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Defined Contribution Health Plans: Review Your Options

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Background: Defined contribution health plans operate the same way a 401(k) plan fixes your annual commitment to employees' retirement savings. The traditional (and original) alternative is the …

Background: Defined contribution health plans operate the same way a 401(k) plan fixes your annual commitment to employees' retirement savings. The traditional (and original) alternative is the defined benefit model, in which you agree to provide a specific level of benefits, such as a pension amount determined by a formula, or a particular set of health services regardless of whether claims go through the roof.

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  • 1. Toll Free: 877.880.4477 Phone: 281.880.6525 www.hrp.net Defined Contribution Health Plans: Review Your Options
  • 2. Background: Defined contribution health plans operate the same way a 401(k) plan fixes your annual commitment to employees' retirement savings. The traditional (and original) alternative is the defined benefit model, in which you agree to provide a specific level of benefits, such as a pension amount determined by a formula, or a particular set of health services regardless of whether claims go through the roof. The first option you may consider is the health reimbursement account (HRA) approach. HRAs are not new, but typically have been used to fund health plan deductibles or medical expenses not covered by the health plan. Unlike flexible spending accounts and health savings accounts, HRAs also can be used to pay health plan premiums, and by doing so, fix your annual contribution to employees' health benefits. www.hrp.net »
  • 3. www.hrp.net Pay as You Go Only the employer can contribute to an HRA; employees cannot add to it by payroll deduction. There are no minimum or maximum "contributions," but amounts are fixed for as long as employers choose. The accounts are "notional," in other words; funds don't actually exist in a cash account but are disbursed by the employer to employees as they incur expenses covered under the arrangement. Unused account credits in one year can be rolled over into subsequent years.
  • 4. Contributions are deductible for the employer and not taxable to the employee, assuming funds are used for qualified medical expenses. The accompanying table from The Bailey Group, an employee benefits firm, illustrates how one employer used the HRA in conjunction with the health plan it was offering. The table shows higher deductibles result in higher employer credits to employees' HRA accounts. www.hrp.net »
  • 5. www.hrp.net
  • 6. Beginning in 2015, employers will face the same ACA-mandated benefit and affordability standards, whether they use an HRA or any other type of plan, or incur penalties. This means if you're using an HRA to support employees' premium payments, you'll need to calculate your contributions to ensure you pass the 9.5 percent of household income affordability test, as well as the 60 percent actuarial value test. If your HRA is deemed to be an "integrated" one, it will not be subject to ACA's ban on annual ceilings on health benefit payments. An integrated HRA is connected to the basic health plan, but can only be used to provide coverage for specific benefits (e.g. vision or dental) not covered under the main health plan. What other defined contribution models could you exploit? www.hrp.net »
  • 7. Problems with Public Exchanges In theory, if you are small enough for your employees to qualify to use the public exchange (under 100 employees in most states and 50 in some others, until 2017 when the limits come off), you could simply drop health plan coverage (without any punitive consequences if you fall under ACA's 50-employee threshold), boost employees' salaries to compensate for the loss of benefits, and send them to the exchanges in 2015. www.hrp.net
  • 8. This would probably be a big mistake, however, for several reasons. First, there is no assurance employees would use the extra cash to buy coverage. Second, this arrangement would not be deemed as a true health plan, so, if your company's size makes you subject to ACA, you would pay the penalty for not providing coverage. And third, employees would be taxed on the additional income; you would have to take this into consideration when deciding how much to give them, i.e. whether to boost their salaries even more to compensate for the tax consequences. www.hrp.net »
  • 9. Private Exchanges Alternative? Another approach would be to pay the minimum required amount directly to a private health exchange, which in turn would credit the amount to each employee's account, ensuring those dollars can only be used for health coverage. Private exchanges are not subject to any employee census limits. They are run by stand-alone exchange operators, as some large benefit consulting firms and some large health insurance carriers. Your payments to exchange operators are deductible to you, and non-taxable to employees. www.hrp.net
  • 10. Some private exchanges will offer more choices than others. Naturally, those operated by insurance carriers would not include plans from their competitors. They do, however, include ancillary policies from other insurers which they don't offer themselves, such as vision, dental, and disability insurance. After you've crunched the numbers, the decision of whether or not to go the defined contribution route might ultimately depend on how your company views employee benefits, and the role of these benefits in attracting and retaining desirable employees. www.hrp.net »
  • 11. 14550 Torrey Chase Blvd., Ste. 360 Houston, TX 77014 USA www.hrp.net E-mail : info@hrp.net Toll Free Phone Fax : : : 877.880.4477 281.880.6525 281.866.9426

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