A "pure" defined contribution health benefits strategy is a straight-forward concept. Employer designs the plan and sets healthcare allowance amounts. Employees purchase individual health insurance and/or incur eligible medical expenses. Defined contribution software takes care of the rest. At the same time, there are many custom plan design options that give employers control over the cost of health benefits, and flexibility in designing a plan that attracts and retains key employees.
This article focuses on plan design options for "pure" defined contribution health plans, where the vehicle for the defined contribution health plan is a stand-alone Health Reimbursement Arrangement (HRA).
In fact, it's the "nearly anything goes" nature of the HRA that makes "pure" defined contribution health plans so flexible for employers. The use of a stand-alone HRA also allows for the employer and employees to receive the same tax-benefits as a traditional group health insurance plan.
So, what are the most popular defined contribution health plan design options? Read on.
Plan Design Option #1: Allowance & Frequency
When designing the defined contribution plan, employers set the amounts to allocate for each class of employee, and at what frequency will they be available (monthly, annually, etc.). For example, employees could have a $100 monthly defined contribution allowance, made available at the beginning of each month. Or, an annual allowance of $1,200 made available at the beginning of the plan year. There are no minimum or maximum allowance amounts.
Plan Design Option #2: Employee Classes & Eligibility
When designing the defined contribution plan, employers decide if they'll offer one benefit level for all employees, or give different allowances by class of employees. Employers can allocate different allowances based on bona-fide job criteria such as job description, tenure with the company, geographic location, part-time or full-time status, etc. ERISA and HIPAA allow this, as long as all "similarly situated" employees are treated equally.
This plan design option, of being able to offer different amounts and benefits to different classes of employees, is attractive to employers with specific recruitment needs ("Our nonprofit needs to provide $500/month to attract a new Executive Director, but continue to offer $250/month to case workers").
For more on defined contribution class options, see this article.
Plan Design Option #3: Annual Rollover of Unused Funds
When designing the defined contribution plan, employers decide what will happen to employees' unused defined contribution funds at the end of the plan year. The employer has full control over this. The plan can be designed to allow maximum rollover of unused funds, a capped rollover of unused funds, or no rollover of unused funds ("use it or lose it").
Plan Design Option #4: Eligible Medical Expenses
When designing the defined contribution plan, the employer can decide what types of expenses to reimburse through the plan. The IRS determines the definition for medical expenses that can be reimbursed through an HRA, which again is the base of a "pure" defined contribution health plan. IRS-eligible medical expenses are listed in Section 213(d) of the Internal Revenue Code. Generally, employers can limit expense categories not to reimburse. Categories may include health insurance premiums, doctor's visits, hospital care, pharmacy, mental health, physical therapy, chiropractic, etc.
Plan Design Option #5: Cost-Sharing Options
When designing the defined contribution plan, employers can decide if employees will share in the cost of their medical expenses. If so, employers can design the plan with a co-insurance and/or deductible. For example, with a defined contribution co-insurance the employer could reimburse 80% of all eligible medical expenses. With a defined contribution deductible, employees could be required to pay out-of-pocket a certain amount per plan year before the defined contribution allowance is available to them.
Plan Design Option #6: Expense-Specific Maximums
When designing the defined contribution plan, employers can put a limit ("max") on certain types of expenses. Within an employee's annual allowance, the employer can design the plan to limit the amount reimbursed for certain categories of health care expenses. For example, an employer could offer a $2,000 annual allowance, with an annual limit of $500 for dental expenses.
All of these defined contribution plan design options are specified in the HRA plan documents.
What do you think? Did we cover the most popular defined contribution plan design options?