Reimbursing employees for deductible amount only

[Guest Julie Schoshinski]

Our company is looking at increasing our current health insurance plan from a $250 deductible to a $1000 deductible. We would still only hold the employees responsible for the first $250, and would reimburse for the $750 beyond that, until the deductible is met. Our plan is a simple 80/20 plan with no co-pays, etc. We would offer this to all employees and dependents enrolled in the health care plan.

Reasoning for this is much greater savings on premium with the high-deductible plan. We are a small company (29 employees, 40 lives on the health plan).

We would like to self administer the plan through employee submittal of EOBs. All personal health info would be blocked out -- we would just have to see the portion that states. "Employee has met X amount of year-to-date deductible" and reimburse for the difference. (Probably on a quarterly basis).

Can we do this as a MERP (Medical Expense Reimbursement Account) under a Section 105?

Is it essentially then an HRA?

Any feedback would be greatly appreciated. I have done a good deal of research, and can't seem to get a straight answer.

[mroberts]

You should do this plan under a Section 105 plan, otherwise it would be taxable. As far as if this is an HRA, then answer sounds like no. This is something your company is doing behind the scenes to save on premium. A plan needs to meet certain requirements to be considered an HRA. Additionally, any money left over in a Section 105 plan at the end of the year does not roll over. It would go back to the employer.

I would consider carefully drafting the 105 plan as to not allow the moneys being put into these accounts to be used for any reimburseable medical expenses listed in the regs. You should limit them to amounts associated with the deductible.

[Guest Julie Schoshinski]

We are planning on setting it up as a section 105 -- we were told this is something we can put together and file internally -- I actually have an example that was provided to me by a broker.

Any ideas on how this would affect individuals on COBRA?

[maverick]

I want to make a comment as a former group health insurance underwriter. Rates set for various deductible levels, "assume" that there is no under-the-table reimbursement for part/all of the deductible. In this case, if the insurer knew that you were going to reimburse 750 of the 1k deductible, your monthly premiums would increase. The reasoning is consumers will have no reason to "ration" health care if anything above 250 is reimbursed internally. For example, a person would not go to the doctor for a cold if he or she knew that the cost of the visit would not be paid because the charges were going toward meeting the deductible.

Things may have changed in the past few years, but that's the way it was in the mid nineties.

Also, the insurance company may ask if the employer will reimburse part/all of the deductible.

[mroberts]

Good point Maverick. I'm an underwriter by trade as well and I've gone down this road before. Fortunately I have not had any carriers push back on me. With smaller groups, we have to realize that 19 out of 20 are going to get ripped off by the insurance carrier. A lot of sales reps at carriers feel this way too and work with you. If a group comes up with a good game plan such as this, they should reap the reward.

The way my administrator and I have worked it out is through a different funding mechanism, so I've never used individual accounts through a Section 105 plan before. I would be interested to see what others post just in case I try a similar plan outside my region.

[E as in ERISA]

The greatest risk of a claim is often in that first thousand or two. Sometimes the decrease in premiums is very close to the increase in deductible.

Would this employer could consider doing something like putting $250 into an FSA for each employee instead? Do underwriters consider employer contributions to an FSA? They may be used for dental or vision or dependent care benefits...or premium payments so they don't necessarily affect the use of medical care.

Under the old method or new proposal, those who spend their own money to eat right and keep fit and never miss a day of work will miss out on the $750 from the employer (and may be aggravated seeing certain hypochondriac co-workers get an extra $750 for all the medications they spend half the day talking about). These employees could use the $250 in the FSA to pay part of their premiums or unreimbursed vision or dental claims -- or maybe even dependent care). They will be getting a pay increase and will be happy.

A majority of the other employees probably have health claims of $500 or less. They would get reimbursement from the employer for the other $250 under any of the three methods (old, new or mine).

Many in the group with claims over $500 only have such claims in limited years (due to acute illness in one year, pregnancy, etc.) In other years, they will fit in the first or second category. So over a period of years they may come out even or close to even.

The only ones who would benefit more by the $750 reimbursement are those who routinely incur expenses due to either chronic illness or chronic hypochondria. The former is probably a very limited group. They would lose out under my method. The employer would have to decide whether a pay raise was appropriate to keep them happy.

Under my method, the employer could even consider raising the deductible to $2,000....

I'm waiting for the day when some of those plaintiffs lawyers figure out that it might be worth their while to start a class action discrimination suit on behalf of healthy single employees who are forced work long hours and do more travel than other employees and who make a lot less per hour than other employees (based on combined pay and benefits).

[KJohnson]

Julie,

I would take a careful look at the plan being provided by the broker. This is an ERISA-covered plan (although you will probably be exempt from annual reporting).

Does it have an SPD? Does it have claims and appeals procedures that comply with the new regs? Does it have a named fiduciary? etc.

Does it deal with COBRA? I believe that an employer funded medical reimbursement account does not get the relief that a medical FSA under a 125 plan has.

Some of the things that I have seen insurance brokers hand out are only two to three pages and don't do the job under ERISA.

[maverick]

Katherine's suggestion to have the ER put $$ into a FSA is a good idea. Back when I was underwriting, we did not factor that in to the rates.

[SLuskin]

We have put in several plans in the past 2 months with "insurance deductible account" fsa's and other plans with simple employer contributions to the medical fsa. Both employers and participants seem to like it. Of course, we have the docs, spd, etc. done.