Employee Benefits | An Introduction to Supplemental Employee Benefits |
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Employee Benefits | An Introduction to Supplemental Employee Benefits |
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Many companies offer their employees paid time off in the form of vacation and sick leave. And despite the rising cost of health care, more companies than ever are offering some health insurance to their employees. To help offset costs, companies have begun asking employees to contribute a portion of the monthly premium payments for Major Medical, Vision, and Dental Care plans. Most of us are familiar with Major Medical plans: usually, you are enrolled in an HMO (Health Management Organization) or a PPO (Preferred Provider Organization) program where you see a specific doctor for your regular checkups and occasional illnesses. You may be asked to make co-payments (in the amount of $10-20). Your prescriptions are discounted but you may still have to make co-payments. Vision and Dental Care plans, while less frequently offered by employers, usually work in similar fashions. Some Major Medical plans include these benefits at an additional cost. Most people don't realize how much money their employers pay for these benefits. A typical Major Medical premium can run to several hundred dollars per month per employee, not including the employee's spouse and dependents, if they are included in the coverage. While many people are hard pressed to contribute to their own health coverage, companies get group rate discounts. To buy similar health insurance on your own, you would have to pay considerably more money. And there ARE people who, having no other options, do pay the higher individual rate premiums. But as health care costs have increased, insurance companies and health service providers have trimmed their budgets and reduced services. That means that many critical, catastrophic, but still somewhat rare illnesses are not fully covered by Major Medical insurance plans. Worse, many Major Medical plans don't provide much coverage for accidents which result in hospital stays and surgery. Who pays for these services? Usually, YOU do. Yes, there every state provides some form of Workmen's Compensation, but employers are not required to enroll in the program. They ARE required to inform you of whether you are covered under Workmen's Comp, so check with your human resources person (who may simply be your boss) to find out if you are covered. And for the people who are not covered by Workmen's Comp or similar programs, there is still a low-cost option: supplemental employee insurance. Believe it or not, voluntary or supplemental insurance has been offered in the United States since about 1939. Long before ducks began quacking on your television set, a few insurance companies have been offering employers special plans to augment their Major Medical plans. Supplemental insurance, or voluntary insurance, is usually implemented through payroll deduction. That means the employer contracts with an insurance provider for a set of policies to offer employees. The employees are offered an opportunity to enroll in the policies at group rates once per year (unless they marry, divorce, have children, or experience some other special changes). The premiums are withheld from employee paychecks and forwarded to the insurance companies on a regularly scheduling billing cycle. To help people realize some tax benefits, the Internal Revenue Service has defined some requirements for these kinds of plans in Section 125 of the I.R.S. Code. These plans are thus often called Section 125 plans, or Cafeteria Plans (because you don't have to enroll in all the offered policies). Employees pay their own premiums, and depending on the plans these may be flexible premiums (you determine how much coverage you want and pay just for that). Employers may wonder why they should offer supplemental benefits to their employees. One good reason is to provide your employees with choices. People don't like having choices made for them, especially when it comes to the means of providing protection for their employees. But, depending on the program your company participates in, you may find that your employees are better informed about how much your company is actually doing to help them. Some insurance companies reduce the tedious workload of reconciling the billing against enrollment data which, if you have dozens or hundreds of employees, can be a very time-consuming (and therefore expensive) process. Automated reconciliation saves the employer both time and money. Some insurance companies provide trained enrollers. That is, they don't simply give the employee a box of applications and brochures to pass out. The employers benefit from working with a professional enroller who takes the time to sit and explain the benefits package to each employee. The process generally takes about 15-20 minutes per employee. It is best to schedule the enrollments during company time so that employees understand this is not a sham benefit. The value the employer attaches to the enrollment process makes a big difference. Through participating in voluntary insurance plans, employees become better informed about the limits of their medical coverage. Many older employees, for example, may be interested in purchasing Cancer or Critical Illness protection because they are moving into the age ranges where their chances of developing life-threatening illnesses increase. Most Major Medical plans provide only limited protection against Cancer and other significant illnesses (which is why these supplemental plans are important). So, what's in it for the employee, besides a reduction in their take-home pay? Well, believe it or not, if you are not currently enrolled in a qualified Cafeteria plan, it might not cost you as much as you think. Depending on the policy and how you choose to pay for it, you may be able to save some money by using pre-tax dollars. That is, if you are making $500 gross pay per week, you probably pay about $100 in Federal income tax. You can reduce that tax amount by having a pre-tax deduction made from your gross pay. So, if you pay a pre-tax premium of $16 for, say, Disability Insurance, your tax bill would be reduced by a couple of dollars (this has to be calculated at the time your deductions are made). Many people now enroll in their company's 401(k) plans to save for retirement. You make pre-tax contributions to these plans and thereby reduce your tax liability (in reality, you are deferring that tax liability, because you will have to pay taxes on the money you withdraw). Supplemental or Voluntary Benefits often work the same way. "Often" is the key word here, because you or your employer may elect NOT to make the deductions pre-tax. There are some benefits to paying with post-tax deductions. For example, let's say you take out a Critical Illness policy. That policy may pay you up to $10,000 if you develop a specific illness. Federal law requires that, if you paid for the policy with pre-tax dollars, then you must pay taxes on the benefit that is paid to you. HOWEVER, if you paid the premium with post-tax dollars, the benefit is NOT taxable. That is how most life insurance policies work. We pay the premiums after we have paid our income taxes, so the benefits are usually non-taxable when they are paid to our beneficiaries (or us, if we cash out the policies). Some people choose to pay for their disability insurance with post-tax dollars so that they can get the full benefit if they are disabled. Disability policies are designed to prevent employees from receiving full replacement of their lost wages, so every dollar you save on taxes is important to you. The types of policies which are made available to you are determined by your employer and the agent or company offering the plan. While many different types of policies are offered by insurance companies, usually new enrollments start out with just 1 to 3 policies. Accident, Cancer, and Disability policies are the most popular, but other supplemental benefits include Flexible Spending Accounts, Health Savings Accounts, and Universal Life Insurance. And perhaps one of the least-often mentioned benefits to participating in supplemental insurance plans is that the policies are often portable. That means, when you leave your job (for any reason), the policies you paid for usually go with you. You have to make arrangements to continue paying the premiums, but you won't usually see a jump in premiums. Unlike Major Medical policies, which are owned by your employer, your supplemental policies can stay with you for as long as you need them, not simply for as long as you work at your current job. |
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