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Small Business Employee Benefits and HR Blog

Pure Defined Contribution vs. SHOP Exchange - Which is Better?

With health care reform right around the corner, many small businesses and their brokers are strategizing about the best health benefits solution for 2014. Here's a look at two common small business health insurance approaches: pure defined contribution and group health insurance through the new SHOP exchanges. This article explains how each approach will work in 2014, and compares the two options side-by-side. defined contribution or SHOP exchange

Pure Defined Contribution in 2014

Quick summary: A "pure" defined contribution health plan allows the employer to contribute any amount to employees' individual health insurance, and gives employees access to individual health insurance subsidies through the new health insurance exchanges.

With a "pure" defined contribution health plan, a business offers a healthcare allowance instead of a group health insurance plan. Employees shop for a health insurance plan that best fits their needs, and are reimbursed by the businesses, up the amount in their allowance.

Pure defined contribution health plans allow the business to defined their contribution amount, rather than defining the specific plan of coverage. A pure defined contribution plan is not linked to a group health insurance plan. Rather, the defined contribution health plan is the business's health benefit.

With a pure defined contribution health plan:

  • The business provides employees a fixed monthly allowance for health insurance premiums. No group health plan is offered.

  • With the help of a broker or agent, employees purchase their own individual health insurance premiums. Employees can purchase any type of plan from any carrier, including from the new state health insurance exchanges ("marketplaces"). Starting in 2014, all individual health insurance policies will be guaranteed-issue and significant individual health insurance tax subsidies will be available for plans purchased through the exchanges.

  • Employees submit their premium expense to their defined contribution provider, and the business reimburses employees tax-free on payroll, up to the amount available in their allowance.

Defined contribution health plans provide the same tax benefits as a group health plan. However, one hurdle preventing some businesses from switching to a defined contribution health plan was that key employees had a pre-existing condition.

In 2014 this hurdle goes away. With guaranteed-issue policies starting in 2014 and massive health insurance subsides through the individual health insurance exchanges, defined contribution health plans are becoming a popular solution for small businesses.

SHOP Exchange in 2014

Quick summary: The SHOP exchanges are public small group exchanges that will be offered in each state. The SHOP exchange is similar to the current small group market except that the small business health care tax credits will only be available through the SHOP, and a limited number of states will offer "employee choice" plans.

As part of Affordable Care Act (ACA), starting in 2014 small businesses will have the option to purchase a small group plan through the new Small Business Health Options Program "SHOP" exchanges (also called SHOP Marketplaces). The SHOP exchanges are a required program of each state's health insurance exchange.

Small businesses with less than 100 employees or less than 50 employees are eligible, depending on the state. The small business SHOP exchanges will open on October 1, 2013 for shopping and enrollment, with plan coverage starting January 1, 2014.

The SHOP exchanges will work similarly to the current small group market, with the following distinctions:

  • Starting in 2014, the small business health care tax credits will only be available through the SHOP exchanges. The small business health care tax credits apply to employers with 25 or fewer employees, whose employees receive less than $50,000 a year in wages. 

  • Some state's SHOP exchanges will offer small businesses an "employee choice", in which small businesses can offer a choice of health plans to their employees through the SHOP exchange. Originally required as part of the ACA, this "employee choice" feature is now optional for state SHOP exchanges until 2015.

Defined Contribution vs. SHOP Exchange

Here is a comparison of "pure" defined contribution vs. the SHOP exchange for small businesses in 2014.

 

"PURE" DEFINED CONTRIBUTION IN 2014

SHOP EXCHANGE (A SMALL GROUP PLAN) IN 2014

Minimum Employer Contribution?

No Minimum Contribution

Business determines its own contribution strategy.

Generally Requires Minimum Contribution

Business must generally contribute 50%-75% of premium. However in 2014, small employers that fail to meet contribution or minimum participation requirements may be limited to the annual enrollment period, from November 15 through December 15. 

Minimum Participation?

No Minimum Participation

Employer can set eligibility requirements by class of employees.

Generally Requires Minimum Participation

50%-75% of employees must participate in the plan. However in 2014, small employers that fail to meet contribution or minimum participation requirements may be limited to the annual enrollment period, from November 15 through December 15. 

Administrative (HR) Role

No Administrative Hassle

Business spends less than 5 minutes per month administering. 

Requires Additional Admin

Requires paperwork and annual renewals.

Cost

 

Less Expensive Per Employee

Individual health insurance plan rates (on the exchange or off), are on average are less expensive per employee than coverage through the SHOP.

 

More Expensive Per Employee

SHOP plan rates are, on average, more expensive per employee than coverage through defined contribution / individual health insurance. 

Access to Individual Health Insurance Subsidies?

 

Yes, if an employee is eligible (based on household income).

A defined contribution plan does not disqualify employees from receiving subsidies.

 

No.

Offering an affordable, qualified group health insurance plan through the SHOP disqualifies employees for subsidies.

Tax benefits on employer contribution?

 

Yes, when employer uses a Healthcare Reimbursement Plan (HRP) as the vehicle for the defined contribution plan.

 

Yes.

Annual renewals?

 

No. 

Business controls contribution costs year to year.

Varies.

Often there are annual plan renewal increases.

Medical Underwriting?

 

No.

All individual health plans will be guaranteed-issue in 2014.

No.

SHOP group plans are guaranteed-issue for all employees.

Employee Choice of Plans?

Yes.

Employees can purchase any individual or family health insurance plan with their defined contribution allowance.

 

Depends on state and employer's plan design.

In some states, employers will be able to offer employees a choice of multiple plans. This will be required of all SHOP exchanges by 2015.

 

Available for businesses with 50+ employees?

 

Yes.

Although, a defined contribution health plan does not satisfy the "employer mandate" in 2015 (which is only applicable to employers with 50+ employees).

Employers with 50+ EEs will need to do a cost analysis of whether to play, pay, or play different with defined contribution.

 

Varies by State.

The SHOP exchange is only in some states to businesses with 50+ employees. Under ACA, all states will be required to expand to businesses with 50+ in future years.

 

So... which do you think is better for small businesses - "Pure" Defined Contribution or the SHOP Exchange? Let us know in the comments below.

 The Comprehensive Guide to the Small Business HRA