Many small employers are using a pure defined contribution health plan approach paired with individual health insurance, and the new health insurance subsidies, to create affordable health benefits that employees love.
As background, the Affordable Care Act (ACA) introduces individual health insurance subsidies to help make individual health insurance premiums more affordable. The health insurance subsidies will be available to eligible employees starting January 1, 2014. The subsidies are available through the health insurance marketplaces which open October 1, 2013.
Employers can help employees get access to these discounts by offering a pure defined contribution health plan instead of traditional group health insurance.
Pairing Defined Contribution with Health Insurance Subsidies for Cost Savings
Many small employers are transitioning away from group health insurance (because of the cost, participation, hassle, etc.) and instead offering pure defined contribution health benefits. With pure defined contribution health benefits, employees receive a set monthly healthcare allowance to spend on their choice of qualified health insurance.
Small employers are especially attracted to this solution because it provides a formal benefit to employees, while also giving the employer more fiscal control and predictability over the cost of health benefits.
With this approach, an employer would follow these four steps:
Not offer a traditional group health insurance plan (offering group health insurance disqualifies employees from the subsidies).
Give employees a defined contribution healthcare allowance to use on qualified individual health insurance.
Assign a health insurance broker to help employees enroll in individual health insurance through the marketplace, and receive a discount via a health insurance subsidy (if eligible). Employees can also enroll in health insurance "off" the marketplace through a broker or private exchange.
Reimburse employees on payroll, after employees submit proof of their health insurance to their defined contribution software provider.
Which Employees Will Benefit From the Health Insurance Subsidies?
If employees meet certain income requirements, and do not have access to an affordable employer-sponsored or government health insurance plan, then they will be eligible for the health insurance subsidies. (Note: Offering a defined contribution health plan does not disqualify employees from the health insurance subsidies because the defined contribution health plan is not considered a qualified health plan under ACA.)
Eligibility for the subsidies is based on a standard called the "federal poverty level" (FPL). The employee's subsidy will cap the cost of their health insurance between 2% and 9.5% of his or her annual income, depending on how much money they make. Employees who earn up to 400 percent of FPL may be eligible. This translates to an individual earning up to $45,960 in 2013 and a family of four earning up to $94,200 in 2013.
These charts show income levels eligible for the subsidies, examples of the subsidies, the and max cost eligible employees would pay for insurance (before the employer's contribution). Or, view specific plan rates and subsidy amounts via your state's marketplace website (look up your state marketplace website here).
What About Employees Not Eligible for the Health Insurance Subsidies?
Employees not eligible for the subsidies, because of household income or access to coverage under a spouse's health insurance plan or government program, can still use the defined contribution allowance for their health insurance premium expenses purchased through the marketplace, or through the private market.
Example of Pairing Defined Contribution with Health Insurance Subsidies
An auto body repair shop in North Bergen, New Jersey employees 7 full time mechanics and is able to offer health benefits for the first time using a pure defined contribution approach. The auto shop makes available $150/month to each employee to use on personal health insurance.
One of the mechanics, John, is 32-years old and single, and makes $32,000 annually in 2014.
Because the auto shop does not offer a traditional group health insurance plan to employees, John is eligible for a subsidized insurance policy through his state exchange, based on his income and family size.
John purchases health insurance from his state’s health insurance marketplace for a discounted price of $236/month. This includes a government subsidy of $57/month.
Through the defined contribution plan, the auto shop reimburses John $150/month. After the government discount and the auto shop's contribution, John's total out-of-pocket amount is $86/month.
What are your questions about how to pair a pure defined contribution health plan with the health insurance subsidies? Leave a comment below and join the discussion.