I've been involved with the financial services industry since 1991. Over the past 25+ years, I have interacted with thousands of small business owners. In my last post, I went over the definition of a benefit, identified taxable benefits, and non-taxable benefits. Now, let’s take a deeper look at the two ways you can get health and dental coverage for small business.
1. Health and Dental Insurance
Health and dental benefits arranged by an employer using an insurance company, is marketed and sold as health and dental insurance. The insurer provides a template for the employer that includes a specific list of health and dental services. The more services that the employer wants to include in the template, the higher the cost of the plan. The inherent problem with these plans is their inability to be tailored to the varying needs of the individual employees and their families.
Adding to this complexity is the belief that employees have 100% coverage for all their health and dental needs. In reality, there is coverage for a little bit of many things. Expensive non-catastrophic services such as orthodontics, laser eye surgery, and dental implants are usually excluded. Other services and practitioners such as massage, chiropractic, acupuncture etc. are capped at low annual limits, with a low per visit maximum and may include a deductible.
In these ‘premium paid’ plans, control of the benefit moves from the employer to the insurer in the form of a premium. If the employee files a claim for a service not listed, there is no benefit paid out. The employee must pay out of pocket. The value of the benefit intended for the employee is reduced and lost in the premium. This is a lose/lose/win situation for the employee/employer/insurance company - respectively. The same scenario plays out with co-payments. The employee files a claim for a health or dental service and they are reimbursed a percentage based on the co-payment. The balance is paid out of pocket after tax by the employee. Only part of the employer provided benefit reaches the employee.
2. Health Spending Accounts (HSA)
In the insured plans described above under ‘health and dental insurance’, the value of the benefit provided by the employer is lost or diminished in a premium. As mentioned in my last blog post, HSA plans are also called Private Health Services Plans or PHSP’s. They are set up by employers to provide tax-free health and dental benefits to employees. When the plan is set up, the employer decides how many tax-free dollars to provide to their employees annually - which is the HSA dollar limit. The employees are able to claim for all their eligible health and dental bills up to their annual HSA limit.
These HSA plans are sometimes called ‘flex accounts’. The HSA is ‘flexible’ because the employees are able to decide how and when to use their tax-free HSA dollars. The full list of eligible expenses is available for the employee to use without restrictions. This includes their spouse and dependents.
An HSA transfers the full value of the benefit from the employer to the employee on demand. The administrator of the plan receives and pays claims submitted from the employee. The receipts are verified to the list of eligible expenses and is then paid out to the employee. The employer funds the plan monthly so that claims can be paid when submitted by the employee. The employer does not incur an expense until an employee claim is submitted and subsequently paid by the administrator. The administrator charges an administration fee at the time the claim is paid. If there are no claims, there’s no cost for the employer. These pay-as-you-go health and dental plans or HSA’s are efficient and cost effective. There are never unplanned cost overages or lost money with a ‘flexible’ HSA plan.
To learn more about adding a Health Spending Account into your employee benefits package, download our FREE Beginner's Guide below: