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Small Business
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Battling the Rising Cost of Health Insurance with Creative Benefit PlansAs a young man, whenever I procrastinated on some household chore, my late father, regardless of the time of year, would invariably say “What are you waiting for? Christmas?” After years of business consulting, I find myself saying the same thing to my clients concerning various pre-tax plans. Especially now. Every year about this time, small business owners and CFO’s alike start their tax review process, meaning they call in all their experts and complain about why their taxes take a bigger bite of their profits every year. Misguided perception in some cases, but a grim reality in most, as decision makers and strategic thinkers look for innovative ways to reduce their tax burden and/or reduce some other resource or expense that impacts their tax base. And, every year about this time, I get into another discussion about the rising cost of health care being so quickly passed onto employers through their health insurance providers. So what do tax savings and rising health insurance costs have to do with each other? Let me paint you a picture. A recent study by Hewitt Associates, the Lincolnshire, IL-based consulting group reported that their 650 large to medium-sized business survey respondents anticipate an average health care cost increase of 14 percent next year but also replied that on average their organizations could only afford to absorb an increase of slightly less than 9 percent. This increase marks the fifth year in a row that annual health care costs have risen 10 percent or more, which makes this the longest sustained period of double-digit increases since the mid-to late 1980s. As a result, nearly all savvy business decision makers are re-evaluating their overall benefit plans. In some cases small business owners and their employees are left in the lurch as costs have risen so dramatically that several insurance companies have eliminated their provisioning to the small business owner. Roughly 41 million Americans are uninsured, and over 60 percent reside with a family employed by a small business. Statistics show that workers in the smallest businesses that provide health insurance pay an average of 17 percent more for health benefits than workers employed by large companies. Even employees at companies that previously enjoyed relatively low premiums because of their size are experiencing the sticker shock of escalating costs without an increase in benefits. As many small and medium size business owners pull their hair out trying to wrangle with the costs impacting their bottom line, smart business owners know that changes in their benefit plans affect their employees as well. Employer-sponsored health coverage declined in 2002 Census Bureau statistics because many businesses with less than 25 workers were forced to drop coverage due to rising health care costs. Others look for ways to keep their costs down like increasing deductibles to numbers that would put a dent in anyone’s wallet. Among small employers, the median PPO in-network deductible jumped from $250 to $500 for an individual. Many are now in the $2000 range. Health benefit costs have been rising faster than inflation for the past four years. According to USA Today, since 2000, the average premium for a family plan offered by employers rose from $6,438 to $9,068 – just short of a 41% increase – and the amount that employees pay toward their premiums has risen nearly 50%. Unfortunately, the nation’s smallest companies have been hit the hardest. The nation’s smallest firms pay higher premiums for single coverage than any other size group - about $30 more per month than other firms. Only 55 percent of firms with 3 to 9 workers offered health benefits in 2002 - down from 58 percent in 2001. Not a very rosy Christmas outlook. With no relief for sky rocketing health care costs in sight, Congress is working toward passing the Small Business Health Fairness Act of 2003 which would allow the creation of Association Health Plans (AHPs). AHPs are group health plans whose sponsors are trade, industry, professional, chamber of commerce, or similar business associations, and which meet certain Employee Retirement Income Security Act (ERISA) certification requirements. These AHPs would allow small business owners to band together, even across state lines, to purchase health insurance as a group. While this could be a great advantage for some small business owners, others are still looking at more traditional, but often little known, ways to enhance their current benefit plans via supplemental insurance or “flexible benefit” plans. A flexible benefit plan creates additional take-home pay for employees while saving payroll taxes for the employer, simply by converting employee-paid insurance premiums to a pre-tax status. Converting a taxable expense to a non-taxable expense saves a minimum of about 30%, considering federal, state, and FICA taxes. In other words, for every 3 dollars of taxable expense converted to a non-taxable status, you can take home a free dollar to spend. A Flex Plan (also known as Section 125 Plan or Cafeteria Plan) gives preferential tax treatment to the employee's share of insurance premiums for employer-sponsored plans. Examples of employer-sponsored plans include group medical, dental, and voluntary products (employee-paid premiums) such as dental, accidental death, life and specified disease (i.e., heart disease or cancer) insurance. In many cases, Flex Plan insurance contracts are "guaranteed issue" which means that employees may enroll regardless of a pre-existing medical condition and “guaranteed renewable” meaning that once accepted, policy holder cannot be cancelled unless premiums go unpaid. AFLAC, with their ubiquitous duck commercials, is the number one provider of these types of programs in the US. Professional Employer Organizations (PEOs) also routinely offer flex plans as a means to reduce health insurance costs and expanded benefits to their clients. Other plans cover self-employed married couples, parking and travel expenses and dependent care. Recent research by AHP advocates shows that 83 percent of companies with more than 5,000 employees offer a choice of more than one health plan, while only 10 percent of firms with fewer than 50 workers offer a choice of plans. Flex Plans offer employees of small businesses choices of policies and coverage levels. Another benefit for employees is that some policies are “portable”, meaning that they stay in force even if they leave the company where they bought them, as long as they continue to pay the premium. Like other qualified plans, there are rules to observe, but the advantages can be plentiful if enough employees participate (i.e., if as few as 3 employees participate that triggers pre-tax status for all employees), and observed directly on the employer’s bottom line and the employee’s paycheck in the form of tax savings. In some cases savings amount to significant dollars that can help offset the increases in the company’s core health insurance plans. Some frugal folks will put off a day of Christmas shopping to meet with their CPA and have these plans capturing every dollar starting at the stroke of midnight January 1, 2004. Procrastinators will wait until after the New Year to put these plans in place and miss out on a month or so of tax savings, but even those folks will have more money to spend and less to fret about come next Christmas Season. So…what are you waiting for? Have a wonderful holiday! John Logan (john.logan@macedoin.com) is Chief Operations Officer for Macedoin Outsource Network, LLC, (www.macedoin.com) a business development, insurance, HR and benefits administration consulting firm focused on helping small and mid-size businesses create or restructure business processes to improve their bottom line. John happily provides initial consultations free of charge.
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