incur only if and when employee claims are approved. Additionally, these plans can be added to any employer group plan, individual policy, spousal policy or Medicare plan. What’s more, annual maximum benefits for these plans can be as much $100,000.