"Defined contribution health plans are the newest and smartest way for companies to offer health benefits without breaking the bank." Frank A Welsh.
The general idea of a defined contribution health plan is that a company gives each employee a fixed dollar amount (a "pure defined contribution") that the employees chooses how to spend. Typically, employees are allowed to use their defined contribution to reimburse themselves for individual health insurance costs or other medical expenses such as doctor visits, prescription drugs, dental coverage, vision coverage some pre-taxed and some post-taxed.
Why use a defined contributions health plan?
There is no doubt group insurance premiums are rising. In 2014 group health insurance premium rates are the highest most states have ever seen. Even more more companies are dropping coverage or moving the health insurance expenses to the employee.
Instead of paying to provide a traditional group health plan benefit or what is known as a defined benefit, employers can choose specific amounts of tax free dollars on a monthly schedule to create a defined contribution health plan for their employees. Or you have the option to create a premium only plan (a type of defined contribution), where the employee requests to set a side an amount of their paycheck to pay for their personal policy with tax free dollars.
Defined contribution health plans are generally less expensive than an employer-sponsored group health insurance plans. A defined contribution is not an actual health plan because each employee has their own individual health insurance plan, but administered my one system. This way an employee can obtain plans that fit their needs because they can choose from all plans from the individual market.
A company’s health benefit package is absolutely essential for recruiting and retaining key employees. With defined contributions employees are responsible for selecting their own insurance by consulting with a professional broker and pay their own premium.
Why can't an employer pay directly for their employee's individual health insurance?
The employer will be out of compliance with two major laws.
The main federal law is ERISA, which states, "federal and state laws treat health insurance in the employer group market very differently than personal health insurance market. If the employer provides, sponsors, or endorses a personal health insurance plan, the plan becomes an employer group health plan. As such, it would become subject to all the same state and federal rules applicable to other employer-provided health insurance plans. Insurers will not knowingly let their plans be used for employer-provided health insurance."
The other law is HIPPA, where an employer has no legal right to know an employee's HIPPA protected health expenses. If an employer is paying for their workers insurance they must know the price, and therefore are out of compliance.
Also, the IRS requires that if you reimburse your employee, it has to be considered taxable income to that employee.
What types of benefits are covered with defined contributions?
1. Health Insurance Premiums
-This includes major medical plans
-Short Term Health Plans
-Limited Benefit Plans (indemnity)
2. Doctor Visits
3. Dental and vision
Can an employer give different amounts to their employees?
The answer is yes. You can apply different amounts to different classes of employees. You must justify these classes by general job categories, part-time, full-time, entry level, management, and so on.
What is the difference between defined contributions and defined benefits?
Defined contributions is the amount a company gives an employee for health insurance expenses using an ERISA and HIPPA compliant system. Defined benefits usually refers to traditional group insurance or group benefits.
If you have any questions about defined contributions, premium reimbursement arrangement, HRA section 125, compliance, preexisting conditions, or any matter regarding health insurance, contact us now.