Flexible Benefit Plans

An Introduction to Flexible Benefit Plans

Sometimes called “Section 125” plans, or “cafeteria” plans, flexible benefit plans can include different approaches for enhancing the value of employee benefit programs, but all flexible benefit plans have one element in common: employee choice.

Premium Only Plans

Section 125 of the Internal Revenue Code gives tax-free status to employee earnings that are spent on health insurance premiums. Often called Premium Only Plans, or “POP” plans, these plans make it affordable for employees to pay for the insurance coverage they need, and make it possible for an employer to offer choice without increasing the company’s costs. For example, if the bargain basement HMO plan is not suitable for employees with college-age children who live many states away, a more expensive PPO plan could be offered as an option, with the difference in cost paid pre-tax, by the employee. POP plans are easy to set up, and easy to administer. Employees choose to reduce their taxable compensation, and use the amount of the reduction to pay for health-type insurance plans.  Since their deduction is pre-tax, their paycheck doesn’t take a corresponding hit; making it much more affordable to buy good insurance protection for themselves and their families. Employers save, too, with lower payroll taxes on reduced payroll amounts.

After your POP plan is in place (we can help with the required plan documentation, set up forms and instructions) consider adding Flexible Spending Accounts for even greater tax savings and choice.

Flexible Spending Accounts

New user-friendly features make Flexible Spending Accounts increasingly attractive for employees and employers.  With an FSA plan, an employee may redirect a portion of her salary into a flexible spending account (FSA) and pay no taxes, including federal, state (most states) and Medicare and Social Security tax, on this redirected money.

There are two types of FSAs. A Health FSA pays for health care expenses not covered or paid by insurance or other benefit programs.  A Dependent Care FSA pays for child care or day care for an elderly parent that is necessary in order for the employee to work.

Employees are very much aware of how taxes affect their income.  Because taxes reduce the value of each dollar earned, an employee has to earn considerably more than $100 to actually have $100 to spend.  FSAs permit employees to set aside untaxed income that can be used to pay for health care expenses and for day care services while they are at work.

Most employees and their families have health care expenses not covered by insurance.  The cost of day care for the children of working parents can consume a significant portion of the parents’ paychecks.  To employees, an FSA Account is like getting a discount on the cost of these services because they don’t have to earn as much to pay for them.

FSA Plans Save a Lot and Cost Little

When an employee contributes pre-tax income to a Health Care or Dependent Care Spending Account, the employer’s payroll is reduced.  For every dollar an employee spends on pre-tax health premiums or redirects into an FSA, an employer’s payroll tax is reduced by 7.65%. The savings usually offset the administrative costs of the FSA plan.

FSAs Are Easy To Understand And Easy To Use

Employees quickly grasp the simple concept.  After calculating how much he or she is likely to spend annually for out-of-pocket medical expenses (deductibles, copays, prescription drugs, hearing aids, contact lens, dental care, etc.) the total estimated amount is evenly divided over the number of pay periods in the employer’s plan year.

Each payday, this amount is credited to the employee’s Health Care Account, to be spent as the employee or family member has qualified expenses.  A family with young children or an elderly dependent parent would use the same process to assess their annual dependent care expenses and fund a Dependent Care Account. The money that is “contributed” to an FSA actually stays with the employer until the employee submits a claim for an eligible expense.

The convenience of the Benefits Card is another important (optional) feature of an FSA plan. The Card works just like a bank debit card. When employees swipe the card to pay for eligible expenses, the money to pay the vendor is automatically transferred from the employers FSA bank account. For employees this means they don’t need to worry about having the personal funds to pay for their prescription drug at the pharmacy, or pay the copay at the doctor’s office. The Benefits card will be loaded with the entire amount of the employee’s annual Healthcare FSA election. Dependent Care is different; funds can be spent only as the dollars are contributed via payroll deduction.

The “Use it or Lose it” feature of FSA plans has been a drawback to FSA participation in the past. IRS rules say that any funds not spent on eligible expenses during the plan year may not be returned to the employee. However, the IRS recently modified the rule for Health FSA plans.  Up to $500 in unspent contributions can now be “carried-over” and spent on new expenses incurred in the following plan year.

Savings and Choice

A well designed flexible benefits plan provides savings and choice; the two attributes that employees rate most highly, next to salary, when evaluating employer-sponsored benefits.

Employers can also contribute a pre-determined amount annually to FSA accounts on behalf of their employees. This is a simple way to encourage employee participation and help employees meet their individual needs.  Employer contributions are limited under the tax code; we can help you develop a compliant plan design.  Also, a “Limited Purpose Health FSA” is a plan option for employers who offer qualified high-deductible health plans and Health Savings Accounts. Limited Purpose Health FSA plans can pay for dental, vision and preventive care services, so employees have additional pre-tax savings options for healthcare expenses.

IHS Makes It Easy

An employer doesn’t need an army of HR folks or a lot of forms: Innovative Health Services is in the business of making employee benefits truly a benefit – not a burden- for employers and their employees.

Please contact us to learn more about the value of flexible benefit plans.