Page 170 - Essentials of Payroll: Management and Accounting

Benefits
Given the high cost of medical insurance provided by third parties,
some organizations are turning to self-insurance plans. Under this
approach, employee medical claims are submitted directly to the com-
pany or a third-party administrator, with the claims in either case being

paid by the company. Once total claims reach a certain point, a stop-loss
insurance policy takes over and pays all remaining claims. This stop-loss
coverage prevents the company from incurring inordinate losses by
providing umbrella coverage for major insurance claims. This approach
eliminates the profit that would otherwise be charged by a third-party
medical provider, while also allowing the company to exert more con-
trol over employee claims.

A key drawback to this arrangement is that if the plan’s benefits are
skewed in favor of highly compensated employees, the excess medical
payments made on behalf of this group will be considered income to
them for tax reporting purposes. Excess payments are considered to be
those paid that exceed the level of payments made to other employees
in the plan. In order not to be considered discriminatory, a self-insured
plan should include at least 70 percent of all employees.
Example. The management team of the Humble Pie Company is
offered free corrective eye surgery; it is not offered to other employees.

The Chief Financial Officer (CFO) has this surgery, which costs
$2,200. The entire cost of this surgery should be added to the CFO’s
reportable income, since the benefit was not made available to the rest
of the company.

Insurance Continuation Subsequent

to Employment
Under the terms of the Consolidated Omnibus Budget Reconciliation

Act, employees of private sector, state, and local governments who lose
their jobs have the right to accept continuing health insurance coverage,

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