the advantages to educators of 125 plans and alternative benefit programs september 24 & 25,...

The Advantages to Educators of 125 Plans and Alternative Benefit Programs

September 24 & 25, 2009

2009 Best Practices Conference on School Operations, Finance and Business Leadership

Presented by:Lisa DuquetteTracy Mungeam

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Topics For Discussion

Section 125 Plans

Alternative Benefit Programs

– Consumer Driven Health Plans

– HRA vs. HSA

– Healthy Choice Plans

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Section 125 Plans

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Internal Revenue Code Section 125 provides for pre-tax treatment of thefollowing expenses:

Employer Sponsored Insurance Premium Contributions

• Medical, Dental, Vision

• Group Term Life Insurance less than 50,000 in coverage

• Short Term & Long Term Disability

Health Care Reimbursement Account

Used to reimburse employees for their family’s out-of-pocket medical expenses that are not reimbursed by insurance or any other source.

Dependent Care Reimbursement Account

Used to reimburse employees for the dependent daycare expenses incurred which allows the employee and their spouse (if married) to be gainfully employed.

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When employees pay their eligible expenses using Pre-Tax dollars, they SAVE MONEY!

The savings are:

• Federal Income Tax (15% - 33%+)

• State Income Tax (if applicable)

• FICA/Medicare Tax (7.65%)

Total tax savings is anywhere from 22.65% to 35% or more depending on the employee’s federal tax bracket!

Pre-Tax Treatment: Opportunity for Employees to Save

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Every dollar that goes through the Plan is NOT subject to FICA or Medicare Tax.

Employers’ tax savings is 7.65% of all pre-tax contributions through the plan

Opportunity for Employers to Save Too…

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Plan must be in writing (Plan Documents) and be kept current with latest IRS regulations.

Summary Plan Descriptions must be distributed to Plan participants.

Plan must be administered on a plan year that is best made coincident with your medical insurance plan year. (July 1 to June 30)

Elections once made cannot change during the plan year unless there is a “qualifying event”.

Section 125 Flexible Benefit Plan Requirements

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Flexible Spending Accounts


Pre-tax treatment for out-of- pocket medical expenses.

Election must be made annually and is locked in for the balance of the plan year.

Uniform reimbursement – total election must be made available at start of plan year.

Use it or lose it – funds must be spent during plan year or be forfeited.

2 ½ month extension possible


Pre-tax treatment for child care expenses.

Election must be made annually and is locked in for the balance of the plan year.

Claims are reimbursed based on the cash currently credited to the account.

Use it or lose it – funds must be spent during plan year or be forfeited.

2 ½ month extension does not apply

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Flexible Spending Accounts Election Limits

Plan Type Election and Claim Limits


Annual Election limit set by the Employer – usually ranges from $1,000 to $5,000

Full annual election available up front


$5,000 if single or married filing jointly

$2,500 if married filing separately Claims are payable as money is

credited to participants’ account

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Health Care Reimbursement AccountExpenses Eligible for Reimbursement

Medical Fees and ExpensesDeductibles or co-insurance

Co-payments

Ambulance

Laboratory fees

Physicals

Hospitalization

Sterilization

Transplants

Vaccinations and immunizations

Dental CareCleanings/fillings/x-rays,etc

Dental expense balance after insurance coverage payment

Deductibles or co-insurance

Orthodontia

Durable Medical Equipment

Hearing aids and batteries

Wheelchair/crutches

Orthotics

Syringes, needles and injections

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Eligible Healthcare Expenses Continued……

Treatment, Therapy & Wellness ProgramsChiropractorsHypnosis for treatment of an

illnessMental health careTherapy by licensed

therapistsPsychoanalysisAcupuncture by a licensed

practitionerAlcoholism/drug

dependency treatmentWeight Loss Programs*Massage therapy*

Prescription drugsCo-paymentsBirth control pills

Vision careLasik eye surgery

Contact lenses, supplies and solutionsEye exams and eyeglassesPrescription sunglasses

* Must be medically necessary-meaning you have a qualified medical diagnosis and a recommended treatment plan from a health care professional.

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Analgesics Pedialyte for a sick child

Antacids Smoking cessation products

Anti-diarrhea medicine Sinus medications

Bug bite medicine Hemorrhoid creams & suppositories

Calamine lotion Wart Removal products

Cold/flu medicines Non prescription birth control

Contact lens solution Thermometers

Cough drops Nasal Strips

Diaper rash ointment First aid kits (including band-aid

Motion sickness pills gauze, bandages, cold- hot packs,

Menstrual pain & cramp relief rubbing alcohol)

Sleeping aids Reading glasses

Must be purchased in a reasonable quantity

Additional Eligible Healthcare ExpensesOver the Counter (OTC) Medications/Supplies

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Dependent Care ReimbursementAccounts

Expenses are eligible only if they allow a single parent or both spouses to be gainfully employed, or attend school full time.

Expenses must be for a dependent who can be claimed on your income tax return, who is under age 13, or physically or mentally incapable of caring for him or herself. This may include adults.

The dependent must live in your home at least 8 hours per day.

Eligible day care providers* include:

• Day care center, nursery school, summer day camp or before/after school program that meets state and local requirements. Overnight camps and kindergartens are NOT eligible.

• Babysitters inside or outside the home as long as they are not your legal dependents.

* Please Note: The participant will be required to furnish the tax ID or Social Security number of all providers to the IRS.

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Alternative Benefit Programs

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Consumer Driven Health Plans(CDHPs)

Almost every employer is offering a consumer driven health plan as an option

Only about 6% of employers make CDHPs their sole health plan.

60% of CDHPs have HSAs, while 40% have HRAs.

HSA linked CDHP enrollment reached 8 million lives at the beginning of 2009.

Business Insurance, July 27, 2009, CDHP Enrollment Growing Quickly

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Consumer Driven Health Plans – Sample Design

HRA

Employer pays 100% above the out-of-pocket maximum of $2,000

Employer pays 90% coinsurance 10%

Employee pays the remaining $750 for a total deductible of $1,500

Employee provides a HRA Fund of $750

Employer covers

preventive care 100%

Fund Amount

Deductible

Coinsurance

OOP Maximum

$750

$1,500

90%

$2,000

$500

$750

$750

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Consumer Driven Health Plans - Savings

Studies indicate savings from implementing CDHPs

• Companies with a CDHP experienced a two-year cost increase trend of 5.5% versus 7% for companies without a CDHP1

• Milliman analysis shows when offered a new choice CDHPs deliver 1.5% in savings beyond non-CDHPs based on a typical risk and benefit adjustment factors2

• Aetna study indicates that employers who offer their CDHP as an option experience annualized cost trend that is 1.7% lower than PPO trend3

• CIGNA study indicates medical cost trend for CDHP was lower in both first and renewal plan years with approximate savings of 2% annually in renewal years4

1 Watson Wyatt/National Business Group on Health Survey: March 13, 20082 Managed Healthcare Executive: May 1, 20083 Managed Healthcare Executive: July 13, 20094 CIGNA Choice Fund Experience Study: January 2009

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HRA vs. HSA Comparison Chart

Health Reimbursement Arrangement (HRA)

Health Savings Account (HSA)

Permissible Contribution Sources Employer Only Employer, employee and even unrelated third parties including state governments, may contribute.

Specific Health Coverage Required No Minimum annual deductible in 2010: $1,200 single/$2,400 family.

Statuatory Limits on Contributions None, except nondiscrimintation requirements apply.

Adjusted annually 2010 limits:1) $3,050 for employees with single coverage; or2) $5,650 for employees with family coverageCatch-up for age 55 and over - $1,000 in 2010

Eligibility to Make/Receive Contributions

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Nondiscrimintation Requirements Yes, §105(h) prohibits discrimination in eligibility and benefits provisions in favor of highly compensated emplolyees.

Yes, if employer makes direct contributions, subject to "comparability requirements" (excise tax applies to employer for violations); if made through cafeteria plan, subject to §125 nondiscrimination.Comparibility - Contributions are comparable if same amount or percent of deductible for comparable participating employees (same category of employees and same category of coverage).

Eligibility to Make/Receive Contributions

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Tax-Favored Reimbursable Medical Expenses

All deductible (§ 213(d)) medical expenses (including non-prescription drugs and insurance premiums) except long-term care expenses.

All deductible (§ 213(d)) medical (including non-prescription drugs) and long-term care expenses except most insurance premiums.

Vesting Schedule Allowed Yes, employer may incorporate in plan design.

No, all funds are 100% vested.

Carryover Allowed Yes, but not required, depends on plan design.

Yes, required as part of HSA design.

Permissible/Required Features

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Distribution of Any Remaining Balance at Account Beneficiary's Death

No, right to reimbursement is lost unless plan design extends coverage, but COBRA may apply.

HSA becomes HSA of surviving spouse and transfer is not taxable. Other beneficiaries will have taxable income on fair market value of HSA's assets.

Portable No, but can be designed to allow use following retirement, termination, or while covered by another employer's plan.

Yes, required as part of HSA design.

Pre-Funding Required No Yes. May reimburse expenses incurred only AFTER establishment of HSA.

May be Offered With Other Accounts Yes, provided ordering rules are followed and HRAs are properly limited.

No, unless FSAs and HRAs are properly limited.

Permissible/Required Features

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Employer Contributions Deductible by employer, not taxable to employee.

Deductible by employer, not taxable to employee.

Earnings Plans usually are unfunded and have no earnings, but any earnings would be excluded from employee's income.

Plans are funded, assets may be invested and earnings are excluded from account owner's income.

Tax Treatment

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Healthy Choice Plans

Low Risk Moderate Risk High Risk Chronic DiseaseLow Risk Moderate Risk High Risk Chronic Disease

Traditional ChoiceLower Benefits

Must enroll and participate in one intervention based on

individual need

Healthy Choice Plan Richer Benefit Schedule

CompleteHRA

YesNo

HRA results prompt eligibility for appropriate health

interventions

Health ImprovementPrograms are Available

Must be actively participating or completed appropriate intervention to stay in the healthy choice plan the following year.

Employee Enrollment

• Target areas:Physical activityNutritionHealthy decisions

• Web-based lifestyle behavior maintenance programs

• Health action programs

• Targeted risk factors: Smoking Physical Inactivity Overweight Stress

• Six-month phone-based lifestyle behavior change programs

• Web-based lifestyle behavior change programs

• Targeted risk factors: Smoking Physical Inactivity Overweight/Obesity Stress High blood pressure High cholesterol

• 12-month phone-based lifestyle behavior change programs

• Web-based lifestyle behavior change programs

• Disease management program:

Treatment and drug compliance

Behavioral focus Lifestyle behavior

modification Psychosocial support Self-management skill

development

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Questions?