State to try out innovative insurance plan

PROVIDENCE - Your employer may soon be offering something called a "cafeteria plan," but it has nothing to do with food.

Under a new law passed by the General Assembly, companies with 25 or more workers will be required to offer employees the opportunity to buy health insurance with pre-tax income.

The legislation does not force companies to pay anything toward their employees' insurance, or even to offer workers the chance to buy insurance at a group rate. But it is still expected to help bring health insurance within the realm of affordability for many workers who are currently uninsured.

About 39 percent of Rhode Island workers do not have access to employer-sponsored coverage, according to the office of the state health insurance commissioner. Some work for companies that do not offer insurance. Others aren't eligible for benefits, for instance, because they don't work enough hours per week to qualify.

The tax break will mean a savings of up to 40 percent of the premium cost, depending on the worker's tax bracket, the commissioner's office estimates.

The plans are called "cafeteria plans" because employees are free to opt in or out and employers can offer a variety of options for using the money, such as vision coverage, a dental plan and life insurance, in addition to regular medical insurance. The more technical term for the plans is "Section 125" plans, in reference to the section of federal law that allows employees to pay for the plans with pre-tax dollars.

Governor Carcieri signed the bill, sponsored by Sen. Rhoda E. Perry, D-Providence, into law last week. A companion bill, by Rep. Eileen S. Naughton, D-Warwick, was transmitted last week and is awaiting action from the governor.

The new law does not require employers to start offering the plans until 2009, and the state Department of Labor and Training has yet to issue regulations that spell out what companies must do to comply.

Matt Stark, policy director for the health insurance commissioner's office, said companies might choose to offer health-insurance plans that employees could buy through the company at a group rate. But he said the law does not require companies to do that, or anything else be yond setting up a payroll deduction mechanism so employees can set aside money.

Stark said employees would choose a health-insurance plan and that plan would bill the employer for the cost of the insurance premium. The costs would be paid with the money the employees set aside.

At least for now, getting insurance through Blue Cross & Blue Shield of Rhode Island's often-expensive Direct Pay plans is virtually the only option for individuals buying insurance on their own. In separate initiatives, state government and insurers are working together to create lower-cost options for individuals.

Although companies can set up their cafeteria plans directly with the Internal Revenue Service, Stark predicted most would pay a broker or a payroll company to do it. There is a small cost associated with the task; Stark said one payroll company quoted a rate of $300 a year for a company with 10 employees. Laurie White, president of the Greater Providence Chamber of Commerce, estimated brokers would charge a flat fee of $50 to $100.

"I think from the benefits certainly far outweigh the nominal costs associated with setting these plans up," White said.

The plans save money for employers, as well as employees, because when a worker directs part of his pay into a tax-exempt account, the employer is freed from having to pay a matching amount on the payroll tax for that money. That same company with 10 employees would save $1,800 a year on payroll taxes, far more than the $300 administrative cost, Stark said.

Many employers already offer such plans voluntarily, but they tend to be large companies "that have the resources and human resource departments to provide people options for how they can spend this money, and to educate their employees about it," said Grace-Marie Turner, president of the Galen Institute, a Virginia-based nonprofit health policy research organization.

White and Stark said they thought more companies, especially small companies, would offer the plans if they knew about them and understood the benefits. "I think it's just a question of how difficult it is to run small business in Rhode Island," Stark said. "People are focused on their day-to-day operations and this is unfamiliar territory."

This new law might be unique to Rhode Island, said Richard Cauchi, health program director for the National Conference of State Legislatures. "There are certainly various initiatives that encourage the use of cafeteria plans, and publicize their use, but this is the first explicit requirement I've seen," Cauchi said. "Other states may well take a look at this and see if there is something to be learned or to be used as a model."