It’s mid-October, and that means brokers are sharing group health insurance plan renewal rates for 2016. With premiums going up, it also means employers are looking for more cost-effective options for employee coverage. One option many are turning to is transitioning employees to the individual market, along with a service like Gravie. If you’re an employer considering this transition, there are some important tax considerations to keep in mind.
When you drop your group plan, you and your employees lose the pre-tax benefit given to the money spent on health insurance premiums. But if the pre-tax benefit is the only reason you're sticking with your group plan, it's time to reconsider.
In the individual market, employers can give their employees additional compensation to find and buy a health insurance plan of their own. When employers use Gravie, we help your employees apply this money directly toward the cost of their plan (if they choose to).
The IRS prohibits employers from giving money — either pre-tax or post-tax — only after an employee has shown proof of purchase. This is considered reimbursement, and it comes with a hefty fine. With Gravie, though, employers provide extra taxable income that employees can choose to cash out or use toward their healthcare coverage costs, a method that’s in full compliance with the IRS.
How It Works
As an employer, you simply decide how much compensation – or taxable income – you’d like to give to employees. Gravie handles getting that money to them – there’s no administrative hassle for you. When you do it this way, you also get a more defined budget because you know exactly how much money you’ll give to each employee.
With this approach, employers pay taxes on the added compensation, and employees do, too. Even with this added compensation and tax, many employers still come out ahead compared to what they’d been paying for traditional group plan premiums. (In fact, when comparing the amount our customers spent on group plans to what they spend on helping employees pay for individual insurance through Gravie, customers have saved, on average, 36%.) Some employers “add on” to the amount they give employees to cover the income tax employees will pay on the additional compensation – and employers still come out ahead.
What’s even better is that employees also come out ahead; the individual market gives them more choice and, typically, they find coverage that better fits their needs and that costs them less than they’re currently paying for their group plan.