Product Information

This is the simplest level of plan implementation, but you still need guidance. Employees may choose to pay for their qualified premiums with pre-tax dollars instead of after-tax dollars without Section 125.

Employees may save 25% to 35% of the taxes from these deductions. Employers will save the matching 7.65% Social Security and Medicare taxes. In most cases employers will save on federal and state unemployment taxes, and even worker's compensation depending on the state.

The eligible premiums consist of:
	Group Health Insurance
	Group Term Life (up to $50,000 of Death Benefit)
	Group Dental Insurance
	Group Vision Insurance
	Cancer Insurance
	Intensive Care Insurance
	Accident Insurance

This is the IRC Section 125 Plan that allows employees to make pre-tax salary reduction elections for additional unreimbursed qualified expenses. Those expenses can consist of; some insurance premiums, medical expenses not paid for by insurance, and child/dependent care expenses.

Employers enjoy a reduction of their payroll taxes when employees elect for pre-tax payroll reductions because lower adjusted gross income also reduces matching FICA, Medicare and Federal Unemployment Tax (FUTA), and in most states , State Unemployment Taxes (SUTA).

Premiums Paid For		Unreimbursed Medical Expenses (see list)
	Group Health Insurance		Health insurance deductibles
	Group Term Life (up to $50,000)		Co-insurance or Co-pays
	Group Dental Insurance		Vision care costs
	Group Vision Insurance		Routine exam costs
	Individual Cancer Insurance		Travel costs related to medical care
	Individual Intensive Care Insurance		Prescription drug costs
	Individual Accident Insurance		Medically required equipment
	Group Medicare Supplement Insurance		Dental care costs, and much much more

If you are a single parent or your spouse works or is a full-time student, you can run the cost of child/elder care through the Section 125 plan. The government allows Single's to use up to $2,500 annually, and married couples filing jointly up to $5,000 annually.

The ERP like the HRA allows employers to substantially lower existing group health, dental, vision care insurance premiums by selecting higher deductibles and/or copays and then covering the increased deductibles and/or copays with the cost savings from the lower premiums. The employer can fix its liability to no more than the difference in premiums. On the average, only 50% of these funds are used because not all employees incur eligible expenses. Employees enjoy the ERP as these funds are paid at 100% from 1st dollar with no deductible, copay or coinsurance; virtually turning your group plan into a first dollar plan with the premiums of a high deductible and/or copay plan. Unused ERP funds are not currently allowed to roll over to the following year.

With the advent of the HRA the ERP is being used mostly to encourage utilization of the FSA by offering matching funds to only those who utilize the FSA option. With a 25 cents on the employee's dollar match, the ERP will only cost the employer a net of 17.35 cents due to the tax savings of 7.65% on the employee's one dollar deferral. If an employer wishes to realize a zero net cost, it need offer a match of only 7.65%. If desired, this match may be offered for just one year to stimulate interest in the FSA and then cease in following years. Like the FSA, any unused ERP funds must, by law, revert to the employer at plan year end unless the recent carryover provision is adopted by the employer allowing a 2 1/2 month extension into the next plan year to use up the prior year's deferrals.

What is the history? HRA's were authorized by Congress in the mid-1990s but received very little attention. There was uncertainty as to how the HRA would be treated from a tax perspective as the IRS had not responded to the Congress approval. The IRS's announcement on 6/26/02 resolved most all the questions, clarifying, among other issues, that reimbursements are not taxable to the worker, that they are tax deductible by the employer, that unused funds can be carried forward from year to year (but do not have to), and that an employer may offer both Flexible Spending Accounts (FSA) and an HRA at the same time.¹

What is the HRA? HRA's are basically an arrangement whereby an employer elects to take a lesser costly and lesser benefit group health insurance plan and then taking the savings in premiums to fund or pay for the benefits that were lost by taking the lower benefit group plan. One might think that this is merely trading dollars, but the 80/20 principle applies. 20% of the employees use 80% of the benefits so 80% of the employees barely use the plan because they are healthy. The savings comes from the theory that the small portion that is "self-insured" is paid on only 20% of the people. Our experience shows that depending on the design, approximately 40% to 60% of the portion funded with the HRA is actually spent with that portion not spent being retained by the employer as savings.

The HRA can have a copay , deductible and/or coinsurance prior to making the reimbursements to the employees. Or, the employer can "fund" the arrangement meaning that the full amount is immediately available to the employee for qualified expenses, but does not have to. By not "funding" the HRA the employer can protect business's cash flow by limiting to1/12th of the annual HRA allotments to their employees on a monthly basis rather than making the full allotment available from day one. This way, if your HRA is paid for by the cost difference of a lower cost group health plan, the business's cash flow can remain (in the worst case scenario) the same, and hopefully, less. Note: It is rare that doctors or hospitals will not accept monthly payments.

Can the unused HRA allotments roll-over to the next year? Yes, but rollovers are not required. If the employer wishes, the unused HRA allotments may roll from year to year for each specific employee’s benefit. Or, the employer may designate only a certain amount or percentage be allowed to roll, and can cap the cumulative maximum as well. The design is left to the employer's creative thoughts so long as there is no discrimination of individuals. Discrimination by class is allowed. Different amounts may be allotted for single employees than allotted for Family employees.

By installing an HRA with rollover provisions, it combines the best advantages of each. It discourages utilization on two levels. First, from the claims sharing by the employee; and second, from the employee "ownership" of the funds. These two can work together to lower group health claims. With the leveraging of the HRA due to deductibles, etc., there is a greater share of the HRA that can roll and as a result the plan is viewed as a true employee benefit. The net result is designed to encourage lower renewal rates of the employer’s group health plan with happier employees.

Why does the HRA make sense? Basically, the employee becomes more involved in both benefit and cost choices, it makes the employer's funding last longer and saves the employer money. This is due to "leveraging" the HRA allotments through deductibles, copays, coinsurance, etc. before any payouts and this naturally causes it to last longer. This also provides for employee participation in payment of some share of the claims. In so doing, this tends to discourage utilization of the health plan which promotes lower claims and; therefore, lower renewal rate increases.

Coupling the HRA with a high deductible or high copay group health plan helps reduce overall rate increases annually due to the insurance premiums comprising a smaller relative share of the overall employee benefits costs. The overall annual increase is diluted because the HRA allotments do not have to increase annually; whereas, insurance premiums usually do. As an example, if an HRA comprises 25% of the employee group benefit plan costs with the insurance the other 75% and a year later the insurance incurs a 20% increase in rates, the net increase in overall costs would only be 15%. In addition, any unused HRA allotments offset that 15% if it is not allowed to roll, further reducing the increase. If ease of use by the employee is desired, include our MasterCard Debit or Credit Card and this makes the plan considerably more user-friendly.

Who should consider installing an HRA? Most any employer who wishes to lower utilization of their group health plan, lower renewal rate increases on their group health insurance plan, increase employee satisfaction should consider installing an HRA. Employers who utilize this concept should be profitable with sufficient cash reserves to cover HRA reimbursement requests on a monthly basis.

Note: This information about HRA's only scratches the surface of what the HRA can do. HRA's can be used to fund single products such as dental plans, vision care plans, etc. or they can be an umbrella over all benefit plans. Let your imagination go and it can probably be done.

The "Health Savings Account" or HSA was signed into law with the new Medicare bill in November 2003, is now offered for plans beginning in 2004. The concept is composed of two parts, insurance and a "side fund." The insurance must be a qualified High Deductible Health Plan (HDHP) and have a minimum in 2006 of $1,050 deductible for singles and $2,100 for a family deductible with no first dollar benefits such as drug cards, copays and the like. All medical expenses must be applied to the deductible before any benefits are paid. Wellness and certain accidental benefits, however, may be paid prior to satisfying the deductible. The "side fund" must be set up with a qualified custodian such as a bank or insurance company. The HSA may be purchased as an individual or as an employer sponsored group plan.

On a group basis, the HSA can only be used in conjunction with qualified High Deductible Health Plan (HDHP) with at least a $1,050 single deductible or $2,100 family deductible for 2006 (annual out-of-pocket amounts cannot exceed $5,250 for singles and $10,500 for families). When properly implemented, the employee may defer pre-tax income dollars to the HSA to pay with tax free dollars for expenses similar to those available through Flexible Spending Accounts (FSA) under IRC Section 213(d). The maximum HSA contribution to the HSA fund yearly can be no more than 100% of the insurance deductible that the employee has. The maximum deferral in 2006 is $2,700 for a single person and $5,450 for a person with dependents. In addition, individuals over age 55 can make extra contributions to their accounts ($700 in 2006, increasing to $1000 by 2009). Perhaps the most exciting provision is that any funds an employee does not use by year end will rollover to the next year because those funds are owned by the individual. Also, contributions to the HSA can come from both the employer as well as employee. A disadvantage of a group HSA is that participants cannot also participate in a traditional FSA plan because first dollar benefits below the plans deductible are, for the most part, not allowed. To learn more about HSA's click on the following link to the U.S. Treasury.

When the HSA is compared to the HRA discussed above, most employers decide not to install the HSA as its only plan. This is because any contributions the employer makes to their employee's HSA fund is gone immediately and forever. The HRA however can be designed to act much the same as the HSA. It can roll forward and accumulate in the employee's accounts and be used even into retirement if designed that way. Or the employer can design it to have certain restrictions on the rollovers. These restrictions can be most anything the employer wishes and the plan can be designed to favor only those employees who have been dedicated long-term employees much like a pension plan with vesting provisions. Short term employees could have no or little vesting provisions and upon termination they would lose most or all funds rolled over. These forfeited funds stay with the employer for use as it sees fit. The HRA can allow rollovers and 100% immediate vesting like the HSA, but if the goal is to lower the employer's overall group insurance costs, the HRA with restrictions and not the HSA is a far better choice. If the employer wishes, they can offer both the HSA and HRA as separate options to the group and provide funds only for the HRA. Let the employee then make the choice. If the employee truly wants to own the HSA fund, they can fund it themselves and it will go with them when they terminate.

The HSA concept has great potential for establishing "qualified funds" for employees to pay their health care expenses and over time take larger deductibles thereby saving on insurance costs. If you are interested in more details on this new concept, email us or give us a call.

By Federal law, HSA's are self regulating. This means that there is no requirement to have a third party verify the eligibility of claims. The Federal government allows individuals to keep their own records and withdraw funds only for qualified expenses or pay 10% penalties and income taxes on any ineligible expenses withdrawn. The problem with this is the nature of "Human Nature". Not all individuals know what an eligible expense is nor will they maintain the records they would need if they were audited by the IRS. What is the solution?

Allow Superior State to install and provide administration of our

which would provide adjudication of claims assuring their eligibility, provide the individual with tax statements at year end for correct tax filings, provide a "Claims Vault" where qualified claims may be stored so the individual may withdraw funds months, years or decades later without concern if those claims are eligible or qualified. As long as Superior State administers the HSA Funds, the individual would know that their plan's administration has complied with applicable laws.

If you merely want the investment portfolio of our

without adjudication, that too is available. Funds above the necessary liquidity levels may be invested in 16 different mutual funds or a high yield money market fund. Funds left at liquidity levels earn competitive rates of return in the money market fund.

We offer a MasterCard Debit or Credit Card for

instantaneous payments of eligible medical providers services, prescription drugs, vision and dental care from FSA, ERP or HRA funds, thereby eliminating the need to file reimbursement requests. Either card eliminates the necessity of the employee having to pre-pay an expense and then request a reimbursement from the FSA, ERP or HRA funds. This represents the epitome of instant reimbursement and; therefore, dramatically increasing satisfaction for the employee. Because of this, the cards can also dramatically increase employee participation in FSA deferrals which would help reduce the minor costs for including the card because of the employer's increased FICA/Medicare tax savings.

The Credit card works exceptionally with HRA plans because if the HRA has copays, deductibles, or coinsurance, the Credit card pays the entire bill and we then reimburse their card for the eligible amounts leaving a net the employee can pay monthly. The employer can also set either card limit to equate to the FSA, ERP or HRA amounts.

The Debit card includes a filter so that it only works at health care providers offices (such as doctors, dentists, vision care providers, and pharmacies) and not at other retail places that accept traditional Debit cards. This helps reduce improper use of the card.

The employer can designate specific kinds of benefits that the Debit card will function with. This means the employer can limit its functionality to one kind of eligible expense such as prescription drugs or dental only, or two kinds of eligible expenses such as dental and vision care only, etc.

We all know what COBRA is but do you know how to administer it correctly? SSA offers comprehensive administration of COBRA and State mandated "COBRA like" benefits. The IRS estimates that the vast majority of all COBRA plans are being inappropriately administered. How do you know if yours is one of the inappropriate majority or the minority who are doing it correctly? We will relieve you of this responsibility so you can concentrate on your business.

We are flexible in our fees so you have a choice of a fixed per employee fee or a fee only when there is a qualifying COBRA event.

Contact us to learn more about this unique and advantageous benefit: info@superiorstate.net.

Superior State Administrators, Inc. u 1101 11th Avenue u P.O. Box 577 u Menominee, MI 49858

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