One of the biggest problems facing smaller employers is encouraging employees to maintain their health management programs while either paying higher co-pays or adopting high-deductible healthcare programs such as HSAs.

At the same time, many companies are turning to professional employer organizations (PEOs)as a way of better managing their workforce.

While admittedly aimed at increasing their members’ total sales, the National Association of Profession Employer Organizations (NAPEO) argues that small businesses can give their employees an incentive to seek medical care and purchase prescription drugs and over-the-counter (OTC) remedies.

By reducing medical outlays through preventive measures such as wellness, smoking cessation, weight reduction and annual exams, employers can reduce overall healthcare expenditures. Through “125 cafeteria plans” these expenditures can be used to reduce overall tax obligations.

Some experts, including NAPEO, believe that those businesses that work with PEOs can use “125 cafeteria plans,” which provide a tax advantage for employees who meet their healthcare costs with pre-tax dollars.

According to NAPEO, while cafeteria plans will not stem the cost of healthcare and insurance, they can help employees offset these costs by lowering their taxable income each year and enabling them to be reimbursed with pre-tax dollars for eligible out-of-pocket medical expenses.  That could make it easier for employees to seek the care they need, rather than defer it as 40 percent say they are doing now.

Under the IRS Code Section 125 that defines cafeteria plans, employees can elect to regularly deduct nontaxable health benefit costs they’ve agreed to cover, thus reducing their taxable income. Most PEOs have established a cafeteria plan for the workers at their small-business worksites. It is only through a PEO that most workers at small businesses have access to quality benefit plans such as 125 cafeteria plans.  Without the PEO, most small businesses lack the expertise to establish and administer such a program. 

Benefit To Workers

“This is a tremendous service to small-business owners and a major benefit to workers,” said Milan P. Yager, executive vice president of NAPEO. “The PEO’s cafeteria plan gives small businesses and their employees a big-business benefit and may encourage employees to seek the care they need, when they need it.”

Employers also can establish a “flexible spending account” (FSA). An FSA allows employees to set aside money from their pay before taxes are withheld, thereby reducing federal income and social security taxes. The healthcare account reimburses the employee for healthcare expenses not covered or only partly covered by medical and dental plans. The employee submits a reimbursement form and receipt for an eligible expense after paying for it.

Administration of a cafeteria plan could boggle the mind of the small-business owner. The PEO can provide the expertise and systems to make this plan a reality for the nearly 23 million small businesses in America today – good news for their workers beset with rising medical costs. “Most Americans like working on Main Street,” Yager commented, “but desire the benefits offered on Wall Street.”