Human Capital Management, Total Rewards
What happens to benefits when HR and payroll don’t communicate
The right benefits can make or break a job. It’s why we prioritize this particular need among other factors such as pay and culture when making employment decisions. But due to the complexity of the US tax code and health insurance, you and your employees could be losing out on deal-making-or-breaking benefits at your company—all because of poor communication and lost knowledge between departments.
This issue is costly on more than just an individual basis. Companies lose 20 to 30 percent in revenue every year due to business inefficiencies, according to market research firm IDC, and a disconnect is between HR and payroll can negatively impact your benefits and put the health of the whole company at risk. Here’s a look at why communication between HR and payroll is so critical if you want to get the best benefits for you, your company and everyone else who relies on them.
Benefits and resources are lost if HR can’t navigate the tax code efficiently
Nearly 9 in 10 people believe the tax code is too complicated, and as a professional with decades in the insurance industry I couldn’t agree more.
HR departments have many strengths and wheelhouses, but the tax code isn’t always one of them. Your HR team knows about talent acquisition and retention, but may not be entirely clear on how to provide employees with better and more affordable benefits.
Who in your company protects you from the health insurance carrier? Who in your company is aware of carrier rebates to the employer when employees and dependents use the plan, including but not limited to RX purposes? If the answer is no one, you have an issue. This is why HR must talk constantly with finance and accounting. If HR and payroll aren’t communicative with one another, HR won’t be able to understand and parse the IRC (internal revenue code) to everyone’s advantage. This means benefits may not be as good or useful as they could be. Comptrollers (CFO + finance/accounting team) can serve as a guide for learning more about the internal revenue code, specifically 125a. c, h and 105 c, h plans. By not communicating, companies miss out on the advantages of the 125a. c,d and 105 c, h plan. This costs the company and its employees money, and also reduces overall health coverage for employees and dependents.
HR can’t depend on health insurers and third-party administrators alone for information
Also known as a cafeteria plan, the IRS notes “a section 125a plan is the only means by which an employer can offer employees a choice between taxable and nontaxable benefits without the choice causing the benefits to become taxable.” The IRC sends an email to all employers reminding them employers using 125a plans must have their own master agreement. You can lease a 125 a from a payroll company or an insurer can provide an agreement specific to your company.
HR may think third-party health plan administrators have all the answers they need to select the right plan. Lack of clarity on all the fine points of the 125 plan leads to missing out its advantages. But what precisely are they? They’re the ability for employees to pay for certain things, like dental, vision, and general health coverage, on a pre-tax basis. It’s technically a Flexible Spending Account (FSA) that isn’t subject to Social Security or federal and state taxes. For companies and employees, the benefits can be tremendous. It’s estimated workers save $0.25 to $0.30 of every dollar they contribute to a cafeteria plan. Your team members get to take home more of their pay, and your company saves by avoid tax-matching payments. It’s a win-win for everyone. A 125 plan makes a company more attractive to employees, as they can pay out-of-pocket medical expenses with tax free dollars.
It’s vital that HR works closely with accounting and finance when starting a 125 plan for employees. However, to reap the benefits employers must underwrite their own 125 master plan rather adopting a generic one from a carrier. If not, an audit could yield issues with the IRS, and you certainly don’t want that. The IRS can dis-allow a tax deductions if the employer does not have a master 125 plan agreement in place, a costly repercussion.
Accounting and finance can ensure HR implements 125 & 105 plans correctly
Every employer that pretaxes premiums should have their own master contract, not something from a PEO/Aflac/Colonial/Payroll vendor. Contrary to popular belief, cafeteria plans are not rentable.
Unfortunately, the vast majority of companies don’t have master 125 agreements. This is because HR and Payroll aren’t talking with one another to ensure compliance. So, if an IRS audit awaits, the company is in trouble.
With internal revenue code law, as with other lengthy statutes like the ACA, you must read every line. Each relates to another, and while it can be dense and difficult to absorb, the benefits or doing so are, well, proper benefits for your company and employees. This is where HR and accounting/finance can work together, along with advisors like Diversified Employee Benefit Services, LLC to create a master contract.
Then there’s the 105 plan, which saves small business owners an average of $5,000 a year on their taxes while also helping employees cover medical expenses. Under this section of the IRS code, reimbursement of medical expenses is allowed under an employer-sponsored health plan. In my industry, I often ask employers if they are using the 105 plan to their company’s advantage and to help lower-income employees. They say they expect their carrier to take care of it, but the carrier has no interest in helping employees and won’t necessarily honor this agreement if no one calls them out. Similarly, under the ACA, you’re supposed to receive a rebate. But the burden is on employers to hold insurance carriers accountable for this; in other words, if you haven’t read your medical contract, your carrier may keep the rebate. They don’t pass it on to employer, and your company (and employees) lose out on the return.
Choosing the right plans
Together with the comptroller, HR must look at how to use ACA laws to their advantage. There are third-party firms that can help go beyond simple pricing comparisons and find a tailored plan that delivers the most benefits to employees and employers.
If not, you’re losing out on benefits and money that is instead pocketed by your carrier and the trillion dollar health insurance industry. While the goal of health insurance laws including the ACA may be to benefit businesses and individuals, the sad truth is that profit comes first for many in the insurance business. Companies need to work together and fight to get their due.
If you do what it takes to choose the right plans, on the other hand, everyone wins: the company, the employees, and everyone who needs your business to provide benefits they can count on.
