Ways to Mitigate Healthcare Costs
Twelve tips show you how.
October 27, 2011
Health insurance premiums have increased approximately nine percent this year, nearly three times the rate of inflation, according to a The Kaiser Family Foundation and Health Research & Educational Trust study. Average healthcare premiums rose to $10,944 for employers and $4,129 for employees for a total of $15,073 and this does not include out-of-pocket healthcare expenses. Adding to the bad news, employers can expect premiums to rise another 7.2 percent next year, according to the National Business Group on Health.
Possible factors for the increase in premiums include projections that employees would use more healthcare services, continued increases in doctor, drug and hospital costs and to a certain extent, the new federal healthcare rules. Under the 2010 Obama Healthcare (Affordable Care Act) legislation, adult children of insured employees can remain on their parents’ plans until age 26. Since the law was enacted, more than 2.3 million young adults have been added to insurers’ plans, adding stress to the medical-delivery system.
Regardless of which of the Obama Healthcare provisions survive court and Congressional challenges, business owners in virtually every industry are focused on rising healthcare costs. With respect to the Affordable Care Act, Centennial Group President Matthew Hanson observes: “Little in the legislation shows promise of reducing healthcare costs. Employers that are winning by having lower healthcare costs are those who are making strategic shifts in their thinking to recognize that employee health is a critical component of superior business performance. This shift opens up the possibilities for alternative funding strategies, employee engagement change and enhancements to productivity.”
With pressure to expand employee healthcare coverage, a languishing economy and continuing focus on minimizing operating costs, H.R. departments, small business owners and individuals are carefully evaluating ways to retain their healthcare coverage at a competitive cost.
So what can employers and employees do? Below are some approaches to lower overall healthcare costs for both employers and employees:
Healthy Tax Breaks
One factor that should not to be overlooked is the utilization of the Section 125 cafeteria plan to minimize after-tax costs for both the employee and the employer. Cafeteria plans are employer-sponsored plans, allowing employees to choose among qualified benefits and generally avoid income tax on the elected benefits. Qualified benefits include health insurance as well as group-term life insurance, accident insurance, dependent-care assistance and contributions under qualified cash or deferred arrangements (i.e. FSA).
Certain small businesses may qualify to claim the federal Small Employer Health Insurance Credit (see IRC Section 45R). This credit is available to qualified businesses (less than 25 full-time equivalent employees with average annual wages of less than $50,000) that cover at least half of their employees’ health premiums. There is a phase-out for companies with more than 10 full-time equivalent employees or when average annual wages exceed $25,000. The credit is a maximum of 35 percent of the amount (25% for tax-exempt businesses) of employer-paid premiums, subject to state average limitations on premiums paid. Beginning in 2014, the maximum credit will increase to 50 percent of premiums paid (35% for tax-exempt organizations).
Certain equity owners are excluded from generating the Health Insurance Credit. Partners and members of LLCs treated as partnerships, owners of a single-member LLC, shareholders owning two percent or more of an S-corporation and sole proprietors are all treated as “self-employed persons” for health insurance purposes and are eligible for the self-employed health insurance deduction rather than the tax credit.
While businesses cannot control every aspect of their healthcare costs, there are numerous ways as mentioned to mitigate the impact. Rate shopping, research and planning will go a long way to minimize long-term costs, while keeping employees happy (or at least content).
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