What is the Cost of Pre-Tax Benefits? Pricing & Fees
Health insurance is the most valued benefit among job seekers, but it’s also the most expensive, with employers last year spending nearly $6,000 per employee for single coverage and over $14,000 for a family plan. If you’re like most businesses, you’re probably looking for ways to offer health benefits for less.
One solution? Pre-tax benefits like Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs), and Section 125 Premium Only Plans.
While pre-tax benefits will save you money, they’ll also still cost you something, namely administrative expenses. When you offer pre-tax benefits, there are certain administrative tasks required in order to be compliant with applicable laws and regulations.
Complete Payroll Solutions provides outsourced benefits, payroll, HR, and compliance solutions. Our benefits team works with clients every day on administering pre-tax benefit plans as a third party administrator (TPA) so we know what these services should cost you as an employer. Here, we’ll explain what it typically costs employers for the administration of several common pre-tax health benefits:
- Section 125 Premium Only Plans
After reading this, you’ll be able to decide if the value of pre-tax benefits outweighs their costs and how the administration of these plans will impact your bottom line.
What is an FSA?
This pre-tax account, which is owned and set up by employers, is for employees to cover qualified healthcare expenses such as prescription drugs, office visit copays, and dental and vision expenses. Both you and your employees may contribute to their FSA. In addition to tax-free contributions, employees are reimbursed tax-free for their claims. FSA funds that aren’t used at the end of the year are sent back to the employer unless the plan has a grace period or carryover feature.
What is an HSA?
HSAs are tax-free savings accounts that can be used to pay for both current and future medical expenses like coinsurance, deductibles, and other qualified expenses. These accounts, which employees own, must be paired with a qualified high-deductible health plan. Like an FSA, both you and your employees can make contributions to the accounts and employee contributions and claim payments are tax-free.
What is an HRA?
An HRA is unique from FSAs and HSAs because it’s fully funded by you, the employer. You own the accounts so that also means you can direct how the funds are used and how much is allocated to each employee. Usually, although it’s not required, an HRA is paired with a high-deductible plan, allowing employees to get reimbursed on their deductible expenses. Your contributions are 100% tax-deductible and the reimbursements are 100% tax-free to employees.
What is a Section 125 Premium Only Plan?
A Section 125 premium only plan (POP) is a tax savings plan that allows employees to pay for their medical insurance premiums on a pre-tax basis. These aren’t insurance plans, so you’ll need to offer a group health plan separately. A POP simply allows your workers to pay for premiums for their group health benefits using pre-tax dollars.
What Administrative Tasks Are Associated with Pre-Tax Benefits?
Depending on what type of pre-tax benefits you offer employees, there are required certain tasks to make sure they’re set up correctly, funded right, and used appropriately. Here are some of the steps generally required for compliance with pre-tax benefits:
- Develop and distribute summary plan descriptions
- Manage enrollment and set up employee accounts
- Enable self-service through a desktop or a mobile application
- Provide ongoing funding management
- Issue debit cards
- Process claims
- Certify submitted expenses
- Handle reimbursements for manual claim submissions
- Manage employee activity like new hires and terminations
- Perform annual non-discrimination testing
There are some additional tasks that are required with specific types of plans. For example, with an FSA, you’ll also need to determine the amount of funds forfeited at the end of the year by employees who terminated during the plan year. But this list gives you a good idea of what administration of these benefits entails.
Can I Handle Pre-Tax Benefits Administration In-House?
While some companies may choose to handle the administrative tasks in-house, the plans can be highly technical and have complex compliance requirements.
For example, it can be challenging to understand exactly what qualifies as an eligible FSA expense. If you get the determination wrong, it can cause an entire FSA to be disqualified. Or, if you offer an HRA, you need to ensure HIPPA compliance since you’ll see the claims for employees’ medical procedures and prescriptions — or risk fines of up to $59,522 even for a violation you didn’t know about.
As a result, many businesses choose to outsource administration to a TPA for on-going management. A TPA is separate from the health insurance company. Instead of providing the actual health benefits, the TPA handles administrative services we just listed above.
How are Costs for TPA Services Charged?
Generally speaking, TPA costs are charged on a per employee per month (PEPM) basis. You’ll also usually see, although not always, a set-up charge and a monthly minimum cost or base annual fee.
Some administrators will charge the PEPM fee based on tiers of the number of employees, for example, 1-5 employees, 6-10, employees, and so on. Others will charge a flat rate per worker regardless of the total number of employees.
How Much Does The Administration of Pre-Tax Benefits Cost?
TPAs can handle the administrative services for one or many pre-tax benefits. Keep in mind that all TPAs are different so there may be factors that drive fees higher. For example, if your employees submit claims manually rather than using a debit card, some administrators may charge more.
Here’s what you can expect to pay for administration for each type.
Flexible Spending Account (FSA):
You can expect to pay at TPA anywhere from $150 to $1,500 to set up an FSA. Then an average of $5 PEPM for administration. Keep in mind there’s usually a minimum amount you’ll pay for administration, even if you just have a small number of employees.
At Complete Payroll Solutions, we charge $250 to set up an FSA with a base annual fee of $550 and a PEPM of $2. So if you have 10 employees, that would be a total for the year of $800 plus the one-time set-up fee.
Health Savings Account (HSA):
TPAs will generally charge a one-time set-up fee of anywhere between $150 and $1,500 and a PEPM of $3 to $10.
At Complete Payroll Solutions, we charge $250 to set up a plan and about $4.50 PEPM for administration. Using the same 10-employee company example, it would cost you about $550 in total for annual administration of an HSA plus the one-time set-up fee.
Health Reimbursement Arrangement (HRA):
For an HRA, you can expect to pay a TPA a set-up fee of anywhere between $150 and $1,500. You’ll also pay $450 to $750 per year for annual administration plus a PEPM charge of $2 to $5. That’s in line with what we charge at Complete Payroll Solutions: $250 for set up with a $550 base annual fee and a PEPM of just under $2, making the cost for 10 participants for the year a total of $800 plus the one-time set-up fee.
Section 125 Premium Only Plan:
In terms of administration, there’s not as much required with a Section 125 premium only plan. Since there’s less involved, you’ll spend a bit less. You can find vendors online who will charge as low as $100 for a required plan document that contains all the information about the plan, or up to $500 per year for full administration and compliance services. At Complete Payroll Solutions, our fee is $250 per year for annual administration and compliance.
How Can I Save on Administration Expenses?
You may be able to save a little off these average costs of these pre-tax benefits by combining the administration of multiple plans with the same TPA. At Complete Payroll Solutions, for example, we give a 20% discount for combining an FSA and an HRA account.
If your TPA charges a PEPM based on tiers of employees, your rate may go down as you grow.
Keep in mind that with any of these pre-tax savings accounts, your company will save money because of the tax benefits – which can make them even more affordable.
For example, when your employees contribute pre-tax money to an FSA, HSA, or Section 125 Premium Only Plan, you won’t have to pay your share of payroll tax on those amounts. That means for each $200 an employee sets aside, you save about $15 – or 7.65% for your share of payroll taxes. And with an HRA, your reimbursements to the employees are tax-free, which means you won’t need to pay FICA taxes on those contributions either.
So there you have it. While you’ll likely have to pay some fees if you outsource the administration of pre-tax accounts to a TPA, the costs are surprisingly reasonable. Just remember that the fees will vary by TPA. Complete Payroll Solutions offers affordable pricing for outsourced administration of the plans and can be a good fit for your company if you’re looking for a cost-effective way to enhance your benefits package. Visit our pricing page for more information.