Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
What is it?
• The most widespread employee benefit
• Tax-free form of employee compensation
• Two types of plans
– prepaid
– postpaid
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
Plan Design
Three fundamental types of plan design
1. Basic plan
a) inpatient hospital charges
b) in-hospital visits by physicians
c) surgical fees
2. “Supplemental” major medical plan
3. Comprehensive plan
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
Benefit Structure
Deductibles
• Initial expense paid by employee—usually
$100-$500
• Usually computed annually, may have
carryover provision
• Usually “all causes” but may have “percause” per family
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
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
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
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
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
Funding Postpaid-Type Health Plans
Premiums reflect
1. Expected benefit payments
2. Administrative expenses
3. Commissions
4. State premium taxes
5. Risk charges
6. Return on insurer’s capital allocated to the contract
(profit)
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
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 preestablished rates) for medical benefits provided to
covered employees
Employees using nonparticipating hospitals are
paid/reimbursed on usual and customary rate basis
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
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
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
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
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
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
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
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
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
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
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
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
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
Eligibility and Coverage
Continuing Health Coverage for Retirees
Current alternatives
1.
2.
3.
4.
5.
6.
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
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
Tax Implications
1. Cost of health insurance premiums tax deductible for
employer
2. Limited deduction available to employer for prefunding medical benefits
3. Employee receives premiums paid and benefits taxfree unless highly compensated in discriminatory
plan
4. Employee may be eligible for itemized deduction
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
True or False?
1. A basic health insurance plan primarily covers
hospitalization.
2. An HMO is an example of a post-paid health care
plan.
3. Premiums for commercial health insurance include
such costs as commissions and state premium taxes.
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
True or False?
4. A basic principle of Blue Cross / Blue Shield plans is
to offer coverage to any individual who requests it.
5. Employer health insurance plans typically cover all
employees.
6. Under current tax law, no one can be excluded from
participation under employer’s health insurance for
any preexisting condition.
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Health Insurance
Chapter 45
Employee Benefit & Retirement Planning
Discussion Questions
1. How do employer health and accident benefits fit
into a cafeteria plan?
2. 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?
3. Do COBRA rules apply if the employer’s plan is not
health insurance?
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