You are a business owner, an employee comes to you and asks if you would pay for their dental bill. You agree, congratulations you just started a benefits plan.
Now what if that same employee has an embarrassing medical condition, you said you would pay for their bills, but the employee doesn't want you to know about their private medical history. We now have a need for a third party who can process the claims confidentially. These third parties are usually insurance companies or trust companies.
There is a possibility that the employee could have very expensive medical claims down the road, possibly in the tens of thousands of dollars. As a business owner that is too much of a risk to take on by yourself, you still want to provide the benefits, but not be on the hook for a huge claim. An insurance company will gladly take that risk for you in exchange for health insurance premiums.
Another way to limit your liability is to simply say that you will pay for expenses up to a certain dollar amount, but no more. This is the basis of a Health Spending Account, every employee gets a predefined amount of money they can spend on healthcare and once it is gone, the business is no longer liable.
Through both insurance and a dollar maximum the business owner can control their liability. But what if employees start to abuse the benefits? What if they start claiming expensive cosmetic procedures like Botox, or gold teeth? Plan designs can be put in place to control what is eligible and what is not eligible.
Governments like healthy citizens, so benefits payments are given preferential tax status. Paying for medical or dental claims is a deductible business expense for the business owner, and the cost is not added to the income of the employee. This way the business gets a write-off and the employee doesn't pay income tax on the benefit they receive. Because of this taxation the benefits payments are far more affordable than paying a similar raise or bonus.
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