The Basics of Employee Benefits

Health Insurance

Health insurance is one of the most desirable benefits you can offer employees. There are several basic options for setting up a plan:

  • A traditional indemnity plan, or fee for service. Employees choose their medical care provider; the insurance company either pays the provider directly or reimburses employees for covered amounts.
  • Managed care. The two most common forms of managed care are the Health Maintenance Organization (HMO) and the Preferred Provider Organization (PPO). An HMO is essentially a prepaid health-care arrangement, where employees must use doctors employed by or under contract to the HMO and hospitals approved by the HMO. Under a PPO, the insurance company negotiates discounts with the physicians and the hospitals. Employees choose doctors from an approved list, then usually pay a set amount per office visit (typically $10 to $25); the insurance company pays the rest.
  • Self insurance. When you absorb all or a significant portion of a risk, you are essentially self-insuring. An outside company usually handles the paperwork, you pay the claims and sometimes employees help pay premiums. The benefits include greater control of the plan design, customized reporting procedures and cash-flow advantages. The drawback is that you are liable for claims, but you can limit liability with "stop loss" insurance--if a claim exceeds a certain dollar amount, the insurance company pays it.
  • Archer Medical Savings Account. : Under this program, an employee of a small employer (50 or fewer employees) or a self-employed person can set up an Archer MSA to help pay health-care expenses. The accounts are set up with a U.S. financial institution and allow you to save money exclusively for medical expenses. When used in conjunction with a high-deductible insurance policy, accounts are funded with employee's pretax dollars. Under the Archer MSA program, disbursements are tax-free if used for approved medical expenses. Unused funds in the account can accumulate indefinitely and earn tax-free interest. Health-savings accounts (HSAs), available as of January 2004, are similar to MSAs but are not restricted to small employers.

Cost Containment

The rising costs of health insurance have forced some small businesses to cut back on the benefits they offer. Carriers that write policies for small businesses tend to charge very high premiums. Often, they demand extensive medical information about each employee. If anyone in the group has a pre-existing condition, the carrier may refuse to write a policy. Or, if someone in the company becomes seriously ill, the carrier may cancel the policy the next time it comes up for renewal.

Further complicating manners, some states are mandating certain health-care benefits so that if an employer offers a plan at all, it has to include certain types of coverage. Employers who can't afford to comply often have to cut out insurance altogether. The good news: Many states are tying to ease the burden by passing laws that make it easier for small businesses to get health insurance and that prohibit insurance carriers from discriminating against small firms. (MSAs, described above, are in part a response to the problems small businesses face.) The following states make some special provision concerning small employers and health insurance: California, Connecticut, Illinois, Iowa, Kansas, Maine, Massachusetts, New Jersey, North Carolina, Oregon, South Carolina, Tennessee, Wisconsin and Wyoming.

Until more laws are passed, what can a small business do? There are ways to cut costs without cutting into your employees' insurance plan. A growing number of small businesses band together with other entrepreneurs to enjoy economies of scale and gain more clout with insurance carriers.

Many trade associations offer health insurance plans for small-business owners and their employees at lower rates. Your business may have only five employees, but united with the other, say, 9,000 association members and their 65,000 employees, you have substantial clout. The carrier issues a policy to the whole association; your business's coverage cannot be terminated unless the carrier cancels the entire association.

Associations are able to negotiate lower rates and improved coverage because the carrier doesn't want to lose such a big chunk of business. This way, even the smallest one-person company can choose from the same menu of health-care options that big companies enjoy.

Associations aren't the only route to take. In some states, business owners or groups have set up health-insurance networks among businesses that have nothing in common but their size and their location. Check with your local chamber of commerce to find out about such programs in your area.

Some people have been ripped off by unscrupulous organizations supposedly peddling "group" insurance plans at prices 20 to 40 percent below the going rate. The problem: These plans don't pay all policyholders' claims because they're not backed by sufficient cash reserves. Such plans often have lofty-sounding names that suggest a larger association of smaller employees.

How to protect yourself from a scam? Here are some tips:

  • Compare prices. If it sounds too good to be true, it probably is. Ask for references from other companies that have bought from the plan. How quick was the insurer in paying claims? How long has the reference dealt with the insurer? If it's less than a few months, that's not a good sign.
  • Check the plan's underwriter. The underwriter is the actual insurer. Many scam plans claim to be administrators for underwriters that really have nothing to do with them. Call the underwriter's headquarters and the insurance department of the state in which it's registered to see if it' really affiliated with the plan. To check the underwriter's integrity, ask you state's department for its "A.M. Best" rating, which grades companies according to their ability to pay claims. Also ask for its "claim-paying ability rating", which is monitored by services like Standard and Poor's. If the company is too new to be rated, be wary.
  • Make sure the company follows state regulations. Does the company claim it's exempt? Check with your state's insurance department .
  • Ask the agent or administrator to show you what his or her commission, advance or administrative cost structure is. Overly generous commissions can be a tip-off; some scam operations pay agents up to 500 percent commission.
  • Get help. Ask other business owners if they've dealt with the company. Contact the Better Business Bureau to see if there are any outstanding complaints. If you think you're dealing with a questionable company, contact your state insurance department or your nearest Labor Department Office of Investigations.

Above and Beyond

What does COBRA mean to you? No, it's not a poisonous snake coming back to bite you in the butt. The Consolidated Omnibus Reconciliation Act (COBRA) extends health-insurance coverage to employees and dependents beyond the point at which such coverage traditionally ceases.

COBRA allows a former employee after he or she has quit or been terminated (except for gross misconduct) the right to continued coverage under you group health for up to 18 months. Employee's spouses can obtain COBRA coverage for up to 36 months after divorce or death of the employee, and children can receive up to 36 months of coverage when they reach the age at which they are no longer classified as dependents under the group health plan.

The good news: Giving COBRA benefits shouldn't cost you company a penny. Employers are permitted by law to charge recipients 102 percent of the cost of extending the benefits (the extra two percent covers administrative costs).

The federal COBRA plan applies to all companies with more than 20 employees. However, many states have similar laws that pertain to much smaller companies, so even if your company is exempt for federal insurance laws, you may still have to extend benefits under certain circumstances. Contact the U.S. Department of Labor to determine whether your company must offer COBRA or similar benefits, and the rules for doing so.

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