Defined Contribution Health Plans: A Transition from Defined Benefits to Defined Contribution in the Healthcare Reform Era
By Andrew Wheeler,
Director of eCommerce
CIBC of Illinois, Inc.
For many years, businesses have operated under the Defined Benefit (DB) model of health plans for their employees. Employers would pick a plan or set of plans and tell employees “here are your benefits, so go pick the level of coverage you and your family needs. We will pay X amount/percentage for your contribution to our group plan(s).” It was for good reason; there is no viable health care market for who have a prior medical history. Pre-existing conditions and underwriting requirements excluded a large part of the employer workforce potential so there were no other options, to be honest.
Now, as a result of the implementation of the Affordable Care Act 2014 and the rules that eliminate medical underwriting and pre-ex exclusions, we are at the point where a new paradigm can enter the employee benefits arena; Defined Employer Contributions (DC).
This Sounds Vaguely Familiar?
The whole thought of DC is not new as we have been using this methodology with retirement benefits for years. In the mid-2000’s as retiree costs skyrocketed, companies faced a choice of raising the cap associated with retiree contributions, or pass along the increases to the retirees. Most companies chose the latter of these two and DC was off and running. The same applies to employee retirement contributions.
Skin in the Game
We have already seen the recognition of the need to get employees involved in the structure and operation of their health plan, even before ACA became law. The use of an HRA/HSA within the health plan is a hybrid of DC and DB, and most employees are at least aware of these types of hybrids. Many employees and employers have experienced the benefits of becoming participants in Consumer Driven Health Plans (CDHP). When implemented correctly, with robust employee education and careful plan design, these types of CDHP’s have done the trick. They have provided stability, however tedious and fleeting, as opposed to the DB model.
Now, as we look at full implementation of the ACA in 2014, employers are looking at a similar situation with their health plans. Because there is the “Affordability” factor associated with ACA, employers cannot require employees to pay more than 9.5% of their W2 wages for employee-only contributions without incurring a $3000 tax (fine). Costs are being shifted to the employer contribution in most cases, and employees are left with picking up more of the spouse/family costs as a result. Employers are looking for some stability in a market that, by all indications, will continue to be volatile for the foreseeable future. Costs are rising in the face of ‘Affordable Care” legislation and carriers are signaling that they will continue to rise well into 2014 and beyond. Just like The Rolling Stones, employers are also crying “Gimme Shelter,” and maybe a migration to DC is that path to peace of mind for employers so they don’t “fade away.”
Defined Contribution: The Model
In the DC model, employers contribute a fixed amount to employees for health insurance purchases. The employer selects products to offer to employees and sets a defined contribution. The employees go to the exchange and use the employer contribution to select and insurance plan that meets their needs. Now, the risk of premium increases moves to the employees.
Employers usually establish HRA’s to make contributions in their DC plans because unlike FSA’s and HSA’s, HRA’s can be used to reimburse premiums. This also allows employers to utilize health plans other than High Deductible (HDHP) plans in their offering. Because ACA prohibits annual limits on essential benefits after 2013, employers need to know if their HRA is Integrated or Stand-Alone.
Integrated HRA’s are not required to be compliant with the ACA annual limit restriction if the coverage by itself satisfies the annual limit restriction. Integration also occurs when the HRA is available only to employees who are covered by employer coverage that meets annual limit regulations. As of right now, the agencies implementing ACA state that an employer HRA cannot be integrated with the individual market coverage or with an employer plan that provides coverage through individual policies. In addition, an employer HRA may be treated as integrated only if the employee receiving the HRA is enrolled in that coverage.
Stand-alone HRA’s that do not fall under an exemption (retiree, vision only, dental only, certain FSA’s) will not be subject to annual limit restrictions. This means that employers will not be able to offer a stand-alone HRA for employees to purchase coverage in or outside of the exchanges.
SHOP and Private Exchanges
With the recent proposed rule allowing States to delay SHOP exchanges until 2015, small group employers will have their traditional broker or direct relationship with carriers. Employers can also utilize private exchanges that are starting to pop up. Unlike the Federal or State-based exchanges, these private hubs will contain other lines of employee benefits like health, vision, and dental insurances. Employers will be able to use the DC model in private exchanges, within the rules laid out in the above paragraphs, but it is quite unclear how employees will adjust to a DC model without the traditional broker-advocate-employee personalized connections. As with much of the ACA, it is unclear how compliance with the ACA will be monitored by HHS and the IRS with regard to private exchanges. However nebulous, it is still something that small group employers should at least be aware of and seek counsel on.
This article is intended for informational purposes only and should not be construed as legal advice. Please consult with a legal professional for legal opinions.
To get more information on CIBC of Illinois, visit us at http://www.CIBCINC.Com or call toll free 877-936-3580.
- How Your Health Insurance Will Be Turned On Its Head (forbes.com)
Posted on May 28, 2013, in Health Care Reform, Plan Design and tagged ACA, Defined contribution plan, employee benefits, group health insurance, health insurance, Health Reimbursement Account, Health savings Account, HRA, HSA, Illinois, illinois health insurance, Kankakee, Obamacare, Patient Protection and Affordable Care Act. Bookmark the permalink. Leave a comment.