Defined Contribution: A Healthcare Win for Employers and Employees
Employers need a competitive health benefits program to recruit and retain top employees, but traditional employer-sponsored health insurance has become unaffordable. As a result, businesses of all shapes and sizes are considering offering “healthcare reimbursements” vs. “health insurance” rather than reducing or cutting out benefits completely. Similar to employers’ recent shift to from “defined benefit” pension plans to “defined contribution” 401k plans in the retiree benefit space, defined contribution healthcare plans are becoming an attractive alternative to traditional “defined benefit” employer health insurance plans.
With a defined contribution healthcare plan, a company utilizes a health reimbursement arrangement (HRA) to reimburse its employees tax-free for individual health insurance premiums and other covered medical expenses, such as doctor visits and prescription medications. The employer makes available to each employee a fixed HRA dollar amount (aka “defined contribution”), which can vary by employee class. This differs from the traditional “defined benefit” health insurance approach, whereby an employer selects and funds a single “one-size-fits-all” health plan for employees and their families.
So, how can jumping on the defined contribution healthcare bandwagon be a win-win-win for Brokers, Employers and Employees? Read on…
How Defined Contribution Healthcare Plans Are a Win for Brokers
Studies show that U.S. businesses are dropping traditional health coverage at an increasing rate. These studies show that consumer-driven health plans (CDHPs), including defined contribution healthcare, have overtaken health maintenance organizations (HMOs) to become the second most popular plan design offered by employers today. Health insurance brokers who are at the forefront of defined contribution healthcare are already benefiting from a competitive edge and appear to be poised for success as more employers make the transition to defined contribution. Here are three ways brokers benefit from the defined contribution movement:
New Solution for Companies Without Group Health Insurance – Businesses without a tax-advantaged employee health benefits program limit the ability to recruit and retain the best employees. Before defined contribution, there was little a broker could do to help companies that couldn’t afford to offer group health insurance. Defined contributions plans allow an employer to control its costs on a monthly basis while still reaping 100% of the tax advantages associated with traditional employer-sponsored health insurance. There are no minimum or maximum contributions requirements.
Increased Individual Health Insurance Sales – With a defined contribution healthcare plan, brokers become a “401k-like” advisor for individual health insurance, and help employees pick the best health insurance plan for their family. As a result, brokers everywhere are dusting off their once-ignored individual product lines to meet the demands that defined contribution healthcare plans are generating.
Increased Voluntary Healthcare Sales – Defined contribution healthcare plans can be used to reimburse voluntary products like Dental, Vision, Accident and Long Term Care plans.
How Defined Contribution Healthcare Plans Are a Win for Employers
Employers need a competitive health benefits program to recruit and retain top employees. Defined contribution healthcare plans allow an employer to control its costs on a monthly basis. Additionally, the employer determines which expenses are eligible via the plan document. For expenses that are reimbursed, the employer saves FICA and FUTA taxes and the employees receive the benefit 100% tax-free. Here are three ways employers benefit from the defined contribution movement:
Fixed Liability – With a defined contribution healthcare plan, the employer’s maximum financial exposure is capped at the monthly defined contribution and distributions are only made for approved medical expenses. Additionally, most defined contributions plans have a utilization rate of less than 100%, meaning only a fraction of the total liability will result in an actual expense.
Plan Design - An employer may wish to provide different benefits for a manager, full-time employee, and part-time employee. With a defined contribution healthcare plan, the employer can customize benefits for an unlimited number of employee classes, and designate which medical expenses the contribution can and cannot be used for. Additionally, the employer can choose to provide the benefit based on many factors: date of hire, full-time status, geography, etc.
Easy Administration – Defined contribution healthcare plans are extremely flexible, and they allow an employer to provide a quality health benefits program in less than 5 minute per month. Each employer designs its plan with the help of a broker and an administration provider, and can set terms and conditions that meet the businesses’ exact needs. Once the defined contribution plan is set up, employee reimbursement requests (or “claims”) are reviewed and approved by a third party, and tax-free reimbursement is paperless via direct deposit or payroll system, requiring minimal involvement from the employer.
However, it’s not just about the employer. The purpose of offering health benefits is to recruit and retain employees with a competitive benefits package.
How Defined Contribution Healthcare Plans Are a Win for Employees
Employees win with defined contribution because, rather than having a “one-size-fit-all” group plan that may or may not fit their family’s specific needs, they are able to choose an individual health insurance plan that works best for them, their spouses and their dependents.
Lower Monthly Premium – Individual health policies in 45 states typically cost less than 1/2 the cost of group coverage, often from the same carrier. With individual policies, premiums cannot increase due to medical conditions.
More Choice – Each employee may choose the insurance carrier and plan design (covered benefits, deductibles, network, etc.) that best suits his or her needs, and those of any spouses or dependents.
Portability – With a defined contribution healthcare plan, an employee purchases an individual health insurance plan that is independent of their employment, and is reimbursed for the premium tax-free. Because the individual health plan is purchased independent of employment, the coverage is maintained directly with the insurance company, and the employee retains his or her health insurance when he or she changes jobs, putting them on path to “health insurance for life”.
Note: This should not be taken as legal or tax advice.