Page 288 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

274 The Complete Guide to Executive Compensation

accident. This void has been filled by dental insurance. Like medical insurance, such policies
are either scheduled or comprehensive type plans. Carriers could include HMOs, PPOs,
POS plans, or fee for service. The latter typically provides the most flexibility to the employee
in choosing a dentist. Many plans pay the full cost of normal checkups, x-rays, and cleaning
to encourage early detection of problems. Thus, early diagnosis and treatment should reduce
the need for expensive restorative care. In addition to preventive care, plans provide basic
care (restorations and basic oral surgery) as well as major care (complex restorations, crowns,
orthodontics, and root canals). While preventive care may be fully reimbursable,
the patient will pay a portion for basic and even more for major care. This is of moderate
interest to the executive only if expenses are extensive.

Vision and Audio
There are some instances of vision care insurance to reimburse all or a portion of examinations
and eyeglasses. Audio care is a similar health-care item dealing with the hearing and necessary
corrective devices. Neither has become very popular, perhaps due to a combination of tolera-
ble expenses in one instance and infrequent utilization in the other. Executive interest is low.

Health Spending Accounts
There are two types of health spending accounts: CODA flexible spending accounts and
health savings accounts.
Flexible spending accounts (FSAs), described in Section 125 of the Internal Revenue
Code, are individual employee accounts funded by pretax payroll deductions. There is no
statutory limit on the total amount for medical care; however, it must be determined prior to
the beginning of the year. It can be used to pay out-of-pocket expenses such as the deductible,
the employee portion of coinsurance, as well as expenses not covered by the medical plan.
Plans may permit the carryover of unused funds to March 15 of the following year, but after
that date unused amounts are forfeited. One way to expedite use of flexible spending accounts
set aside for medical expenses is to provide the employee with a debit card that will take the
money directly out of the account. Such cards work like bank debit cards. Some executives
consider this of high importance, but it is more likely moderate if the medical plan is
generous and has a stop-loss maximum. Of less importance to executives is the dependent
care because of the $5,000 annual limit.
The 2003 Medicare Act introduced the health savings account. It permits individuals to set
aside pretax dollars into a separate savings account. To be eligible the person must be a
taxpayer and a participant in a medical plan with a high annual deductible and significant
maximum out-of-pocket cost (both numbers are subject to annual adjustments). The tax-
payer can set aside up to but not more than the annual deductible. Unused amounts at the
end of the year may be rolled over into the following year.
The individual is responsible for selecting the specific plan. The employer has no role
other than providing a plan with qualifying deductibles (otherwise, the individual needs to
find such a plan) and perhaps direct deposit into the health savings account from the
paycheck.
The employee pays qualified health-care expenses (such as the deductible on medical
expenses). But use for nonqualified expenses, such as cosmetic surgery, will be subject to
income tax along with a 10 percent tax penalty.