Recently, we sent renewal materials to a Premium Only Plan (POP) client and she responded that she didn’t think her company needed a POP anymore. Why? It’s a low-cost win/win benefit? Well, at renewal, they eliminated the group medical plan in favor of a medical cost sharing plan (MCSP). This was a new one for me. Not the plans themselves, I’ve heard about them. I was pretty sure I knew the answer, but I had some niggling questions. You know I love to research, so here is what I found out.
Among the most popular MCSPs (also called health sharing plans or healthcare sharing ministries) are Medi-Share, Altrua HealthShare, Zion HealthShare and Solidarity HealthShare. And while their mission is to cover healthcare costs, these programs are not insurance.
The differences between MCSPs and traditional medical insurance
Most, but not all, MCSPs are Christian/religious based plans. As such, the applicant must agree they do not use illegal drugs and attest that their sexual relations are within the bounds of a Biblical Christian Marriage. Participants must understand that other “non-biblical” medical expenses may not be covered. Some also carve out certain activities where injuries sustained by, say, dirt bike riding, flying airplanes, etc. will not be covered. They can pretty much make their own rules. Because they are not insurance, they are outside the rules governing traditional insurance plans.
As well:
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- They often do not cover pre-existing conditions
- There usually is a lifetime maximum
- Maternity coverage is often limited
- Alternative medicine is often excluded
- Dental and vision expenses are generally excluded
With all these outlined risks and restrictions, why would anyone choose an MCSP over traditional medical insurance? I’ll give you one guess. Money. For participants and families paying out of pocket, this may amount to thousands of dollars every year.
A case study of an MCSP in practice
A solopreneur friend of mine has used an MCSP for seven years. He and his wife have been healthy and happy with this decision. They looked at the numbers and the risks. Remember, medical insurance costs for sole proprietors are expensive. For my friend, the restrictions and risks made sense from a financial standpoint for a long time. However, today as he’s turning 60, he is growing nervous. What if one of them gets cancer? What if they end up with a chronic illness and they hit the lifetime maximum. For now, they are holding their breath and praying their luck continues until they reach age 65 and can enroll in Medicare.
MCSPs are not necessarily a cheaper option
Many individuals buying actual healthcare insurance through exchanges qualify for tax credits due to an income threshold that significantly lowers their monthly premiums. My friend with a higher income, however, does not qualify for these tax credits. As a result, he pays far less for his MCSP than he would if he were shopping the exchange for an individual plan. An MCSP also may not make financial sense for younger people. As many plans on exchanges are age-based (and include the tax subsidies), a premium on a traditional plan (that really is insurance) could be similar to what they would pay as their “share” on an MCSP. If you are intrigued, it pays to truly compare them side-by-side – both the economics and the benefits.
But what about the POP?
Before adopting an MCSP, my POP client paid 50% of the employee-only portion of the group insurance premium and deducted the other 50% from the employee’s check on a pre-tax basis – hence the need for the POP. Now with the group medical plan eliminated, my client cannot deduct premiums from employee checks as pre-tax dollars. This is because, as I stated above, MCSPs don’t have to follow the same rules – like Section 125 of the IRS Code that allows for pre-tax premiums only when group medical insurance is in place. Therefore, she would no longer be able to run the cost sharing through a pre-tax plan – as an alphabet soup expert, that I do know.
But in the spirit of being thorough, I had a couple of questions I didn’t know the answer to, so I asked a CPA client two additional questions that she might want to know:
- Can she deduct the employee’s 50% “contribution” to the medical cost sharing plan from an employee’s paycheck. Answer: YES
- If the employer is paying 50% of the “premium” for this non-insurance type of plan, is it still considered a business expense for her? Answer: YES
And in support of my opinion on the whole pre-tax matter, he concurs, “It is my understanding that a business can deduct the “premiums” for this type of plan, however, the amount paid for the employee would be a taxable fringe benefit for that employee. Using this logic, a deduction from employee wages would be allowed, but the amount deducted would not reduce taxable income for withholding or FICA purposes.”
He pointed me to an article – Is Health Sharing Tax Deductible? – Updated for 2024 for additional insight. It reads, “Health sharing ministry contributions and health insurance premiums are treated slightly differently for businesses…From the business’ standpoint, payments for health insurance premiums and contributions to health sharing ministries made as an employee benefit are both fully tax deductible. However, while health insurance is generally tax-free to employees (under a POP), health sharing is a taxable benefit for them.”
That covers my client’s question on POPs, but what about all the other alphabet soup programs? This one is clear. If a participant is not enrolled in a qualified medical plan they are no longer able to:
- Contribute to a Health Savings Account (HSA)
- Be reimbursed for medical expenses under a Flexible Savings Account (FSA)
- Enroll in COBRA when incurring a qualifying event.
Should you offer/participate in an MCSP?
Medical cost sharing plans potentially save a lot of money in premiums/contributions over traditional health plans – but there are some steep restrictions and risks. You’ll want to research state/federal exchanges and compare an individual plan with tax credits to the cost of an MCSP. In this comparison, don’t forget to include the cost of prescriptions, office visits, and medical expenses a participant will have to pay before the cost sharing benefit kicks in.
If you are looking to institute this for your employees, consider the current health of your employees and understand the dollar limits and restrictions to pre-existing conditions as well as for certain medical conditions. Be prepared to communicate that employees will have to pay federal, Social Security and Medicare taxes for their “contributions” to an MCSP.
And, as an employer, if you deduct “premiums/contributions” from employee paychecks, you will pay the 7.5% FICA match on those deductions because they are not tax-free. So, for my client who is only paying 50% of the cost sharing contributions, to offset the risks and restrictions, she might consider paying 100% of their “premiums.” After all, it’s all tax-deductible business expense for her.