NJ Insurance Plans - Mike Sheeran, CFP

The tax filing deadline is just days away so I thought this was a good time to touch on one of the most overlooked tools in saving taxes on your hard earned money. My news feed is full of tips and articles on how to save on your taxes, yet this one simple tool is often overlooked. I’m going to cover:

• What an FSA is
• Who they are best for
• How to use your FSA
• What can you pay for with your FSA
• How they help employers
• How much you can save on your taxes with a sample family tax analysis

A Flexible Spending Account(FSA), falls under IRS Section 125 which allows employees to convert some of there taxable income into non-taxable benefits. The most common FSA types are the medical and dependent care. The maximum annual election for 2019 is $2,700 for medical, and $5,000 for dependent care.

Please stay with me and don’t overlook this great tax savings strategy.

Setting The Stage of Taxes, and Medical + Dependent Care Expenses

Before I go into the workings of the Section 125 plans, it will be helpful to show how most people handle their expenses without a Flexible Spending Account.

Medical Expense Deduction

In 2019, the IRS allows you to deduct medical expenses that exceed 7.5% of your income. This means that if you have $10,000 of expenses, you can deduct $2,500 of those expenses.

To take the medical expense deduction, you have to itemize your tax deductions. This means that totaling up your deductions will exceed taking the standard deduction of $12,200 for singles and $24,400 married filing jointly.

With the much higher standard deduction, and other changes to the tax laws, it will be much harder for families to exceed that amount in 2019 and going forward.

What does that mean to you? Expect to be taking the standard deduction and you won’t be able to deduct your medical expenses.

Dependent Care Expenses

There is a provision in the tax law that allows you to deduct certain dependent care expenses.

The law allows for up to a 35% tax credit on the first $3,000 of daycare expenses for one child, and up to $6,000 for one or more children. The key phrase is “up to”. The percentage is based on a sliding scale and is reduced to 20% once your income exceeds $43,000.

So if you are paying $800 a month for your child’s daycare, and your earnings are above $43,000, you will get a credit of:

20% of the first $3,000, which is $600.

If you had two children in daycare and you paid $1600 a month as an example, you will get a credit of:

20% of the first $6,000 or $1200.

Where the medical expenses are a deduction, the child care situation is a tax credit. A deduction lowers your taxable income, whereas a credit reduces the taxes you will owe, dollar for dollar.

What is an FSA?

Now that I’ve set a little groundwork for how expenses work on your taxes, I will go over the actual FSA. FSA stands for Flexible Spending Account and it’s a tax favored account that is set up through your employer.

The FSA allows you to defer some of your earnings into this special account that is to be used for qualified medical expenses or for dependent care. There are some other options as well, but these are the most common uses.

How Much Can I Contribute?

The IRS allows you to defer up to $2700 in 2019 for a medical FSA and up to $5,000 per year for a dependent care FSA.

When you elect the coverage, your employer will split up the amounts over your annual paychecks and deposit the money into your account. A third party administrator will handle everything and will set up the account along with a debit card and checkbook.

As an example, you defer up to $1200 a year, your employer would deduct $100 a month from your paycheck to be used for medical expenses.

What Can I Use The Money For?

The medical FSA must be used for qualified medical expenses. This includes things like dental care, vision, medical etc.. You can look up the items line by line in IRS publication 502.

For the dependent care FSA(DCA), there are a few extra rules involved. In order to qualify, the care must be necessary to allow you and, if married, your spouse to work and earn an income or attend school full time.

The eligible expenses are:

• Child Care
• Adult Care
• In-home dependent care
• Before and After School Care
• Nursery School

What If I Don’t Use All Of The Money?

This is one of the gotchas about the FSA plans that people don’t like. Traditionally with these setups, they are use it or lose it. Meaning, if the money isn’t spent, it gets forfeited to your employer.

Thankfully, most plans now will have special rules that will allow you to have an additional grace period to use the money after the calendar year ends, OR the ability to rollover up to $500 into the next year.

The grace period provides up to 2 1/2 more months to use whatever medical FSA funds you have left. Unfortunately, there is no grace period or rollover for the dependent care account.

How FSA’s Help Employers

For you to participate in an FSA, your employer has to support this and set the plan up. For them, it means extra administration and there is also a cost involved. From what I’ve seen, it can be a few hundred dollars a year or thousands depending on how many employees are in the company.

The biggest benefit for employers is that they aren’t paying FICA on any of your contributions. This means they save 7.65% on every dollar you defer.

For every thousand dollars that goes in, they save $76.50. Not too shabby.

In addition to saving on FICA, the use it or lose it rules, will benefit them. If an employee has $1000 left in their account at the end of the year, they can roll over $500, but they forfeit the other $500 to the employer. This money can be used to help pay for administration or other losses. Which leads me to my next point…

How FSA’s Hurt Employers

Unfortunately, the benefits to employers aren’t so cut and dry. Yes, they save on FICA, and can recapture unused funds, but they also have some risks, especially when participation is low.

With an FSA, the money you defer is 100% available to you on the first day of the year. If your family defers $1500, that whole sum is available on day 1 even if you haven’t paid a penny from your salary.

The money comes from the employer.. The employer is obligated to have the money available to each employee so this can be big risk to them if cash flow isn’t great. Picture a small employer with 10 employees that have chosen to defer $2000 each. That’s $20,000 the employer could potentially have to front right away.

Not only that, if you use the money and then leave during the year, they have no recourse for getting the money back. Its a loss for them. That is why they have the recapture rules for unused funds.

It’s not all bad though, if the plan runs well and participation is good, the employers stand to save over the long run.

Only the medical FSA’s have the upfront funding rule. The dependent care FSA’s do not.

FSA Tax Savings!

Finally, the big benefit of the FSA. Tax savings!!! Its not huge, but it adds up. It reminds me of the saying, “little hinges, swing big doors” by W.Clement Stone. Keep doing some of these little things in your financial life, and they can make a huge difference.

In the chart below, I have some sample calculations for a family that earns a gross income of $120,000. They have medical expenses of $2700 and dependent care expenses of $5,000.

After taking out federal taxes and the costs of the medical and dependent care, their net income is $89,108.

In the second spreadsheet, I have the same exact scenario, but in this case the family used the medical FSA and dependent care FSA offered by their employer.

In this case, their income is $90,621 after the same exact expenses. That is a tax savings of $1513 just for deferring into the tax advantaged accounts.

Finance bloggers talk about the latte factor and saving $5 a day, and make no mention of this tool. We are working with saving over $100 a month, with this one simple switch. It will pay for your coffee habit and then some.

Related Questions

Are Flexible Spending Accounts worth it? Yes, as long as you have somewhat predictable medical expenses each year, and/or dependent care expenses. You can expect to save around 20- 25% in taxes on every dollar you put in. As your income rises, your savings increase.

Is FSA money available immediately? Yes, on the first day of the plan year or after your new employee wait period, you can access 100% of the money. Dependent Care FSA’s are not available immediately. As the money is withdrawn from your checks, it then becomes available.

Time to break out the calculators. Doing the math on how much a small business health insurance plan is straightforward to figure out, and with some careful planning, you can save a huge amount on the average cost.

What does a self employed health insurance plan cost? The average across the plans I surveyed in NJ is $573.37 per month. As a small business owner, you are obligated to a pay a minimum of 10% of the cost for your employees in NJ. Your cost on that is average, is at least $57.37 per month.

So what does this average cost mean? Absolutely nothing. Your actual cost will depend on a lot of factors to include the plans you choose, your zip code, the actual ages of those enrolled and how much you decide to pay. Keep reading to get some more detailed premiums and my favorite strategy to save business owners up to 30% on their premium.

Self Employed Health Insurance Premiums in NJ

The easiest way to get quotes in NJ, is to reach out to your trusted health insurance broker. Someone like myself or whoever you prefer to work with. I do not recommend working with anyone that doesn’t specialize in health insurance or is from outside the area. There are too many nuances to the plans that you need someone local to the area to make your experience a smooth one.

If you aren’t ready to reach out to a broker, the State of NJ has some great resources to calculate rates and get more information. I’m going to link to their pdf rate sheets in my guide here.

For each carrier in NJ, they will calculate the premium due for each covered member in this fashion:

Base Rate X Age Rating Factor X Territory Factor

By looking at the guides you can see clearly what age groups pay the most and also the comparison between the plans and locations.

2nd Quarter 2019 Rates for NJ

• Horizon BCBS
• Amerihealth
• Oscar
• Oxford

I did the math on some of the more popular Horizon BCBS plans for different age groups so you can see how the numbers stack up. This is also how I arrived at my average. It’s simply the average of the numbers below.

As you can see the premium for younger employees are less than half the cost of those aged 59+. That is why averages don’t mean much. We really need to look into the demographics of your company to get the actual rates.

Saving with an HSA

My first choice for reducing premiums for employers is to go right to the H.S.A plans. These are the lowest premium plans available without sacrificing the network of providers.

Depending on how you structure your employer contributions, you will save money when you pay a percentage of the premium or will hold steady if you pay a flat amount per month for each employee. In the second option, your employees save a considerable amount in premiums.

To illustrate the savings, I assumed you have one employee at age of the ages I listed in my chart above. I also assumed you are currently in the Omnia Platinum plan.

Just by moving from the Platinum plan to the Bronze H.S.A, the premium is reduced by a whopping 41%! That is really money. Over $32,000 for a group with 9 employees.

The big downside to this is that your employees had a small deductible with low copays on the Omnia Platinum. They won’t be thrilled when you move them to a plan with an upfront deductible of $3,000. Again, you have to run the numbers because each employee may be saving a few thousand dollars in premiums each year. They can use that to save for other goals if they are healthy or use the money to fund a tax favored Health Savings Account.

Saving with an HRA(Health Reimbursement Arrangement)

This is my favorite choice for business owners looking to save on their average cost of health insurance. The HRA is an incredible tool to get your employees Platinum benefits for Bronze prices.

With the H.S.A setup, you are putting all of the risk on the employees shoulders. The deductible is theirs to figure out for the most part and it can cause some grief.

With an HRA, you are setting up an additional plan to reimburse employees for their claims as they are incurred.

Setting up the HRA

With your brokers help, you will choose a third party administrator to handle the reimbursements. Their fee is usually around $1,000 a year.

For that fee they will:

• Set up the HRA Plan Documents (Needed for IRS Compliance)
• Issue Debit Cards to the Employees to use for claims
• Make direct deposits for reimbursements into employees bank accounts
• Verify all claims are valid and meet your goals for the plan.

The usual set up is the employer will fund the the full deductible for each employee and their families. You can choose any amount you wish though and can even reimburse for claims not covered by the health insurance plan. (dental, vision etc…)

Since the HRA only pays for claims that are incurred, you are not overpaying for a Platinum plan that may or may not get used. If the employees do use the plan, you reimburse them through the HRA.

Funding the HRA

Don’t worry, you won’t have to put all the money in the account at once. It works alot like an EZPass. You will put a percentage of the total HRA exposure in a separate account with the administrator. When the funds dip below a certain level, they will reach out to you to bump it back up to the minimum.

If the employees don’t have any claims, its your money to keep and use on other business expenses.

Health Insurance Cost With the HRA

Just like above, I’ll use the same plans and employee demographics.

If you remember, with the H.S.A, the premium savings were over $32,000. We are going to use that money to fund the full $3,000 deductible for each employee. Total HRA fund exposure is $27,000. If the spend all of your money, you still save over $5,000 in premiums.

I ran different scenarios to illustrate how much you can save based on the usage of your employees. I’ve never seen the full fund be used by each employee. Its incredibly rare.

What about saving up to 30%?

We surveyed the groups we have insured with the high deductible plan combined with an HRA and the trend is roughly 30% usage of the HRA. This means of the full amount the employer agreed to fund, the employees are only using 30% of that.

In this particular case, if employees used 25% of the HRA, the employer would have savings over 32%. As employees use more, that number drops but hitting that 30% number is more common than you would think.

Wrapping Up

The cost for self employed plan can vary depending on many things, but as you can see, there are some very reasonable ways to bring that average cost down. Health insurance continues to be one of the larges expenses for employer and using this tool can help save thousands in premiums per employee. Unfortunately, not all brokers will recommend this due to the fact that is twice as much work for us and the commission gets cut dramatically. Just something to keep in mind if you ask your broker, and they shun the idea. I recommend the HRA to all of my small business clients.

Related Questions

Can I get health insurance if I’m self employed? Yes, as long as you have at least one full time, W-2 employee and can meet the participation guidelines. In NJ, you need 75% of your employees to enroll or have other valid coverage.

Can my LLC pay for my health insurance? Yes, but please consult your tax professional. If you are a Single Member LLC, there may be instances where you can’t deduct your premium. If your spouse has group coverage available, that would be one such situation.

Getting your gym membership paid for by your health insurance company is becoming easier every year. In NJ, we have several insurance carriers that will reimburse you for membership fees and some for taking a certain amount of steps with your watch and cell phone.

What health insurance pays for gym memberships?

• Horizon BCBS – Bfit program will reimburse up to $20 per month for your gym memberships.
• Amerihealth – $150 in fitness fees reimburesment
• Aetna – $200 for you and $100 for your eligible spouse every 6 months
• Oscar – $400 for policyholders and $200 for their eligible spouses
• Cigna – Various dicsounts, but up to 40% in total fitness fees reimbursement
• Aetna Medicare – Silver Sneakers free membership

For most of the programs, you will need to do at least 12 workouts a month. With membership fees climbing every year, this is a great way to save some money and also encourage you to stick with the program.

Horizon BCBS Bfit

Horizon offers their gym reimbursement through their Bfit program.

You will just need to verify your gym participates with the program and enroll through the Horizon portal here.

HorizonbFit

Amerihealth

Amerihealth’s program is called Healthy Lifestyles.

They offer $150 annually in gym reimbursements as well as up to $150 each on weight management programs and smoking cessation.

See more information here: Amerihealth Healthy Lifestyles

Aetna

Aetna offers gym membership reimbursements for their group products as well as their Medicare Advantage Plans.

With their program, they split it up into 6 month periods, but married couples can get up to $600 annually!

If you are enrolled in one of their Medicare Advantage plans, you are automatically enrolled in the Silver Sneakers program. Silver Sneakers offers free gym memberships for the participating facilities. This is the best program I know of for any insurance company

Aetna Group Gym Reimbursement

Aetna Silver Sneakers Program

Oscar

Oscar is pretty new to the scene in NJ, but they are offering a great benefit for the gym reimbursement. Up to $400 per year for the member and $200 for their eligible spouses.

Cigna

Cigna’s benefit was a little harder to find than the others. They mention up to 40% in reimbursements, but it’s not clear if that is an unlimited benefit or not

Cigna Healthy Rewards Program

Other Notable Programs

The trend has really been pushing for the insurance companies to be involved in your overall health and its encouraging.

In addition to the gym reimbursements, keep your eye out for other discount programs offered by life insurance companies.

John Hancock will offer a free Fitbit or Apple Watch at $25. The only catch is you to have to complete activities every month to earn enough points to pay off the watch. I took them up on the challenge last year and they are true to their word. I got my Apple Watch and am using the points to pay it off. You can read more about their program on the Glenn Insurance website here.

You need to purchase a life insurance policy that is part of their Vitality program and they take it from there. The life insurance costs me less than $15/month and in return I got the insurance AND the watch. Not bad!

Related Questions

Does Medicare pay for gym membership? No, unfortunately not. However there are some Medicare Advantage and Medicare Supplement plans that offer gym reimbursements.

How do you qualify for Silver Sneakers? Silver Sneakers is offered through certain insurance companies that cover Medicare beneficiaries. If you have one of those plans, you have it at no additional cost. C

Health insurance broker pay information is difficult to find online. I’ve debated whether or not to put all this out there, but decided it will be good information for consumers to see as well as for new agents before jumping into this career field. I will go over group and individual health plans sold in NJ. In later posts, I’ll cover other employee benefits and Medicare plans.

How are health insurance brokers paid? Brokers in NJ are paid either by a percentage of premium, or a fixed amount per month. This is referred to as per member per month(PMPM). The average is 5% of total premium for group health insurance, approximately $20 per member per month for individual coverage, but can be as low as $50 per year or $0 in some cases.

My goal is to give some insight into the compensation structure for brokers and what you should be aware of when getting advice from a commissioned broker. The right compensation amount that is fair is really difficult to determine since the value of your broker will depend their experience and what they bring to the table.

Pay for Group Health Insurance Brokers

I’ve been a group health insurance broker for over 12 years in NJ. I’ll share my experiences up until now.

Insurance Company to OfficeI

For the small and midsize markets in NJ, the insurance office your broker works for will get paid about 5% of your premium. If your broker is a sole proprietor they will get all of that, but if they work for a larger office, there will be a commission split. The office will be paying for administrative staff and other overhead so the split usually falls in around 60% to the office and 40% to your actual broker. Again, it’s different everywhere, but this is a pretty common split.

Example For A Small Business Plan

To illustrate what this means for your actual broker, lets go over how this will break down.

Lets say you have a small group plan with a monthly premium of $5,000 per month, $60,000 per year.

Monthly Premium	$5,000
Full Commission to Insurance Agency @ 5%	$250
Office Commission (split of 60% Office /40% Broker)	$150
Broker Commission	$100

For this example, your broker will take get paid out around $100 per month. The commission is to compensate them to make sure your plan is running smoothly and proactively making things easier for you as a business owner.

What is a broker doing for their pay or should they be doing?

Some people will look at the numbers above and be angry that it’s too much. Others will think its not enough. It all depends on your perspective and what you expect your broker to do for you. I’m going to list of some of the things we do in our office. The list is not exhaustive of course, but just a general idea of what we are doing to earn our commission.

• Quotes – at least annual or anytime there is a big disruption in the plan or marketplace. Price reductions by another carrier or something in your demographics that would deem we should do this. This is probably the easiest thing we do, but some brokers act as if they have moved mountains to provide a quote.
• Claims – this is arguably the hardest and most time consuming thing we deal with. In my opinion, your broker should be actively trying to help you with any ongoing claims that haven’t come out right or obviously need more intervention. It can mean filing appeals, calling the insurance company and often your doctors office directly. Some claims can take months to iron out and over ten phone calls to different providers.
• Member Maintenance – we help manage the members of your plan. Adding people, terminating people, changing addresses etc..
• COBRA and NJ Continuation – depending on how active your plan is, your broker should be helping with this process and guiding you along at the least. In some cases, it makes sense to outsource this to another vendor because COBRA administration can be very tedious and the penalties are large.
• Open Enrollment Meetings – annually or whenever asked. It’s not uncommon for our office to meet with new employees anytime they are hired in addition to the annual open enrollment for all employees
• Questions – There are always things that come up when it comes time to navigating health laws, maximizing your tax strategies and so on. An experienced agent can be invaluable with their ability to answer questions on the spot or do the research required to get you what you need. This is one the harder skills to find in a broker.
• Proactive planning – Your broker should be looking to the future to help your bottom line and employee retention. The benefits you offer can have a direct correlation to employee happiness and the cost to you can drastically affect your operations. A good broker will be well versed in different strategies that will help your business succeed.
• Questions from Employees – I added in addition to the other questions bullet, because a good broker will not only work with you the business owner, but also your employees. We’ve always made ourselves available to employees, their spouses and children. Health insurance can be confusing so a trusted adviser can squash alot of the anxiety for everyone by helping in this area. It also take the burden off of the employer to field questions about how things are covered and the affects down line.

Those are the big points in my opinion that a good broker should be doing for their 5% per month. Some will do much less and some more, but hopefully it gives some insight into what you should expect.

Per Member Per Month Commissions

The points above will also hold for companies with insurance carriers that pay on a per member per month basis.

Using the same example as above, lets assume that $5,000 per month premium is to cover two families and two employees.

Monthly Premium	$5,000
Full Commission to Insurance Agency@$20 PMPM	$80
Office Commission (split of 60% Office /40% Broker)	$48
Broker Commission	$32

Conflicts of Interest

As you can see, the commission difference between the two are drastically different and all for the same work.

I share this so you can see what motivations will lie with your broker and motivations. I like to hope everyone is recommending the best product to their clients, but its something to be aware of.

Some of the strategies we recommend like using an HRA, or even a low cost HSA qualified plan can double the amount of work we do, but also cut the commission by half. Keep this in mind if your broker doesn’t have a great feeling about these strategies. It may be time for a second opinion.

In the future, I hope the small group market moves to a fee based setup and brokers are paid a fee for their advice. This is already taking off in the financial planning space and in my opinion, removes almost all of the conflicts of interest for those involved.

Individual Health Insurance Broker Commissoin

Unfortunately, the Affordable Care Act slashed commissions for brokers across the country. It’s unfortunate because many brokers had no choice but to stop offering these products or greatly reduced the services surrounding the offering.

In NJ, the last I checked the commissions were the following:

	Company 1	Company 2
Open Enrollment	$17.50 PMPM	$50 Annually
Special Enrollment	$0	$0

The strategies involved with individual health insurance can be just as complex as the group market in my opinion. As CFP, I can get involved in tax planning to get larger credits, maneuvering in and around Medicare, working with dependents turning 26, and so on. There are a lot of nuances involved with these plans that can get you if you don’t plan your strategy out right.

Good Advice is hard to find

As I mentioned, many of the brokers got out of the market because they couldn’t turn a profit offering individual health insurance. As a broker, you are now dealing with many hundreds of clients instead of maybe one hundred group clients if you are good.

If you are lucky enough to have 400 individual health clients, your annual income would be about $33,000 annually. That is after your office takes its cut.

400 clients means 400 open enrollment meetings every year squeezed in between November 1 and December 15. That’s 8 meetings a day if you don’t take days off. My point is, its hard to get good help.

That is the one of the main reasons I maintain this blog. I get many calls about help with individual health, but unfortunately I don’t have the time to help everyone. My goal is to spend an hour writing a blog post that might help hundreds of people instead of helping one person per hour with a one on one consultation. In the future I may offer a service for a fee, but not just yet. I make a tiny bit of money with the ads on my site and its enough to cover the upkeep of hosting fees.

What to do with this information

Now that I’ve shared some information about how much or little your broker gets paid, I hope you keep it in mind when choosing your advisor.

The broker gets paid the same amount whether they are great or terrible, so do your due diligence and choose someone that has a lot to offer. They have a lot of experience, hold a top credential life CFP, CHFC, CLU, or just be really great at making everything a smooth process. Just don’t settle.

Some clients want to go direct with the insurance company to save money. You can go direct, but the premiums are exactly the same. The insurance company will have a team that helps but I can almost guarantee the level of service will not be the same as dealing with a local broker.

Related Questions

Do insurance agents make a lot of money? It depends. According to many studies, the average is around $60,000. Their is a very high turnover so that would be an experience agent.

What is the difference between an agent and a broker? An agent works directly for an insurance company and a broker represents many companies to present to you, the client. In theory, a brokers interest is more aligned with the consumer.

Do insurance brokers charge a fee? Typically not, but I think over time they will and should. This would be in place of the current commission structure.