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Greetings!
Medical Reimbursement Plans
Flexible Spending Accounts
Problem
At renewal our clients have increased the exposure to employees by changing to higher co-payments or deductibles in order to lower premiums. This has left employers with a new problem.
How do employees pay the added expenses?
Assuming they do pay these expenses, it is also highly unlikely they are tax deductible. Tax-payers, who itemize, can only deduct above and beyond 7.5% of AGI (adjusted gross income).
Solution
Advantage Benefits has expanded their services to help employees cover these added expenses on a tax-preferred basis.The Medical Reimbursement Plan (also referred to commonly as an HRA) utilizes employer dollars, while the Flexible Spending Accounts is funded with employee dollars.
Many companies utilize one or both, but may have no formal paperwork. If there is not proper documentation, employers run the risk of having these plans discredited by the IRS and all benefits paid out through these plans, taxed retro-actively.
We will be reaching out to our clients over the next 3-6 months to review their needs and install any plans that may be needed, as well as handling the record keeping and administration of claims at no charge. If you are not a client there will be a fee.
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Medical reimbursement plans (HRA)
Section 105 of the IRS code
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There are many employers that help employees with all, or a portion, of their out of pocket expenses. Here are the most popular plan designs we see:
- Company has 1,000 hospitalization. The employee pays $500 while the employer pays $500.
- Company has a $2,000 deductible. The employee pays the first $1,000 and the employer pays the second $1,000.
In either case, monies paid by the employer are fully deductible and nontaxable to employees. Again, employers need to have formal plan documents detailing benefits and claims procedures. Here is another good link explaining the plan.
Lastly, employers do not have to pre-fund this benefit, but merely pay the claims as they are processed and approved. In addition, it provides some claims experience at renewal when an employer is looking at even higher co-payments and deductibles to control costs.
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Flexible spending account (FSA) changes
Over the counter drugs and cap limits
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 The Patient Protection and Affordable Care Act of 2010 (PPACA) made some important changes to the FSA, which enables employees to defer monies on a tax deductible basis to pay un-reimbursed medical expenses. First effective 2011, an employee must need a prescription to utilize their FSA to pay for over-the-counter medications. A note from your doctor is not sufficient, it must be an actual prescription.
Second effective 2013, the cap pre-tax contribution will be $2,500. These two changes make the plan easier to implement the FSA since it will cut back on the number of claims and limit the exposure to the employer.
Here is an example of how an FSA can work for an employee. Assume an employee looks at their medical needs over the next 12 months and determines - $500 in co-payments
- $300 day surgery
- $700 of dental work
- Total--- $1,500
They would withhold $30 per week PRE-TAX out of their paycheck. That money is retained by the employer and accounted for as the employees FSA account to cover the out of pocket medical expenses. This would lower medical costs by about a third, since they are now 100% tax deductible through the FSA. Employees must be careful, if they do not use the monies, they lose them. Although there is extra work for the employer to process the weekly deductions and file the claims, the employer is not only helping employees pay for these un-reimbursed medical expenses on a tax deductible basis, they are also generating a savings on the corporate level by lowering the matching FICA obligation. |
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Clients are our most valuable asset
Planning for tomorrow
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Over the past 20 years, we have seen many changes in health insurance. Ten years ago, we recommended employers to look into $250 hospitalization co-payments. Today, we are discussing $2,000 deductibles. Tomorrow, it will only be higher deductibles.
Anyone can get you a quote, but not many brokers take the steps to plan for tomorrow. The need for MRP and FSA plans only become greater each year as the plans pass more and more costs to employees. Advantage Benefits is here to meet this need.
Why are we adding these services at no charge to our clients? First, to separate us from other brokerage firms, and to secure a stronger and better relationship with you. The only item we may ask you for is a Referral to another business owner you may know that we could help. Just like you, we need to always be looking for other ways to expand our business.
Thank you for your business, and for your referrals.
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