EMPLOYEE BENEFITS

In the U.S., people seeking financial security and protection from the perils of death, disability, illness, and accidents must rely on a combination of sources including their employer, the government and themselves for what is not provided. There are myriad reasons for the way this has evolved, including legislative and tax factors, insurance principles, and the state of the overall economy. The net result is that to achieve peace of mind within budget realities, people have to carefully coordinate their available resources. 

For most workers, a foundational resources is their employer’s employee benefits. Similarly, employers recognize that employee benefits are critical to recruiting and retaining talented employees. Competing in a global economy, coupled with the increased cost of medical insurance, has led employers to manage their benefits programs to find the right balance to enable their organization to remain competitive. 

Here are the insurance-related employee benefits that employers – or self-employed workers – can select to meet their needs and those of their employees. Of course, retirement plans like 401(k) plans, vacation, company stock, daycare, and other perks and benefits are valued by employees, but because they do not involve insurance, they are not covered here. 

It’s important to remember that even if the employer is not contributing much (or anything) to the cost of a group benefit, by offering it through payroll deduction and having the employee pay for it on a voluntary basis, it can be less expensive and offered on a guaranteed issue basis thus avoiding medical questions and a physical exam.

Group Health Insurance

A major consideration in changing jobs is what a potential employer provides for health insurance from both a coverage and cost standpoint. Decades ago, health insurance was perhaps an afterthought as employers of any size provided it and it was comparable to the coverage other employers offered. However, as the cost of healthcare has greatly outpaced inflation, employers varied in their aggressiveness in managing their healthcare costs. 

There are distinct advantages that most group health insurance plans have over the individual market. There is more flexibility to offer plans that reflect the demographics and needs of the organization’s workforce. Group health insurance plans do not have a preexisting condition limitation for someone enrolling when hired or changing plans at their annual election. Because the health risk is spread across the organization’s employees, the resulting economies of scale help keep costs lower than a comparable individual health insurance plan. 
Generally, employers share in the cost, and to the degree that employees contribute to the plan, the contributions are made on a before-tax basis, which subsidizes the cost by the amount of the person’s federal, state and FICA (Social Security and Medicare) marginal tax brackets, which in total typically start at 25% or more of the cost. And the employer’s cost is a valuable employee benefit because employees are not taxed on the employer’s contribution. 

There are also specific rules that group plans of a certain size must comply with under the Affordable Care Act (ACA), which became law in 2010. For organizations with 50 or more full-time employees, employers must offer “affordable coverage,” which stipulates that the employee’s premium can’t exceed a certain level of household income and must cover 60% of expected costs. 

Annually at open enrollment, group plan participants are given the opportunity to revisit their health insurance choices. Employees do have the opportunity to update their health insurance coverage outside of open enrollment if they experience a change in family status, such as marriage, divorce, the death of a spouse or the birth of a child. 

If someone leaves their job, depending on the size of the employer (or the state they reside in) they may be eligible for COBRA continuation coverage, which allows them to continue to stay in their employer’s plan for a limited time, which is usually 18 months for the employee and up to 36 months for dependents. But there is no employer subsidy available, so they will have to pay the entire cost of the plan plus up to 2% for administration. For someone between jobs this can be a costly burden, and the ACA state exchanges may be a less expensive alternative. 

ACA State Exchanges: A more affordable option?

The Affordable Care Act established a marketplace for individuals and families to compare options and purchase health insurance on “exchanges.” Currently, 21 states provide and administer their own exchanges while the remaining states participate in the federally facilitated marketplace. The exchanges fill a void for people who are not covered by an employer-sponsored health plan, Medicare or Medicaid. The four types of exchange health insurance plans are Bronze, Silver, Gold and Platinum. Generally, the plans range from Bronze plans that provide 60% of in-network benefits, to Platinum plans that provide 90%, with the trade-off being premium costs.

Aside from an array of health plans for most states, people whose income does not exceed the thresholds can receive a premium tax credit that lowers their out-of-pocket costs. The impetus for this approach was to allow more people to afford coverage, which helps hospitals by having more patients with insurance and spreads the risk of insuring by getting more people to participate. The exchanges’ open enrollment period is usually November 1 through January 15; however, you can enroll during the year if you have a qualifying life event such as losing coverage under your employer’s plan, getting married or divorced, having a child or moving to another state.

Participating exchange health plans are required to provide 10 categories of “essential health benefits.” The categories include hospitalization, maternity care, mental health care, emergency services, prescription drugs, and preventive services. Of most significance to people with a preexisting condition, they can’t charge higher premiums or deny coverage, which caused great anxiety to people who lost their employer benefits and needed to buy individual coverage. Although the ACA penalty for not having insurance is gone, there are still several states that penalize people without insurance.

Tax-advantaged ways to lower costs

As health costs continue to escalate, individuals and families have sought alternatives that allow them to self-insure with higher deductibles in return for lower fixed monthly insurance premiums. Since the threshold to deduct health expenses is high – 7.5% of adjusted gross income (AGI) — using a high-deductible health plan (HDHP) allows people to contribute $4,400 for individuals and $8,750 for families in 2026 in pre-tax accounts known as health savings accounts (HSAs). To qualify as an HDHP, the plan’s deductibles must be at least $1,650 for individuals and $3,300 for families.

The interaction between the two is that an HSA allows for pre-tax contributions, the earnings grow free of taxes, and when used for eligible medical expenses, the funds are tax-free when withdrawn. They can be rolled over and accumulated every year and eventually used for retiree medical expenses.

The key assumption when using an HDHP with an HSA is that the users are in good health and can fund the HSA to take advantage of the tax-savings feature. Also, to the degree that the HSA account balances are used up, the family will have sufficient other savings to pay for remaining healthcare expenses. 

There are also several types of tax-favored, employer-sponsored savings accounts that employers can avail themselves of, depending on their size and whether they offer health insurance to their employees. Under this approach, the employees can utilize the state exchanges or other market sources, and take advantage of employer-funded health accounts.

Health reimbursement arrangements 

The difference between health savings accounts and health reimbursement accounts (HRAs) is that, for the HRA, the employer defines a dollar amount (up to Internal Revenue Service (IRS) limits) that they provide for employees to be reimbursed for eligible healthcare expenses.

• Qualified Small Employer HRA (QSEHRA): For employers with fewer than 50 full-time employees that do not provide a group health insurance plan, the employer deposits funds into the account that employees can tap for reimbursement of individual medical insurance premiums as well as eligible medical expenses they incur. Employees are not taxed on the contributions.

• Individual Coverage HRA (ICHRA): For employers that want to design a health reimbursement plan and not be limited by size or a limit on contributions, other than their budget, an ICHRA may be a better fit. Again, employees can purchase their own individual insurance and be reimbursed. 

Section 125 Premium-Only Plan

Another alternative for employers is a premium-only plan (POP), which is subject to IRS rules and regulations under Section 125 of the Internal Revenue Code, the section that governs employee benefit plans. While this may seem like a given, many employees lose sight of the fact that their own health insurance contributions are not taxed when the employer implements a simple premium-only plan. That provides them with a subsidy by the amount of their federal, state and FICA tax brackets, which can save them 25% - 45% of the total cost. 

Group life insurance

One of the most common employer-provided benefits is group life insurance due to its simplicity, relatively low cost and the tax-advantage for a portion of the employer-provided coverage. Generally, employees receive a life insurance benefit that is based on their earnings – one or two times their annual pay – without contributing. They are not taxed on the first $50,000 of coverage they receive. But for amounts over $50,000 they are taxed on the value of the life insurance they receive, which is logically higher for older employees. To receive the benefit, they generally enroll when eligible. There is no requirement for a physical exam or to answer medical questions.

Employees may often be offered the opportunity to purchase additional supplemental life insurance based on their age. They also may be offered accidental death and dismemberment (AD&D) insurance, which is inexpensive.

Employees should be sure to have life insurance independent of their employer in the event they change jobs. Employees may be able to convert their employer coverage when they leave to permanent life insurance, but it is very expensive. 

Group long-term care insurance

Long-term care insurance (LTCI) is designed to cover the costs associated with assistance for daily living activities when a person is no longer able to live independently for an extended period, generally due to chronic conditions, cognitive impairment, disability or the infirmity of living to an advanced age. Since health insurance and Medicare are not intended to cover custodial care, most people have an insurance gap if they need long-term care services. However, it can be difficult to get LTCI as insurance companies have become increasingly selective.

When care is needed it can be provided at home, in an assisted living facility, an adult day care center, or a nursing home. A long-term care policy’s benefits are paid when the benefit triggers are met. The benefit triggers are tied to the insured’s ability to satisfy certain activities of daily living (ADLs).

Offering a group LTCI program on a voluntary basis can allow for simplified underwriting during the enrollment window. Costs can be lower than the individual LTCI marketplace, depending on the size of the group and the amount of participation.

Group disability insurance

The two basic ways to obtain disability insurance are by purchasing it individually or having an employer offer it. Disability insurance through the employer is a meaningful employee benefit; however, there are differences in the particular plan design, which may only provide 60% of base salary (and could exclude bonuses and other payments). Group disability may specify an “own occupation definition,” for the first two years (or not at all), then switch to “any occupation,” which is a more stringent standard. Usually, the employer determines the waiting period for disability benefits to begin (elimination period), which is usually 60, 90 or 120 days and will be coordinated with any short-term disability insurance the employer provides.

If the employee leaves, then they lose the coverage. Further, employer-sponsored disability insurance benefits may offset Social Security Disability Insurance (SSDI) payments so the employee will not receive the total of both payments.

Despite these differences, the reality is that most people don’t buy the coverage on their own, exposing them to a significant insurance gap. That is why it is important to provide some coverage, even if it’s not as comprehensive in coverage as the individual marketplace.

If you do choose to provide disability insurance at no cost to your employees, be sure to ask your payroll department if they can allow the employees to opt for showing the value of the employer contributions on their W-2, otherwise the payments will be fully taxable when received. If they are covered by group disability insurance, they can still take out an individual policy, but the employer’s payments may be coordinated with the employee’s policy. An insurance agent who sells disability insurance may be a good resource to discuss how this would work. 

Short-term disability 

Short-term disability (STD) coverage provides income replacement for temporary disabilities, typically beginning after a short elimination period (commonly 0 to 14 days for accidents and 7 to 14 days for illness) and lasting from 13 to 26 weeks. Most STD plans replace 60% to 70% of an employee’s weekly earnings. STD is often closely coordinated with an employer’s paid sick leave policies and, where required, with state-mandated disability programs.

Several states — including California, New York, New Jersey, Rhode Island, Hawaii, and Massachusetts — mandate short-term disability coverage, requiring employers to provide or fund state-approved plans. Employers in these jurisdictions must understand how their group STD plans interact with state program requirements to ensure compliance and avoid duplication of benefits.

Some short-term disability plans are offered on a voluntary basis, and the employees can choose among various options to fit their needs through payroll deduction.

Dental and vision insurance

One health service that has become increasingly expensive is dental insurance. The financial exposure that individuals and families may face can run into thousands of dollars. For this reason, dental insurance is welcomed by employees. While group dental insurance plans are not designed to provide full reimbursement for complicated treatments, they can provide preventive benefits at little or no cost and a share of the cost of major services. 

A related benefit is group vision insurance that includes eye exams, prescription lenses, contacts and frames, again through a network of participating providers. Group vision insurance can be provided by the employer or through voluntary participation of the employees. Vision benefits are appreciated by employees who spend meaningful dollars on related services.