Employer contribution to Cafeteria Plan

[billfgrady]

Employer currently sponsors group health care for its employees. Employer would like to drop the coverage and proposes to contribute, say $500, to a cafeteria plan account or a health FSA for each employee. The Employer's idea is that the employee would then be free to take the cash and purchase health insurance on his or her own. Does this work? What are the potential pitfalls?

I'm not sure a health FSA will work here since a health FSA may not treat participants' premium payments for other health coverage as reimbursable expenses. And that's what the employer appears to be proposing here.

[papogi]

An FSA won't work here for the reason you stated. An HRA will, however. HRA's can only be funded by employers, and can be used for reimbursement of health premiums.

[leevena]

While I agree with the comments from Papogi, I would like to caution you about this. To begin with, dropping group coverage will require your employees to purchase individual coverage plans, which more than likely will be more costly than the proposed $500 and may very well be underwritten, which could leave some without coverage. Is this really what you want to do?

My guess is that the decision is being driven by cost considerations of the employer. I would hope that you have exhausted all of the group avenues available to you. It may take a little work on your/your broker's behalf, but there are all kinds of new products/strategies available that can decrease the employers cost, and maybe to a level that they are willing to keep the group plan. Good luck.

[Guest llerner]

Employer currently sponsors group health care for its employees. Employer would like to drop the coverage and proposes to contribute, say $500, to a cafeteria plan account or a health FSA for each employee. The Employer's idea is that the employee would then be free to take the cash and purchase health insurance on his or her own. Does this work? What are the potential pitfalls?

I'm not sure a health FSA will work here since a health FSA may not treat participants' premium payments for other health coverage as reimbursable expenses. And that's what the employer appears to be proposing here.

Aside from the plan design, most importantly, if an employee has a health problem or is taking an expensive medication, even something as seemingly innocuous as acne medication,an insurer can decline that individual's participation because as mentioned previously these policies are individually underwritten.

The employees will not be eligible for COBRA since the company plan will no longer exist. If they have current coverage, they can possibly qualify for a costly and barebones HIPAA plan (if they have not had a gap in coverage of more than 64 days).

Even if all the employees can qualify for individual or HIPAA policies, if they had been covering any dependents on the group plan even if at their expense, they would also have to apply for individual coverage for their dependents that may not be eligible under the individual plan. There is a high probability that someone would be declined coverage on an individually underwritten plan and tne employer may face some high drama from this.

If they are in a state that offers guaranteed issue for small employers ( I am assuming that this employer has less than 50 employees), they may want to consider a high deductible HSA or HRA Plan and pay 50-60% of the EE only premium so that all employees could participate. If they are over 50 with no serious high dollar claims, they could do the same. Easiest thing would be to get competitve bids for high deductibles and then compare to current carrier's high deductible plan, not cancelling their insurance until they are approved if they decide to switch carriers.

I don't know their line of business, state, size or industry but once they do this it may be difficult to undo without taking a look at all the alternatives. The employer seems to be trying to pass this off to employees however taking away a group policy may seriously impact other areas in the company, particularly if an employee or family member is declined on the individual side. There may be more headaches created by it than expected, and high drama for sure. Definetly, call your broker or find a reputable health insurance broker and get them to help with this. There are many more alternatives that need to be explored.