Evaluating Health Insurance for Partners

It frequently makes big picture sense for health insurance plans to have plans with lower premium costs and higher health plan user costs like higher co-pays or deductibles. A major reason why this makes sense is that employees pay premium contributions with pre-tax money and also pay health plan user costs with pre-tax money using Flexible Spending Accounts (F.S.A.) or Health Reimbursement Accounts (H.R.A.).Conclusion:  If the firm is implementing health plans with large health plan user cost (co-pays, deductibles, etc.), partners will usually fare better in a properly structured H.S.A. plan or an insured Medical Reimbursement Plan.

The analysis, however, becomes cloudier for partners. Here’s why: Partners and business owners pay or get charged for their own health coverage and then deduct the cost of the premiums on their tax returns. So far, in the analysis its’ the same as employees, i.e. pre-tax money. But when it comes to claim paying, it’s not the same dollars since partners and business owners will be paying with after tax money because most partners (exceptions below) cannot participate in F.S.A or H.R.A. plans. So a shift that lowers premium costs and increases user costs has an automatic extra cost equal to the partner’s marginal tax rate. For every $100 in premiums saved that goes to the user cost side, the partner is paying an extra $30 penalty (assuming a 30% tax rate). It still might make sense but you can see how the taxes can make the less expensive plan into the more expensive total option.

There are three scenarios whereby partners can get equal treatment as employees and therefore the strategy discussed above can work:

1) In law firm structures where the partners are employees, as in a non S Corp PC, partners can participate like employees in the F.S.A. or H.R.A. plan. So both premiums and user costs are the same pre-tax dollars.

2) By selecting a higher user cost health plan that is compatible with a Health Savings Account (H.S.A.), partners can capture the same tax advantage as employees. There are H.S.A. compatible plans that if structured correctly, mirror the positive tax advantages of traditional plans and could even provide better overall claims exposure protection.

3) Purchase an insured Medical Reimbursement Plan with pre-tax premium dollars and use it a “flow through” policy to pay for unreimbursed expenses.

Conclusion:

If the firm is implementing health plans with large health plan user costs (co-pays, deductibles, etc.), partners will usually fare better in a properly structured H.S.A. plan or an insured Medical Reimbursement Plan.

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