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Employees and Employers Save with Cafeteria Plans

As health care costs continue rising and employees are being asked to shoulder more of the expense burden, you can help them by offering a tax-advantaged plan that allows them to save for medical expenses.

These cafeteria plans, which are governed by Section 125 of the Internal Revenue Service Code, allow your employees to withhold a portion of their pre-tax salary to cover certain medical or childcare expenses. Employees can save an average of 30% in federal, state and local taxes on items they already pay for out of pocket.

Because these benefits are free from federal and state income taxes, an employee’s taxable income is reduced, which increases the percentage of their take-home pay. 

The plans benefit employers, as well. Since the pre-tax benefits aren’t subject to federal social security withholding taxes, employers don’t have to pay FICA or workers’ comp premiums on those payments. A cafeteria plan can save employers an average of almost $115 per participant in FICA payroll taxes.

Types of cafeteria plans

Premium-only plan: POP plans allow employees to elect to withhold a portion of their pre-tax salary to pay for their premium payments. Most companies currently have this set up through their payroll provider. A POP plan is the simplest type of Section 125 plan and requires little maintenance once it’s been set up through your payroll.

Flexible spending account: With an FSA an employee pays — on a pre-tax basis through salary reduction — for out-of-pocket medical expenses that aren’t covered by insurance (for example, annual deductibles, doctor’s office copayments, prescriptions, eyeglasses and dental costs). 

Dependent care flexible spending account: The dependent care FSA is an attractive benefit for employees who pay for childcare or long-term care for their parents. Employees may hold back as much as $5,000 annually of their pre-tax salary for dependent care expenses, which include expenses they pay while they work, look for work or attend school full-time.

How an FSA works

Before the start of the year, employees estimate how much they expect to spend on medical expenses and dependent care over the course of the year. 

Employees should be careful to not put too much into the account. (They can carry over $500 in unused funds from the prior year into the new year, but any funds in excess of that would be forfeited.) 

Whatever amount they choose to deduct for the year will be deducted on a pro-rated basis from each paycheck and deposited into their FSA. 

On or after the first day of the plan year, an employee is restricted from changing or revoking the Section 125 agreement with respect to the pre-tax premiums until the plan year has ended, unless a change in family status occurs.

Employees pay out-of-pocket expenses upfront and then submit a claim and documentation to the plan administrator. They are then reimbursed for their expense in the form of a check or account transfer.


Finding Health Cost, Insurance Data Still a Struggle for Patients

Despite newly enacted federal transparency rules for hospitals and health plans, some large hospitals are still not posting the required price lists for their services, according to a recent report.

The Centers for Medicare and Medicaid Services’ transparency rules were implemented to shine the light on what hospitals charge for their various medical services, the negotiated rates insurers have with health plans and the out-of-pocket costs enrollees can expect to pay for these services.

The rule has taken effect in stages and hospitals were the first required to comply, but the report finds their efforts have fallen short. Insurers were required to start posting negotiated rates for their health plans starting July 1, 2022, but currently much of that information is hard to find and decipher.

That means, for now, it may be difficult for plan enrollees to shop around for procedures that they will pay for partially or fully out of pocket. But hopefully, that should change as more rules take effect.

The non-profit Patients Rights Advocate found a number of omissions when recently analyzing price data for seven hospitals in Florida and Texas that are owned by two major health systems: Ascension Health and HCA Healthcare.

The transparency rule requires hospitals to publish machine-readable price lists and display rates for medical services in a format that allows consumers to comparison shop, meaning they are published online.

Insurers for their part are required to post their negotiated rates with providers in machine-readable format.

The effect on health plan enrollees

Health plan enrollees that want to shop around for medical services may currently find it difficult. While the data is posted on the insurers’ and hospitals’ websites, it’s hard to access and decipher since each entity handles the data differently.

Another report, by National Public Radio, highlighted the hurdles a health plan enrollee may encounter if they were trying to find their insurance carrier’s negotiated price for an MRI:

Locating the files — First they have to find the files, which are unlikely to be posted in an easy-to-find section of the insurer’s website. They may have some luck by searching on Google and typing in their insurer’s name, plus “transparency in coverage” or “machine-readable files.” Maybe.

Finding their plan — If they succeed with that approach, next they need to find their plan in all of those files. The files are supposed to have a table of contents, but insurers can have hundreds, if not thousands of different plans, some specific to just one employer. They’ll have to find their plan among those plans, many of which will have similar names to theirs.

Deciphering the data — If they are able to find their plan and download the information, they will have to decipher the various codes for the service for which they are trying to find a price. Each procedure has a specific service code, which the enrollee may not have.

It may get easier soon

The process may become easier on Jan. 1, 2023, when a new rule that requires insurers to provide apps and other tools to help policyholders estimate costs for visits, tests and procedures takes effect.

At that time, carriers will be required to make available online, or in hard copy upon request, patient costs for a list of 500 common shoppable services. That includes things like knee replacements, mammograms, X-rays and MRIs, to name just a few.

In 2024, insurers must add all remaining shoppable items/services to their comparison tools.


Remote Workers Find Benefits Selection Difficult

A new survey has found that remote workers have a more difficult time choosing benefit plans that are the right fit for them compared to their colleagues who work on-site or have hybrid remote-office schedules.

The poll by MetLife found that nearly half of remote workers struggle to understand their employee benefits. As a result, these workers may end up choosing plans that do not meet their needs and they may also spend more time on trying to choose their benefits.

The survey results also reflect the challenges that employers continue to face in meeting their employees’ increasingly diverse needs and that they need to improve their communications, particularly with staff who are working remotely full-time — and especially if they are in another state.

It’s crucial that employers get this right in light of the importance these workers place on their employer-sponsored benefits.

The survey of 1,000 full-time employees at companies with at least two employees found that 61% of workers said that employee benefits are a significant part of what’s keeping them at their company. Those figures were even higher for work-from-home caregivers with children (72%) and millennial and Gen Z workers (67%).

Widespread concern

There are a number of benefit issues that concern remote workers. The survey found that:

  • 45% of remote workers are struggling to understand their employee benefits, compared to 29% of their colleagues that work on-site.
  • 55% of remote workers are highly anxious about their finances, compared to 46% of hybrid and on-site workers.
  • 55% of telecommuters spend over one hour per week worrying about their benefits, compared to 37% of on-site and hybrid employees.

In fact, 65% of remote workers said that a better understanding of open enrollment would help make them feel more financially secure. That’s bad news for those employees, as their lack of knowledge can result in choosing the wrong plan, which may end up costing them more than necessary. As a result:

  • Remote workers are twice as likely to say they enrolled in the wrong type of benefits last year.
  • 57% of remote workers require more information to make the right benefit choices, compared to 47% of hybrid and on-site workers.

What you can do

Without clear communication, employees are less likely to understand and utilize their benefits.

Set up virtual information sessions where plan options, including key defining details and specific benefits, are outlined and covered clearly.

Depending on how many employees you have, you may want to consider offering a few sessions for them to choose from, to ensure they can all make it. If not, record the original session for employees to watch later if they can’t attend.

Also, you should make sure your human resources department is available for one-on-one questions. Some of your employees may need additional help in choosing a plan. You may want to consider offering phone or video chat meetings for them in case you need to show them documents and graphics.


Get Communications Right for Open Enrollment

As group health plan open enrollment looms for most companies, communicating your offerings to your staff is key to getting as many of them as possible to sign up for coverage.

That requires a solid strategy aimed at helping your employees understand their choices and the financial implications of them. Most importantly, you want to reach those employees who didn’t sign up last year and stress the importance of health insurance.

To achieve maximum participation, your communications in the run-up to open enrollment are crucial both in terms of how and what you are messaging. A robust strategy includes: 

Simple messaging

Simplify the process of deciding which health plan to choose in a series of snappy messages that are easy to understand. One of the best ways to get the point across is by using vivid examples, preferably with graphics.

Explain the basics — Focus on your employees’ costs and coverage considerations:

  • Their share of premium,
  • Their deductible, copay or coinsurance,
  • If their doctor is in the plan’s network,
  • If there are any drugs they need for any ongoing health issues.

Help them with the math — Many people have trouble grasping the math. They may look at a low premium without considering the cost on the back end in terms of a higher deductible and/or other out-of-pocket expenses.

Break expenses down with different health care scenarios and the associated out-of-pocket costs based on the plan they have.

Explain coverage for big-ticket items— This includes costs associated with things like a knee replacement or cancer treatment. Humanize the examples by creating a persona and how their health plan covered treatment.

Use creative materials — Provide vivid documentation that includes a lot of bullet points and quick, punchy messages.

Use sidebars to cover important information they need to know, like an increase in deductibles or copays, or that a plan has overhauled its doctors’ network.

Dispensing sage advice

Help your employees by providing guidance on choosing the right plan:

  • Provide clear and direct advice.
  • If an employee is getting family coverage, it’s important they discuss possible choices with their spouse. You can assist by sending hard copies of the enrollment materials to their home.
  • Provide tools for comparing plans to see what their costs would be under each option.
  • Highlight wellness and virtual benefits, which are growing in popularity. Provide details on how to sign up and access these benefits.

Staggering your communications

Step up announcements to build interest by focusing on:

New or changing plans — Use these blasts to let them know about any new benefit programs you are offering or plans you may be discontinuing. You can point them to resources on how the benefits work and any demos. You can also announce changes to plan out-of-pocket costs or deductibles ,or if a plan has beefed up coverage.

Timely communications — These should include reminders about open enrollment and checklists on what your employees should do before it starts.

Once open enrollments starts, you’ll need to send out messaging to get stragglers to act.

Popular programs — If you are adding a plan that your staff has requested, make sure to blast out a few announcements to the troops.

The takeaway

Communication is a key component of a successful open enrollment. You can follow the above advice to generate interest and to help your staff pick plans that are right for them.