Obama-Care: What Becomes of Employee Choice In Self-Funded Group Benefit Plans Under Proposed Health Care Changes?
Thomas Vass - The Private Capital Market, Inc.
By Thomas E. Vass
President, The Private Capital Market, Inc.
The Business Capital Advice Employee Benefit Series© 2009
Is The Freedom To Choose Health Care Benefits Still A Good Idea?
One of the unresolved issues in the current Congressional debate on health care reform is the fate of the current employee choice plans offered in a variety of employer group benefit plans.
Under the current tax system, there is a joint tax benefit for both the employer and the employee so that the employer obtains a tax deduction for paying the premiums for the health care insurance for the employee as a business cost, and the employee obtains the health care services as a tax free benefit.
Most of the current choice plans under group benefit plans are designed so that the employee has free choice among plan options that most closely match the employee’s needs. The plans generally feature some type of shared cost arrangement between the employer and the employee, and many of the plan options are entirely self-funded by the employee.
If the employee funds the free choice options with after-tax salary contributions, then generally the benefits obtained under the plan by the employee are delivered free of taxation. If the employee uses pre-tax salary reduction to pay for the benefits, then generally the benefits are taxed when they are delivered to the employee.
In the current health care debate about how to fund a new national insurance plan for currently uninsured citizens, a wide range of employee-choice health care benefits that are currently tax-free to the employee are under consideration for taxation.
If the new taxes are adopted, then those citizens fortunate enough to still have a job with heath care benefits will start paying taxes on their group health benefits when they are delivered to the employee.
Two issues that have not received much attention in this debate are what happens to the issue of employee choice in non-government plans if health reform ends up taxing employee benefits, and what choices for options will employees have under the new government-sponsored health plan. The Proposed New Taxes On Employee Group Health Care Benefits
In their recent analysis of the proposed employee tax on health care benefits, A Tax to Fund U.S. Health Plan May Cut Employer-Provided Benefits
, (June 25), Bloomberg used the hypothetical situation of hourly workers at Zappos.
Zappos.com’s warehouse and customer-service workers are paid $10 to $11 an hour and get tax free health benefits worth about $7,500 a year. Under the proposal under consideration, part of the $7500 in benefits would be treated as income, resulting in a tax of about $500 for the hourly workers.
Lawmakers led by Senator Max Baucus, the chairman of the Senate Finance Committee, has said that the best way to pay for a $1 trillion overhaul of American medical care would be to tax employee health benefits provided by employers.
Under the Baucus Proposal, future private company group benefit plans would be compared to existing group plans currently offered to government workers. If the private sector plans provided benefits that were more generous than those offered to federal workers, then the government would impose a tax on the additional private sector benefits. Employees would be liable for paying the new tax.
The current government benefits are worth $4,200 for individuals and $13,000 for families. In the Zappo employee example, the hourly workers would end up paying taxes on benefits valued at $3200, out of the total value of the benefits of $7500.
Employers currently pay about $500 billion annually for health benefits for employees. The new taxes would affect about 40 percent of all Americans who are currently covered under private sector group benefit plans. The new taxes would bring in an estimated $418 billion over 10 years, according to the joint Congressional taxation panel.
If the employer elected to drop the current group insurance health plan, or did not offer any plan at all, then the proposals under consideration to fund the health care plans would add a new employer tax. The employer would pay a new direct per-employee tax of $750 per year to the Federal government as a source of funding for the new health care system.
Which raises the question that has not been addressed in the national debate on health care. Given the changes in the tax incentives for group health insurance, what would become of the employee’s freedom to choose other group benefit options that are currently offered by employer group plans?
If employers drop their current group benefit plans that contain employee choice, will the replacement plans offered by the Federal Government contain free choice or “one-size-fits-all” plans? The Current Situation
Janet Adamy and Laura Meckler reported in the WSJ that all employers with a payroll over $400,000 per year would pay an 8% surcharge tax on the value of their payroll, if they did not offer a group plan. The question is whether the diversion of the 8% tax into a government mandated program would contain employee choices. (House Health Bill Penalizes All but Tiniest Employers for Not Providing Insurance
, WSJ, July 15, 2009).
Any worker who did not voluntarily enroll in a health plan would pay a new mandatory tax, according to the WSJ. The proposals in the House version of the health care reform would require most Americans to carry health insurance or pay a penalty equal to about 2.5% of their gross income.
Presumably, the current situation for these workers is that they options to choose their benefits, or that their choice of not having insurance is a free choice.
President Obama has said that the government plan, in its entirety, is an option that would “keep the insurance companies honest.” But, neither the President, nor the House Democrats, have indicated if the government option contains options for consumers to choose their benefits, as they do under current plans.
Asked whether a government-run, single-payer health care system could work, Mr. Obama said no, explaining that most people are insured through employers that are private companies. But he renewed his push for a so-called public option, which could compete with private insurers.
"When I say if you have your plan and you like it, . . . or you have a doctor and you like your doctor, that you don't have to change plans,” said Obama, “what I'm saying is the government is not going to make you change plans under health reform."
However, if employers drop their plans, or if currently uninsured workers are taxed another 2.5% on their income, would the new government plan contain the same set of choices that they currently have? What Happens to The Set of Employee Choice Plans?
ERISA, the Federal law that governs retirement plans, allows large companies to offer health benefits to their employees that are specifically designed to meet their needs.
A wide variety of plans that have employee choice options are currently allowed including, Health Savings Accounts (HSA), Health Reimbursement Accounts (HRA), Medical Expense Reimbursement Plans (MERP), as well as more traditional Flexible Spending Accounts (FSA).
The HSA is an employee-owned account created to pay for qualified medical expenses for the employee and dependents. Contributions can be made tax free by anyone, including individuals, employers, eligible family members or a combination up to annual maximums as established by the Internal Revenue Service. Unlike the FSA, all unused monies at year end may be carried over to subsequent years, thus potentially building substantial value.
In contrast to HSA’s, employers have more discretion in designing HRA Plans. Generally, health care providers offer the traditional HRA’s that are only funded by the employer. This type of arrangement is established to offset a portion of the high deductible and/or high annual out-of-pocket limits of lower cost medical plans may have.
A Medical Expense Reimbursement Plan (MERP) is a form of HRA, but generally gives the employer even greater flexibility in payment and administration of the plan. The MERP falls under Section 105 of the Internal Revenue Code. The concept of the MERP allows the employer to offer a higher deductible plan than what has been offered in past years with little or no impact to the employees.
Established under Section 125 of the Internal Revenue Code, FSA Plans are the most traditional form of pretax savings accounts available to employees to help fund the increasing health plan deductibles and co-payments. FSA Plans can be funded by both the employer and employee on a pretax basis.
Self-Funded Health Plans pay for a variety of health care expenses not covered by their health care plan. An employee at a company who pays in the 25 percent tax bracket and has employer-provided benefits worth $15,000 plus $2,000 in vision and dental benefits would pay an extra $1,000 per year. Beyond the Hype and Spin
Lisa Fritscher, in her About.com article on the Obama plan speculates that the plan that is finally adopted will look much like the current FEHB, which provides insurance for federal workers including members of Congress.
She notes that “the public plan is not a centralized, government-controlled plan. Instead, a network of choices are offered.”
But, it remains extremely unclear if the “network of choices” means a choice between the government plan and a private insurance plan, or whether it means that once enrolled in the government plan that “one-size-fits-all.
About Our Guest Columnist:
Tom Vass is a registered investment advisor, money manager, and insurance advisor for small companies. He is licensed in all areas of life, health, disability, property and casualty insurance. His areas of expertise include technology stock investments, based upon his proprietary and patented investment methodology, helping companies raise growth capital, and devising strategies to use company-owned insurance to help owners obtain a better retirement. His website for business owners is www.businesscapitaladvice.com. He can be reached at 919 975 4856 or firstname.lastname@example.org. For more background information and links to related websites, check out Thomas' Archives as well as all our other guest columns
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