In an environment of continual premium increases, the Affordable Care Act (ACA) is forcing firms to consider alternative employee health benefits programs. A defined contribution plan, or DCP, provides specific advantages to employers under health reform. Industry experts believe the adoption of DCPs by U.S. employers will accelerate over the next year. So, what is a DCP? Here's an overview.
Background on DCPs and Employee Health Benefits
In the 1970s many U.S. employers were statistically bankrupt due to the expected cost of their defined benefit retirement programs. Starting in the 1980s, employers switched to affordable "defined contribution" (vs. defined benefit) retirement programs which today cover more than 100 million Americans.
Today, employers face a similar situation in the employee health benefits space as they did previously with defined benefit retirement plans. Traditionally, employers have offered a defined benefit "group health insurance plan" in which the business decides the insurance benefits to be provided and select the benefit provider (carrier). This approach does little to limit annual increases in an unsustainable and unpredictable environment
Defined contribution plans provide both cost certainty and simplicity. Similar to how 401(k)s transformed the retiree benefits landscape, employers will be able to achieve cost-certainty while providing access to affordable, quality and portable health insurance. It's like a 401k for health benefits. Rather than defining the benefit to be provided, an employer contributes a defined dollar amount (the "defined contribution") and employees decide which individual health coverage to buy. Essentially, DCPs allow employers to get out of the health insurance business, and focus on their core business.
How DCPs Benefit Employers
Cost Certainty and Tax Deductibility- With DCPs, employers fix their health benefits costs and maintain a 100% tax deduction for employee health benefits.
No Minimum Contribution Requirements - Most health insurance companies require businesses to contribute a minimum dollar amount, ranging from 50 percent to 75 percent of the premium. With DCPs, there are no minimum contribution requirements.
No Minimum Participation Requirements - Most health insurance companies require businesses to meet minimum participation requirements. With DCPs, there are no minimum participation requirements.
Administrative Time - Group health insurance plans require employers to invest substantial time and resources into the administration and management of a traditional group health plan. With DCPs, the administration can take less than 5 minutes per month, allowing the HR staff to focus on real HR issues.
How DCPs Benefit Employees
Portability - With a DCP, an employee purchases an individual health insurance plan that is maintained directly with the insurance company, so the employee retains his or her health insurance when he or she changes jobs.
Choice - With a DCP, 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.
Control - With a DCP, employees are in full control over how employer contributions are spent.
Tax-Free Dollars - The DCP distributions for qualified medical expenses are 100% tax free to the employee.
How to Offer a DCP for Employee Health Benefits
Similar to a 401(k) retirement plan, the DCP must include all legal documentation to ensure compliance with applicable regulations. The DCP administration platform needs to be an IRS, ERISA, and HIPAA-compliant platform that includes electronic plan document creation and employee election processes. Here's a 5 step guide to setting up a DCP the right way:
Step 1 - The Employer sets employee eligibility requirements, decides what expenses are eligible for reimbursement, and determines the monthly or annual DCP contribution amounts.
Step 2 - The Employer enrolls Employees into the plan and distributes IRS/ERISA/ACA required plan documents, SPDs and notices to each eligible Employee.
Step 3 - Each Employee chooses and pays for his or her own individual health insurance policy and submits proper documentation for reimbursement.
Step 4 - A HIPAA-compliant claims processor reviews the reimbursement request and approves or rejects the request.
Step 5 - If the request is approved, the Employer reimburses the Employee for the approved reimbursement up to the balance of each Empoyee's DCP.