Most employers have never heard of a hospital indemnity plan. Those who have often assume it is just another insurance product that costs more than it delivers. It is not. When structured correctly under Section 125, a hospital indemnity plan reduces your FICA taxes, puts more money in your employees paychecks, and costs nothing extra to implement.
Here is exactly how it works.
What Is a Hospital Indemnity Plan?
A hospital indemnity plan is a fully insured supplemental health product underwritten by an A-rated carrier. It pays employees a fixed benefit when they experience covered health events such as hospital stays, ER visits, ICU care, or ambulance services. Unlike traditional health insurance, the payment goes directly to the employee, not to the provider.
How Does It Reduce Payroll Taxes?
When a hospital indemnity plan is structured under Section 125, employees pay their premiums with pre-tax dollars. This reduces the taxable wage base for both the employee and the employer. The employer’s share of FICA taxes, currently 7.65%, is calculated on a lower wage base, generating real savings starting on the first payroll run.
For a company with 100 employees, this typically translates to $600 or more per employee per year in FICA savings for the employer.
What Do Employees Get?
- Virtual primary care and urgent care, available 24/7 with no copay or deductible
- Behavioral health support
- Comprehensive generic prescription coverage
- Monthly engagement activities that, when completed, trigger an automatic indemnity payment deposited directly into their paycheck
- Benefits that extend to their family members
- Access to a tax advice line
Does It Replace Existing Coverage?
No. The hospital indemnity plan sits on top of whatever benefits your employees already have. There are no changes to existing coverage, no carrier switches, and no disruption to your current plan design. It is additive by design.
What Does It Cost the Employer?
The plan is structured so that the FICA savings generated by the pre-tax premium structure offset the cost of the benefit itself. For most employers, the net cost is zero or close to it.
Want to see if the numbers work for your team? Check your plan fit.