As a business owner, there are a lot of questions that come up. Borshoff Consulting is here to help you in your journey through small business ownership.
The employer must pay in whole or in part for certain legally mandated benefits and insurance coverage, including Social Security, unemployment insurance, and workers’ compensation. Funding for the Social Security program comes from mandatory contributions from employers, employees and self-employed persons into an insurance fund that provides income during retirement years.
Full retirement benefits normally become available at age 66 for people born after 1943, and age 67 for those born in 1960 or later. Other aspects of Social Security deal with survivor, dependent and disability benefits, Medicare, Supplemental Security Income (SSI) and Medicaid. Unemployment insurance benefits are payable under the laws of individual states from the Federal-State Unemployment Compensation Program.
Workers’ compensation provides benefits to workers disabled by occupational illness or injury. Each state mandates coverage and provides benefits. In most states, private insurance or an employer self-insurance arrangement provides the coverage. Some states mandate short-term disability benefits as well.
A comprehensive benefit plan might include the following elements health insurance, disability insurance, life insurance, a retirement plan, flexible compensation, and sick, personal, and vacation leave. A benefit plan might also include bonuses, service awards, reimbursement of employee educational expenses and perquisites appropriate to employee responsibility.
As an employer, before you implement any benefit plan, it’s important to decide what you’re willing to pay for this coverage. You may also want to seek employee input on what benefits interest them. For instance, is a good medical plan more important than a retirement plan? Furthermore, you must decide whether it is more important to protect your employees from economic hardship now or in the future. Finally, you must decide if you want to administer the plan or have the insurance carrier do it.
Today, most health insurance falls under what is called “managed care” in which you pay monthly premiums, as well as co-pays and deductibles. The four main types of health insurance are briefly described below. For more information contact your plan administrator.
In addition, due to the passage of the Affordable Care Act of 2010, which was upheld by the Supreme Court in July 2012, starting in 2014 states may opt to create a “healthcare exchange” that enable individuals and small businesses to compare health plans, get answers to questions, find out if they are eligible for tax credits for private insurance or health programs like the Children’s Health Insurance Program (CHIP), and enroll in a health plan that meets their needs.
Health maintenance organizations (HMOs) provide health care for their members through a network of hospitals and physicians. Comprehensive benefits typically include preventive care, such as physical examinations, well baby care and immunizations, and stop-smoking and weight control programs. The choice of primary care providers is limited to one physician within a network; however, there is frequently a wide choice for the primary care physician.
A preferred provider organization (PPO) is a network of physicians and/or hospitals that contracts with a health insurer or employer to provide health care to employees at predetermined discounted rates. PPOs offer a broad choice of health care providers.
Point of Service (POS) health care plans are similar to HMOs in that you choose a primary-care doctor from the plan’s network, but you must have a referral in order to see in-network specialists. You can also see out of network providers as long as you get a referral first.
Another option to consider is a high-deductible health insurance combined with a health-savings account (HSA) or a health reimbursement arrangement (HRA). By law, the two must be linked.
Note: HSAs should not be confused with FSAs (Flexible Spending Accounts). Money that you set aside in a health savings account or a health reimbursement arrangement to pay for certain medical expenses is tax-free. HSAs must be linked to a high-deductible health insurance plan, and HRAs often are. (For preventive care, such as cancer screenings, you might not have to pay the deductible first.) Typically, a special debit type card is used for the HSA or HRA account to keep track of expenses and payments.
A disability plan provides income replacement for the employee who cannot work due to illness or accident. These plans are either short term or long term and are distinct from workers’ compensation because they pay benefits for non-work-related illness or injury.
Short-term disability (STD) is usually defined as an employee’s inability to perform the duties of his or her normal occupation. Benefits may begin on the first or the eighth day of disability and are usually paid for a maximum of 26 weeks. The employee’s salary determines the benefit level, ranging from 60 to 80 percent of pay.
Long-term disability (LTD) benefits usually begin after short-term benefits conclude. LTD benefits continue for the length of the disability or until normal retirement. Again, benefit levels are a percentage of the employee’s pay, usually between 60 and 80 percent. Social Security disability frequently offsets employer-provided LTD benefits. Thus, if an employee qualifies for Social Security disability benefits, these are deducted from benefits paid by the employer.
Traditionally, life insurance pays death benefits to beneficiaries of employees who die during their working years. Most employers purchase a group life policy for their employees. Typically an employee is provided with life insurance coverage that is at least equal to their yearly salary. For example, an employee who makes $50,000 per year would receive $50,000 of coverage. The employer is responsible for the premium but may require employees to pay part of the premium cost.
With self-insurance, the business predetermines and then pays a portion or all of the medical expenses of employees in a manner similar to that of traditional healthcare providers. Funding comes through the establishment of a trust or a simple reserve account and a self-insured employer assumes the risk for paying the health care claim costs for its employees.
As with other health care plans, the employee generally pays a portion of the cost of premiums. Catastrophic coverage is usually provided through a “stop-loss” policy, a type of coinsurance purchased by the company. The plan may be administered directly by the company or through an administrative services contract. Businesses with self-insured health plans are not subject to taxes, benefit requirements, profit limits, or other provisions of the Affordable Care Act.
The idea behind cafeteria plans is that amounts which would otherwise be taken as taxable salary are applied, usually tax-free, for needed services like health or child care. Besides saving employee income and social security taxes, salary diverted to cafeteria plan benefits isn’t subject to social security tax on the employer. With a cafeteria plan, employees can choose from several levels of supplemental coverage or different benefit packages. These can be selected to help employees achieve personal goals or meet differing needs, such as health coverage (family, dental, vision), retirement income (401(k) plans) or specialized services (dependent care, adoption assistance, legal services–legal services amounts are taxable).