Providing health insurance benefits to your employees: How does a self-insured plan differ from an insured plan?

Most employers want to provide some type of fringe benefit to their employees. It’s a convenient way to attract and retain good workers. One of the more commonly provided fringe benefits is health insurance. There are three primary methods in which to provide this benefit.

As an employer, you can sign up for a group medical plan through an insurance company. The plan is simply an arrangement that provides payment to employees for illness or injury. The employer or the employee can pick up the entire cost of the policy, or the cost can be shared between them. In either event, the benefit is not taxable to the employee. If the employees are paying a portion of the premiums, the cost can be deducted from their paycheck before withholding is determined. Premiums that are paid entirely by the employer are not added to wages and the employer gets a deduction for the cost.

If you provide your employees health benefits under an insured plan, you are permitted to offer the benefit to some or all of your employees. By only offering the benefit to a certain class of employees, such as management, you can reduce your costs.

Another option is to provide benefits under a self-insured plan. Under this option, you do not carry a group medical plan but instead reimburse employees as they incur expenses on their own. Under this method, you are afforded a certain amount of flexibility in what you provide. You can pay your employees a flat amount or you can reimburse actual expenses. The downside to this type of arrangement is that you must offer the benefit to all your employees. You are not allowed to pick and choose which employees receive the benefit. Provided you do not discriminate, the benefit remains nontaxable to your employees.

The third option is a combination of an insured plan and a reimbursement plan. The same rules as previously mentioned apply to each component of this arrangement. If you offer both an insured plan and a reimbursement option, you can structure it so your employees have a choice between which options they want.