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How to break up a group health insurance plan

by Tony Novak, CPA, MBA, MT
, revised 11/16/11

Professional advisers, including the author, do not encourage employers to eliminate a small business group health plan without consideration of the consequences. This article was written to advise employers when the termination action either becomes unavoidable or the consequences have been considered and termination of the health plan has been judged to be the best solution available.

Small business owners who provide health benefits to employees increasingly find group insurance to be unaffordable or undesirable due to tightened legal and insurance regulations. The individual employees who may be required to pay for part of the cost of this group health coverage are increasingly aware that they can find better quality coverage at a lower price through individual health plans available on the Internet. This tends to increase complaints about employer-provided group health plans. Now the new availability of Health Reimbursement Plans (HRAs) and simple small business Flexible Benefit Plans provide ideal mechanisms to allow an employer to make financial contributions to employees' health care costs without paying for health insurance directly. This frees the employer from the legal and administrative hassle of dealing with group insurance plans and ultimately results in lower costs and an increased level of satisfaction with the health plan. Terminating a group health insurance plan in favor of a more flexible benefit plan design will also result in lower administrative costs, increased benefits paid directly to employees, lower health care inflation, and more individual choice available with the health benefits. (For more information on the benefits, see the article “25 Reasons Small Businesses Choose Health Reimbursement Plans (HRAs)” available at www.TonyNovak.com).

All of these trends lead to the frequent desire to terminate a group health plan in the most efficient manner without leaving any employees uncovered by comprehensive health insurance. Terminating group coverage is a simple matter if the employer follows these steps in this order:

First, contact the current group insurance provider and ask for the procedures and forms to convert group coverage to individual coverage after the planned dissolution of the group plan. This step simply ensures that no employees will be left worse-off than they were under the group insurance plan. Once you have provided this information on the conversion options to the employees they will be assured that they won' t be forced to change their coverage against their wishes. Communicate verbally that no employee is being forced to change health plans, but that the only change is in the manner in which the employer is contributing to the cost of such benefits. Emphasize that the employer’s decision to terminate the group insurance does not require any change in health benefits for the employees or dependents. This goes a long way toward providing peace of mind from the beginning of this process. In addition to your efforts to communicate to employees, most health insurers will write to each employee at their home address informing them of their rights to continue coverage under COBRA law or individual conversion options.

It is important to contact the group insurer directly because many business owners who contacted their insurance agent report that they are told that this conversion option is not available. Yet those who contact the appropriate department at their insurance carrier’s office directly find this to be a painless procedure. Agents typically do not handle group to individual conversions and unfortunately often give erroneous information to their clients.

Second, if the business is switching to a Health Reimbursement Account Plan or other Flexible Benefit Plan, establish the plan documents now and give a copy of the plan (usually called the “Summary Plan Description”) to each employee as early as possible. If the employer' s new level of financial contribution is going to be less than 100% of total healthcare expenses, then it is best to announce that as early as possible to any affected employees. This gives them more time to plan for the change and make appropriate adjustments.

Finally, find replacement coverage alternatives. Healthy employees - who make up 3 out of 4 workers in a typical small business - can typically find better health coverage online at lower cost than the prior group plan. These employees will probably switch insurance plans quickly without further encouragement and use the money saved for some other valuable purpose like covering dental or preventative health care expenses.

Employees with significant pre-existing medical conditions or ongoing medical treatment – about 25% of total employees - should contact the local Blue Cross Association and state assigned risk pool to ask about other open enrollment options. This gives a comparison to the current group conversion benefits. Most states have an open enrollment or assigned risk plan as "last resort" coverage. Also, a number of enrollment services specialize in offering immediate issue coverage for those who cannot wait for the usual health plan enrollment process. Even if your group members do not need this now, eventually someone will ask for it. It makes sense to make this information available to employees.

There are three final tips that will help make the process of replacing group coverage easier and provide some protection from legal liabilities:

1) HRA Plans, Section 125 Flexible Benefit Cafeteria Plans and Medical Reimbursement Plans are regulated by federal tax and labor laws and not by state insurance laws. Confusing these is the most common cause of problems, even among accountants and financial advisers. The eligibility requirements, participation and administrative requirements are completely different between the two categories of health plans. Make sure that you and your advisers are well versed in the distinction between these two types of benefit plans.

2) An employer who gives an employee advice about health benefits is opening the door to the same legal risks as an employer who gives investment advise about the company 401(k) plan. It is simply a bad idea that should be avoided. There are plenty of sources of professional benefits help easily accessible to employees. Employers should simply point employees to the appropriate independent resources for benefits advice.

3) With the increased level of legal risks created by the new medical privacy laws, employers should take steps to avoid having access to employees' private medical information. An employee who complained, for example, that termination was based on medical problems would have a stronger case if the employer had helped handle the employee' s application for medical insurance. This should be avoided; simply let the employees deal directly with the insurer or benefits provider.

Status:  obsolete

Please see "Step-by-Step Guide to reducing small business health insurance costs in 2012" for updated information.

Transition rules of the federal health reform law make much of this article obsolete. Contact OnlineAdviser for current laws and suggestions.

This article is available for republication in its entirety without charge after obtaining the express written permission of the author.

Please e-mail a request to the author that includes the name of the requestor (individual and corporate) and the intended destination of publication.