Pure Defined Contribution Health Plans are quickly becoming the future small business health insurance. Every day we speak with employers and health insurance brokers asking if there's a right way to set up a Pure Defined Contribution Health Plan.
This article outlines ten best practices for Pure Defined Contribution Health Plans.
First, What is "Pure" Defined Contribution?
With “Pure” Defined Contribution Health Plans, the employer establishes a plan (usually a Section 105 medical reimbursement plan) that reimburses employees for individual health insurance premiums.
Employees may use their employer-funded allowance on any individual or family health plan, from any carrier, on or off the Marketplaces. Employees are reimbursed by the Defined Contribution Plan for eligible expenses, up to the amount in their balance.
10 Best Practices for Pure Defined Contribution Health Plans
1) Use a Formal Defined Contribution Health Plan
The first best practice is to set up a formal plan. Some businesses consider setting up healthcare allowances without a formal Defined Contribution Health Plan. In other words, they consider bonusing or giving raises to employees for their personal health insurance.
However, using a formal Section 105 Defined Contribution Health Plan saves the small business and employees money (because of the tax savings), and most importantly keeps the business compliant with federal regulations.
2) Set Affordable Allowance Amounts
How much the business contributes is 100% up to them. As such, set the allowances at a rate the business can sustain. As a best practice, it is always better for employee relations to increase the benefit level rather than decrease the benefit level.
3) Use Defined Contribution Software
There are two main reasons using a Defined Contribution Software is a best practice: 1) Time savings/ease of use, and 2) Tax-savings/compliance.
Defined Contribution Software allows the business to administer the plan 24/7 online, easily add reimbursements to payroll, and change plan design (and plan documents) at any time, with no additional fees. Software makes it easy for employees to view their allowance in real time and submit requests for reimbursement anytime, online.
Additionally, Defined Contribution Software ensures the plan is kept up to date with all current regulations including ACA, HIPAA, IRS, and ERISA rules.
4) Select a Health Insurance Professional
Work with a licensed Health Insurance Broker or Agent to help employees select and purchase personal health insurance policies. Select an Insurance Professional familiar with individual health insurance policies, Defined Contribution, and health care reform.
5) Do Not Get Involved with the Selection or Purchase of Employees' Individual Health Insurance Policies
The federal government has guidelines for employers who want to contribute to an employee's individual health insurance premiums. To avoid endorsement of individual health insurance plans:
Employers must not be involved in employees' decision to purchase individual health insurance, or their decision on which insurer or plan to use.
Employers may not directly pay premiums on individual health insurance policies.
Employers must not become involved in any claim dispute between an employee and an insurance carrier; all inquiries must be directed to the insurer.
Employers must not pressure employees to use their allowance to pay for individual insurance coverage.
In addition to reimbursing for major medical health insurance premiums, employers should also allow the use of the Defined Contribution Plan for non-major medical health insurance premiums (e.g. dental) and basic preventive health service as required by law.
- Employers must limit their role to simply verifying that a qualified medical expense (such as an individual health insurance premium) was incurred, and then reimbursing such amount from the Defined Contribution Plan.
Again, using a third-party Defined Contribution Software provider (who also reviews all claims for reimbursement), creates a safegaurd for employers. And, utilizing a Health Insurance Professional provides employees additional support.
6) Don't Let Employees Contribute
Section 105 Defined Contribution Health Plans are, by definition, 100% employer-funded. Allowing employees to contribute invalidates the health insurance allotment tax benefits.
7) Educate Employees
Providing a Defined Contribution Health Plan is a different type of health benefits. Select a Defined Contribution provider who provides a clear Summary of Benefits and Welcome Kits to employees, and makes buying individual health insurance easy. This will contribute to employees' education, understanding, and satisfaction.
8) Don't Pre-Fund a Third-Party Account - There's No Need To
A big benefit with Defined Contribution is that it is a notional arrangement, meaning you are not required to pre-fund third party bank accounts.
9) Don't Ignore ACA and Federal Regulations
A formal Section 105 Defined Contribution Health Plan is a self-insured medical reimbursement plan. As such, it must comply with ACA, IRS, HIPAA, and ERISA rules. Failure to comply with these rules and regulations can result in costly fines.
10) Do Your Research
When selecting a Defined Contribution provider, do you research. Knowing what questions to ask providers is key to choosing the best Defined Contribution provider for you and your employees. See: Ten Questions to Ask Defined Contribution Providers.
Questions? Leave a comment below.