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this is (90%)($703.92) $633.53. The employee is left to pay the remainder, so the
costs are:POS: Single: $298.75 $219.67 $79.08
Family: $886.92 $633.53 $253.39
HMO: Single: $244.08 $219.67 $24.41
Family: $703.92 $633.53 $70.39Notice that under the formula in (a), there is much less difference in the employee’s cost
between the two plans than under the formula in (b). Under option (b) employees have a
much greater financial incentive to choose the HMO plan. If the company wants to steer its
employees toward the lower cost HMO plan, formula (b) would be a much better contribu-
tion formula to use.Flexible Spending Accounts
While they are not truly an insurance coverage, many employers offer the opportunity to
participate in flexible spending accounts (FSAs) for health or child care expenses. With
an FSA, the employee has money deducted from her paycheck and deposited to a special
account. When she pays for qualifying health or child care expenses, she can then submit a
claim to the account administrator and be reimbursed for the amount paid.
Allowable expenses for medical FSAs include copayments, deductibles, and coinsur-
ance from health insurance, as well as many other medically related expenses such as
eyeglasses.
The advantage of this type of plan is that the money withheld is not subject to income
tax. The avoided income taxes can provide substantial savings.Example 13.2.13 Susannah is in the 28% tax bracket for her federal taxes and pays
6% in state income taxes. Suppose that she expects to pay about $500 in reimbursable
medical expenses, and $4,000 in reimbursable daycare expenses for her daughter.If she takes advantages of the medical and child care FSAs her employer offers, how
much will she save in taxes?If she deposits $4,500 into the FSAs, she will avoid paying state and federal income taxes
totaling 34% on this money.^4 So her savings would be (34%)($4,500) $1,530.On the other hand, deposits made to an FSA that are not used by the end of the plan year
are forfeited, so careful consideration has to be given to the amount of claims that will be
made.Exercise 13.2.14 Tu ng is in the 28% tax bracket for his federal taxes and 8% for
state taxes. He thinks his family’s reimbursable medical costs will total $720 this year,
but is not sure that the total will be quite this much. If he goes ahead and contributes
$720, how much would his expenses have to total in order for him not to lose money?By depositing $720 to the FSA, he avoids (36%)($720) $259.20 in taxes. So the deposits
actually cost him $720 $259.20 $460.80. If his reimbursable expenses total $460.80
or more, he comes out ahead, even if some of the money in his account is forfeited.Other Group Insurance Plans
In addition to health insurance coverage, many employers offer other types of insurance as
an employee benefit. Some examples include life and dental insurance. Dental insurance
takes forms similar to the medical insurance plans discussed in this chapter, though they
cover only dental expenses. Life insurance is discussed in the next section.(^4) We are assuming here that removing this $4,500 from her taxable income does not drop her into a lower tax
bracket. See the Additional Exercises of this section for an example where FSA contributions change someone’s
tax bracket.
13.2 Health Insurance and Employee Benefits 545