An employer’s health insurance benefits are a huge consideration for job seekers. But offering traditional group insurance can be expensive and tricky. But unless you're extremely well-versed in health insurance, you could be choosing a plan with coverage that doesn't fit your employees' needs.
One solution is a consumer-driven health plan. A CDHP can help you give your employees more power over their healthcare while giving you more control over your budget. But what exactly is a CDHP, and how do you know if a CDHP is right for your organization?
In this article, we’ll go over three popular questions employers have about CDHPs, including:
- What is a consumer driven health plan?
- What are the benefits of a consumer driven health plan?
- What are the common types of consumer driven health plans?
What is a consumer-driven health plan?
A CDHP is a plan where a portion of your employees’ healthcare services are paid for with pre-tax dollars. CDHPs are made up of two components: an HDHP and a pre-tax health fund that is used to pay for healthcare services that the HDHP doesn't cover. Although they were initially created to reduce the amount of money employers paid for health coverage, CDHPs are now highly regarded for empowering employees to make their own decisions about their health care.
CDHPs come in two general forms. The first type includes an employer-sponsored group plan and a health savings account that allows employees to use pre-tax money to help pay for qualified out-of-pocket medical expenses, such as co-pays and deductibles.
The second type of CDHP is commonly referred to as a “pure defined contribution” health plan. This is where the employer offers health benefits in the form of a monthly pre-tax allowance to reimburse individual health insurance premiums and over 200 other eligible expenses. With this type of CDHP, the employer doesn’t offer a group health plan at all.
Both of these plans offer a way for employers to provide a more personalized and affordable health benefit for their employees.
What are the benefits of a consumer driven health plan?
CDHPs offer alternatives to traditional group health insurance, and are an excellent way for employers to offer health benefits to employees at an affordable cost. They have become a popular option for many businesses since they are easier to budget for and encourage employees to make their own informed healthcare decisions which, in turn, can boost retention.
Other CDHP benefits for employers include:
- Saving on premium costs: Premium costs tend to be lower for CDHPs than other types of healthcare plans, such as preferred provider organization (PPO) plans.
- Reducing medical costs: Overall medical costs are lower compared to traditional plans because participants take on more of the out-of-pocket costs.
- Increasing employee morale: Employee satisfaction increases because employees have more choices in how their healthcare is handled.
- Tax savings: As long as the contributions are considered a qualified medical expense, the money taken out of a CDHP account is free of income tax.
- Potential for annual rollover: Certain CDHP plan funds can roll over from year to year, at the employer’s discretion. Other accounts stay with the employee, even if they leave the company, for future use.
What are the common types of consumer driven health plans?
CDHPs come in various forms, but typically include a pre-tax health fund. A major difference between the different types of health funds is whether they are funded by the employer or employee, but they all focus on encouraging employees to take a more active role in choosing their healthcare.
The three main types of pre-tax health funds associated with a consumer-driven health plan include:
- Health savings accounts: An HSA is an employee-owned tax-advantaged account set up to pay for healthcare expenses in conjunction with a qualifying high-deductible health plan (HDHP).
- Health reimbursement arrangements: An HRA is a tax advantaged health benefit that allows employers to reimburse employees for their healthcare costs. Certain types of HRAs can be integrated with a group health plan while others are stand-alone.
- Flexible spending accounts: An FSA is an employer-owned tax-advantaged account that provides employees with a set amount of funds to use during the year, and can be paired with any type of health insurance plan.
The most customizable of these three options is the HRA. In the following sections, we’ll go over the most popular types of HRAs and how you can use them as part of a CDHP.
Qualified small employer HRA (QSEHRA)
A qualified small employer HRA (QSEHRA) is for employers with less than 50 employees that don’t offer group health insurance, making it a pure defined contribution health plan. With a QSEHRA, employers set an allowance up to the annual contribution limits and reimburse employees, tax-free, for their qualified medical expenses, including individual health insurance premiums.
Reimbursements are free of income taxes for employees—as long as their insurance policy meets minimum essential coverage (MEC). For employers, their contributions are fully tax deductible and not subject to payroll taxes, making a QSEHRA a great cost-saving solution.
Individual coverage HRA (ICHRA)
An individual coverage HRA (ICHRA) is another pure defined contribution health plan. It’s for employers of all sizes and functions much like the QSEHRA, though with greater flexibility when it comes to plan design. With an ICHRA, you offer employees a monthly allowance, employees choose and pay for individual coverage and other qualified expenses, and you reimburse them up to their allowance amount.
The major difference between an ICHRA and a QSEHRA is that the ICHRA comes with 11 employee classes employers can use to structure benefit eligibility and allowance amounts. These classes add greater control and flexibility to your organization’s health benefit while may help you and your employees save money on premiums.
Group coverage HRA (GCHRA)
CDHPs can also contain an integrated HRA—also known as a group coverage HRA (GCHRA). A GCHRA is a health benefit for employers that want to supplement their group health insurance plan. Using a GCHRA, employers are able to set their own reimbursement allowance for employees to use each month toward out-of-pocket expenses that aren’t fully paid for by the group health plan.
For example, if you’re switching to a HDHP for the premium savings, a GCHRA can cover the additional out-of-pocket deductible costs for your employees. Your business will save money with the HDHP and your employees will still have comprehensive coverage.
With healthcare costs rising, more and more organizations are looking for alternative ways to lower their overall spending while still providing their employees with a valued health benefit. If you want a health plan that offers your employees a different way to take charge of their health care, then a CDHP may be the right plan for you and your family.
Whether you’re looking for an integrated or stand-alone HRA, PeopleKeep has a solution for you. Contact our personalized benefits advisors and they’ll get you and your employees set up with the right health benefit for your business.
This article was originally published on February 2, 2021. It was last updated February 7, 2022.