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Employers forced to drop insurance have another option
Many small businesses have been forced to eliminate group health care coverage because they can’t afford to continue offering it. When eliminating group coverage, many have looked for an alternative. An individually owned health insurance policy, paid for fully by employees but funded through the employer's Section 125 cafeteria plan on a pre-tax basis, could be better than providing employees with no health care options except to pay premiums on an individual policy with post-taxed dollars.
With an employee benefit known as a health care premium reimbursement(HCPR) plan, in eligible states employees can have their individually owned health care policy premiums deducted from their paychecks on a pre-tax basis. "In today’s uncertain economy, employers are establishing cafeteria plans to at least try and stay competitive with other companies when they don’t have the funds to foot the bill for an extensive benefit plan," says Terry Harrington, president of BASE, a provider of employee benefits for small businesses.
Small business owners often establish cafeteria plans to enrich their current benefit plans, offset benefit cutbacks or implement cost saving measures. "An HCPR offered through a cafeteria plan can increase payroll tax savings for the business owner and employees," Harrington says.
How HCPRs Work
In eligible states, if an employer sponsors a cafeteria plan, the employee can elect to have premiums for an individual insurance plan deducted from an employee's paycheck pre-tax when using the HCPR option. To qualify for premium reimbursement, the employee will provide proof the insurance was purchased on an individual basis; it cannot be tied to a group plan in any way. Employees are able to save on taxes while still having the freedom to choose an insurance plan that works best for them. For employers, adding the HCPR option to their cafeteria plan lets them continue to help employees with health care costs.
“Since the health care premium reimbursement option allows an employee to choose their own insurance plan and pay for it on a pre-tax basis, that already saves the individual about 25 percent," Harrington says. "The employee is covered with insurance, and the business owner doesn’t pay the overhead associated with offering a group health plan. Both parties save valuable dollars.”
More employers would be likely to consider offering health care as a voluntary benefit on an after-tax basis if a proposed excise tax on certain health care benefits were to pass, says Beth Umland, chief analyst at HR consultancy Mercer's health and benefits research unit.
Stephen Milleris an online editor/manager for SHRM.
Voluntary Benefits Poised to Increase, SHRM Online Benefits Discipline, October 2009
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