With the cost of medical benefits rising each year, many employers are shifting costs to employees and their families, implementing high-deductible medical plans and lowering catastrophic benefit levels.
Employee-paid supplemental benefits have emerged as a means for employers to offer additional benefits at little or no cost and help employees offset rising out-of-pocket expenses.
Popular supplemental benefits include those that are designed to cover expenses associated with so-called "dreaded diseases," such as cancer or heart attack.
AFLAC, probably the most well-known provider of supplemental insurance, first introduced its cancer insurance product in 1958. The product was marketed to small employers that could not afford to offer comprehensive employer-paid health benefits. Since then, even the largest employers have cut health benefits and many other insurers have entered the supplemental insurance market.
Although employees usually are required to pay the full cost for supplemental insurance, they gain access to discounted group insurance rates and enjoy the tax savings and convenience of making contributions on a pretax basis through automatic payroll deduction.
Supplemental benefits also provide employees more choice and an opportunity to personalize their benefits in a meaningful way. For example, employees who have a family history of cancer may choose cancer insurance, while those at a greater risk for cardiovascular disease may choose a policy that covers heart attacks.
Supplemental insurance policies vary from one insurer to another. Cancer insurance policies, for example, typically provide benefits for hospital confinement, radiation and chemotherapy, prescription drugs, surgery and anesthesia. Policies also may cover expenses for transportation, lodging and extended care facilities, as well as bone marrow or stem-cell transplants. In addition, some policies provide a lump sum benefit upon diagnosis.
Newer cancer policies often provide benefits for outpatient treatment, but some older ones do not. This is important because today cancer treatment, including radiation, chemotherapy and some surgery, is often given on an outpatient basis.
Most cancer policies do not cover cancer diagnosed or suspected before the policy is effective. Also, not all policies cover all types of cancer. For example, skin cancer is often excluded from coverage. Because of these and other variations, employers should carefully review and explain any cancer or other supplemental insurance policy offered to employees.
Most supplemental insurance benefits that are provided to employees are subject to the requirements applicable to other health and welfare plans under the Employee Retirement Income Security Act of 1974. This means that, among other requirements, such benefits must be maintained according to a written plan document and employees must be provided a summary plan description.
An annual report on Form 5500 may be required, although an employer who files a combined Form 5500 for its other health and welfare benefits usually can add supplemental benefits to the same filing. In addition, rules applicable to other group health plans under COBRA and HIPAA generally will apply in the same manner to a supplemental plan providing health benefits.
Employers who provide group health benefits generally already are subject to all or most of these requirements, so making supplemental health insurance available should not significantly increase an employer's compliance burden.
Note that, although it may be possible to offer a supplemental benefit as a non-ERISA plan, employees would be required to pay premiums with after-tax dollars, substantially diminishing the value of the benefit.
Supplemental benefits are very cost-effective for employers. Premiums typically are paid 100 percent by employees. The expenses an employer incurs to implement and administer such plans generally are deductible by the employer for income tax purposes. Furthermore, the employer will not be required to pay Social Security or federal unemployment taxes on amounts that employees pay toward the policy through a cafeteria plan.
Like other employer-provided health benefits, benefits received under a cancer insurance policy are excluded from an employee's taxable income. In addition, premiums for such benefits may be paid on a pre-tax basis through a cafeteria plan.
By offering supplemental benefits, employers can offer employees and their families more choice and more comprehensive insurance coverage in a cost-effective manner.