9. Employment Benefit Plans Flashcards
How to design group life insurance plan
- Identify employees need
-Analyze existing plans
-Identify what employer and employees want to achieve and objectives
Group term
one of most common insurance coverage provided by employer, includes
- nondiscrimination requirements
- coverage rules (benefits 70%+ employees/at least 85% of participants are not key employees, or plan meets cafeteria plan under Section125),
- benefit rules (must not discriminate in favor of key employees, can be done based on percentage/no limit on dollar amount),
- exclusion rules (can exclude those who have not completed 3 years of service, PT/seasonal employees/part of collective bargaining unit)
- compliance to Section 79 rule requirements: must provide death benefit, provided to group as compensation, must carry policy directly/indirectly, precludes individual selection) if more than $50k, then key employees would include greater cost of actual or Table I. If non discriminatory, then take out $50k exclusion and calculate difference of taxable benefit for W2
The group permanent policy
part of the group-term plan and is considered to provide a permanent benefit if it can provide economic value to the policy beyond one year, or if it has a cash surrender value; need s to be specified in writing to be part of group term plan and group term portion of the death benefit complies with regulation formula.
Cost of permanent benefit less employee contribution is included in employee’s taxable income
dependent coverage
de minimis fringe treated favorably for tax purposes if life insurance payable on the life of a spouse or dependent of an employee < $2,000.
Group term Insurance Carve-out
Able to provide portable cash growth by separating key employees/HCEs
-used for amounts >$50,000 group term coverage, which is provided by permanent life insurance policy
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-Can be financed through bonus/section 162 plans, split dollar plans, or death benefit only plans
Tax implications of group life insurance
-exemption for the first $50,000 provided for each employee
-tax on cost of nondiscriminatory coverage above $50,000, calculated by multiplying by Table I rates and subtracting employee payment
-all expenses borne by the employer for insurance premiums are deductible
- employer needs to pay employment taxes, FICA and FUTA, on any premiums paid above the $50,000 limit.
-death benefit is tax-free for the beneficiary
-premiums are deductible for C Corporations but not for S corps, partnerships, and sole proprietorships.
1035 Exchanges
tax-free transfer of existing life insurance policies or annuity contracts for similar new contracts with different insurance companies, can also be partial. Considered abusive if distributions within 24 months except in case of divorce/unemployment
Alternatives to group-term
life insurance in a qualified plan, split-dollar life insurance, death benefit only, and personally-owned insurance plans.
How to install a group life insurance plan
written plan complying with Section 79 requirements needs to be adopted
Which method may NOT be used to finance a group-term carve-out arrangement?
Profit sharing plans- Financing a group-term carve-out arrangement requires the implementation of methods such as bonus plans, split-dollar plans, and death benefit plans
Disability
- ANY- Social Security/total & permanent: unable to engage in any substantial gainful activity because of physical/mental impairment expected to last for 12 months+ (strictest definition of disability/least favorable to the employees)
-Qualified: total and continuous inability to engage in any gainful occupation qualified - Regular occupation /own occupation- total and continuous inability to perform and and every duty of regular occupation (usually reserved for ST/execs)
-Disability income plan considered welfare benefit plan under ERISA and requires SPD naming plan administrator and procedures for filing claims
Exclusions apply if not under physician’s care, self-inflicted, beginning before coverage/eligible
LT Disability insurance
- Unable to work >6 months
-supplement social security
-covers duration until 65/death
-funded through insurance contract - Can be discriminatory
- can provide benefits of 75-80%, typically 50-70 of gross wages
-Most have 3 month waiting period
Tax implications of LT disability insurance
-employer contributions to disability : deductible as employee compensation
-if employee pays through payroll deductions, then not deductible by employee unless effectuated by cafeteria plan
- benefit payments taxable on employer portion over previous 3 years, but not considered wages and not subject to employment and generally state taxes. Subject to Social Security tax for first 6 months
- disability credit
- limited tax credit that is reduced by any tax-free income received by pension/Social Security
-benefits are subject to Federal withholding if paid by employer, if third party, then only if employee requests
ST disability insurance
Short-term disability usually pays out at 60% of gross compensation, usually broader coverage. The policy period can provide for benefits up to two years. However, most policies are much shorter and can last only a few weeks, covering the period until the long-term policy kicks in (normally within 90 - 180 days). The employee can obtain short-term benefits from the state disability division where they work or live, depending on how the state coordinates benefits. The taxability of short-term benefits is the same as explained above for long-term benefits.
-Sick pay refers to uninsured continuation of salary/wages
-ST disability plan starts when sick pay benefits run out and extends until 6 month /LT disability plan kicks in
Health insurance as a benefit
-most widespread, completely tax-free as deductible to employers and not part of employee’s taxable income
Types of plan design
-Basic: hospitalization- inpatient hospital charges, in-hospital visits, surgical fees
-(supplemental) Major medical plan: medical services excluded from basic plans
- combination of above
Deductibles
- All courses: cumulative over the year (most deductibles)
- Per cause
- Per-family
Plan Funding-Commercial insurance company contracts
Reimbursement is usually limited to the usual, customary, and reasonable (UCR) charge
Premiums for commercial health insurance contracts reflect six elements:
Administrative expenses
Commissions
State premium taxes
Risk charges
Return or profit on the insurer’s capital allocated to the contract
Expected benefit payments
For groups of 50 employees or more, premiums are usually experience rated. That is, the insurer keeps separate records for the employer group and adjusts charges to reflect above- or below-average benefit utilization by the group itself.
Plan Funding-Blue Cross/Blue Shield contracts
Blue Cross plans, used for hospital bills, and Blue Shield plans, used for doctors’ bills, are nonprofit organizations operating within a given geographical area. must meet standards prescribed by their national associations. Federal tax law provides that these organizations are taxed on a basis similar to insurance companies.
Plan Funding-Self-funding or self insurance
employer pays claims and other costs directly, either on a pay-as-you-go basis, or out of a reserve fund accumulated in advance; can accelerate its tax deductions for health and accident plans only to a limited extent, even if a fund is accumulated in advance.
can be combined with an insurance contract which provides administrative services only (an ASO contract). Also, the employer can obtain a stop-loss insurance contract, under which the insurer assumes claims above a stated level. This protects the employer against large unanticipated losses.
can be referred to as a medical reimbursement plan; however MERP is usually reserved for a plan designed to supplement existing insured health plans and to provide special tax benefits.
IRC requirements for limitation of exclusions for preexisting conditions
Conditions for which medical advice or treatment was recommended or received within the six-month period ending on the enrollment date, and
The exclusion extends for no more than 12 months. Credit must be given against this period for previous coverage.
IRC requirements on not excluding/paying extra premiums
Health status
Medical condition, physical and mental
Claims experience
Receipt of health care
Medical history
Genetic information
Evidence of insurability
Disability
The plan may not restrict benefits for any hospital length of stay in connection with childbirth for the mother or newborn child to less than 48 hours or 96 hours for caesarean births.
These provisions do not apply to governmental plans, or to plans that have fewer than two participants who are current employees. Other complex exclusions also apply. For noncompliance with these provisions, the penalty is generally $100 per day for each individual up to a total of the lesser of 10% of the employer’s payments under group health plans in the previous year, or $500,000.
COBRA Continuation of Coverage -Consolidated Omnibus Budget Reconciliation Act of 1985
plans that continue health insurance coverage for employees and their dependents for a period of time after termination of employment. Applies to employers with 20+ employees on at least 50% business days
Self-employed individuals, independent contractors, and directors are not counted and exempted from COBRA, as well as government and church plans
Must provide coverage for 36 months after :
-Death of employee
-divorce of covered employee
- employee’s entitlement to Medicare benefits
-bankruptcy proceeding, where employee retired from employer
-child ceasing to be dependent for plan purposes
18 months after termination of employment or reduction in hours of employment, other than for gross misconduct; if disability, then 29 months
If employee is on leave under FMLA and does not return to work, then COBRA event is deemed to take place on the last day of the FMLA leave
Can be terminated before 36/29/18 month if:
-employer terminates health plans for all employees
- employee/beneficiary fails to pay his/her share of the premium
- employee/beneficiary becomes covered under any other plan providing medical care
Former employee/beneficiary can be required to pay part of the cost of continuation coverage, but can’t be >102% of cost of plan. For employee disabled at time of his termination/reduction n hours may be 150% of plan cost after 18th month.
Penalty of noncompliance=$100/day
Continuing coverage for retirees
- Pay as you go: cost can rise unpredictably and burden future cash flow/ employer’s tax deductions is deferred until premiums are actually paid. Under FAS 106, current accrual must be made, so current earnings are reduced
-Earmarked corporate assets: same as above aside from assets set aside to offset additional liability that FASB rules would impose
-Corporate owned life insurance- w/ dedicated corporate asset reserve in form of corporate owned life insurance. Corporation: owner and beneficiary. tax-free cash buildup is used to pay after-tax cost of health insurance premiums. When insured employee passes, tax-free death benefit is used to recover part/all costs
-Increase pension benefits: no formal health insurance continuation plan except for required COBRA, but pension benefits are increased to provide additional money to pay premiums. allows current deduction to employer for extra costs and tax free accum of returns, but nondiscriminatory so needs to provide to all employees (who must pay taxes)
-incidental benefit in qualified plan
-VEBA (Voluntary Employees’ Beneficiary Association) tax-exempt arrangement to set aside assets to meet future insurance liability
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Tax implications
- employer may deduct cost of health insurance premiums in an insured plan or benefits paid in an uninsured plan as a general business expense, as well as plan administrative expenses
-deductions for prefunding medical benefits are limited to Code 419&419A /up to total of direct costs (claims+admin costs) + contributions to an asset account up to 35% of preceding year’s cost
-employee doesn’t have taxable income when employer pays premiums/benefits paid/when plan reimburses for covered expenses (unless HCE and plan is discriminatory) - employee is eligible for itemized medical exp deduction under Code Section 213 if med exp >7.5%AGI
HMO Health Maintenance Organization
attractive to younger employees and employees with many dependents, because the HMO typically covers all medical expenses without significant deductibles or co-pay provisions.
-employs the providers or contacts directly with providers.
-The providers agree to provide medical services to HMO subscribers when required, in return for an annual payment determined in advance.
- Each subscriber to the HMO or the employer who sponsors the plan pays a fee based on the HMO’s projected annual cost.
-The HMO assumes the risk that services required will cost more than the annual payment.
Types of HMOs
- group practice or medical group model involves contracts between the HMO and a medical group or groups that provide services to subscribers
-individual practice association or IPA plan, under which the HMO is an association of individual doctors or medical groups that practice in their own offices.
-staff model HMO is an HMO organization which directly employs doctors
PPO Preferred provider organizations
A health care delivery system through which providers contract to offer medical services to benefit plan enrollees on a fee-for-service basis at various reimbursement levels in return for more patients and/or timely payment
-provide benefits on a fee-for-service basis as their services are used
-plan participants have financial incentives to use the preferred provider network. The primary care physician does not control a participant’s access to specialists
PPO Pros+Cons
-offers flexibility in network development and plan design
-provider-quality mechanisms and provider-reimbursement levels are separate
- may offer quality oversight for their delivery system.
-continually improve the health care delivery aspects of their products.
- primarily use reimbursement methods based on negotiated fees from fee-for-service schedules, not capitation.
Cons:
- there is a balance between the delivery of medical care and the financing of that care which allows for the delivery of the most appropriate care, but not necessarily the lowest cost.
-all PPO growth has been exclusively in the commercial market.
-Physical examinations may not be covered in a PPO arrangement.
Types of PPOs
-gatekeeper plan: patients must choose their PCP from the PPO network. Must get a referral from their PCP for a specialist, otherwise will not get the PPO cost savings.
-open panel plan: patients can see different PCPs and refer themselves to specialists within the network. The financial penalties are not as great if the patient goes out of the network in this plan.
- exclusive provider plan: similar to an HMO and shifts all the costs onto patients if they see a non-network care provider.
