What is it?

1. What is it? • The most widespread employee benefit • Tax-free form of employee compensation • Two types of plans • prepaid • postpaid

2. Plan Design Three fundamental types of plan design • Basic plan • inpatient hospital charges • in-hospital visits by physicians • surgical fees • “Supplemental” major medical plan • Comprehensive plan

3. Benefit Structure Deductibles • Initial expense paid by employee—usually $100-$500 • Usually computed annually, may have carryover provision • Usually “all causes” but may have “per-cause” per family

4. Benefit Structure Coinsurance • Plan participant responsible for specified percentage, usually 20%, of covered expenses • Plans can place upper dollar limit on participant’s share—usually several $1,000 on annual basis Maximum Coverage Limits • “lifetime limit” on amount participant has to pay—usually $500,000 to $1 million

5. Funding Postpaid-Type Health Plans Commercial health insurance Reimburses employee for expenses for covered medical procedures, often limited to ‘usual, customary, and reasonable’ (UCR) charges for given procedure in given area If 50 or more employees, premiums “experience rated” – insurer keeps track of benefit use and adjusts charges accordingly

6. Funding Postpaid-Type Health Plans Premiums reflect • Expected benefit payments • Administrative expenses • Commissions • State premium taxes • Risk charges • Return on insurer’s capital allocated to the contract (profit)

7. Funding Postpaid-Type Health Plans Blue Cross / Blue Shield Provides direct payment in full to “participating” hospitals and doctors (i.e., agreed to BC/BS pre-established rates) for medical benefits provided to covered employees Employees using nonparticipating hospitals are paid/reimbursed on usual and customary rate basis

8. Funding Postpaid-Type Health Plans Self-funding Employer pays claims and other costs directly either on “pay as you go” basis or from reserve fund Insurance can be used to provide administrative services only Employer can obtain a “stop loss” contract to protect against large unanticipated costs

9. Eligibility and Coverage Internal Revenue Code Eligibility and Coverage Requirements for Group Health Insurance: Tax law sets • limits on exclusions for preexisting conditions • conditions for which participants cannot be excluded or charged a higher premium • length of hospital stay for childbirth • benefit limits for mental illness

10. Eligibility and Coverage COBRA Continuation of Coverage Employee must be given option to continue health plan coverage (incl. dependent coverage) for 36 months after various qualifying events • death or divorce of employee • employee eligible for Medicare • bankruptcy • child ceases to be dependent for plan purposes

11. Eligibility and Coverage COBRA Continuation of Coverage (cont’d) Other events are associated with different time frames Health plan coverage must continue for • 18 months if terminate employment (except for gross misconduct) or reduce employment hours • 29 months if termination is for disability

12. Eligibility and Coverage COBRA Continuation of Coverage (cont’d) Continuation coverage can terminate before the 36, 29, or 18 month period if • employer terminates health plan for all employees • beneficiary does not pay own share of premium • beneficiary becomes covered under another health plan, unless a preexisting condition is excluded

13. Eligibility and Coverage COBRA Continuation of Coverage (cont’d) Former employee’s or beneficiary’s share of premium under COBRA cannot be more than • 102% of premium paid by those without qualifying event • 150% of premium after 18th month of continuation coverage for disabled Fine for noncompliance is $100 per day

14. Eligibility and Coverage Continuing Health Coverage for Retirees Current alternatives • pay as you go • earmarked corporate assets • corporate-owned life insurance • increase pension benefits • incidental benefit in qualified plan • VEBA or other trust fund No one best plan exists; employer must weigh advantages, disadvantages, and own situation

15. Tax Implications • Cost of health insurance premiums tax deductible for employer • Limited deduction available to employer for pre-funding medical benefits • Employee receives premiums paid and benefits tax-free unless highly compensated in discriminatory plan • Employee may be eligible for itemized deduction

16. True or False? • A basic health insurance plan primarily covers hospitalization. • An HMO is an example of a post-paid health care plan. • Premiums for commercial health insurance include such costs as commissions and state premium taxes.

17. True or False? • A basic principle of Blue Cross / Blue Shield plans is to offer coverage to any individual who requests it. • Employer health insurance plans typically cover all employees. • Under current tax law, no one can be excluded from participation under employer’s health insurance for any preexisting condition.

18. Discussion Questions • How do employer health and accident benefits fit into a cafeteria plan? • Can a self-employed person or S corporation shareholder-employee be covered under his or her own business’s health insurance plan and obtain any tax advantage? • Do COBRA rules apply if the employer’s plan is not health insurance?