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Small Business Employee Benefits and HR Blog

Top 3 Reasons Defined Contribution is the Future of Health Benefits

January 16, 2015
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Kaiser Health News recently posed the question: “What if employers started giving workers a chunk of cash to buy health insurance on their own instead of offering them a chance to buy into the company plan? Are workers ready to manage their own health insurance like they do their 401(k)?”

Defined Contribution is the Future

The answer is unequivocally, yes.

The Affordable Care Act opened the doors for high quality health insurance through the individual exchange. Employees stand to benefit from access to premium tax credits, but most of all it is the small business owners who have something to gain from the defined contribution model.

Although I will not detail the term here, there exist a wealth of resources on the definitions, types, and structures of defined contribution health plans.

Reason 1. Guaranteed-Issue of Individual Health Plans

Prior to the ACA, individuals with pre-existing conditions could be excluded from coverage under individual policies. This contributed to the moral obligation of employers to provide their employees with group coverage, which does not discriminate based on health status.

However, a big part of the ACA was to establish, for the first time, the guaranteed-issue of individual health plans. This means that the healthy and the sick, alike, can buy the same policy.

Not only is the guaranteed-issue of individual plans responsible toward those who most need medical insurance, but it divorces the moral obligation from employer-provided health insurance. Employees can now get high quality health insurance without having to go through their employer.

Small business owners can then use a defined contribution plan to reimburse a pre-determined amount of the employees' expenses.

Reason 2. Limited Exposure to Business Owners

Group health insurance is overpriced, and the cost is only rising. A 2014 study by S&P Capital IQ suggests that American business owners could save $3.25 trillion through 2025 by moving their employees to the individual exchange. Those savings are worth one fifth of the entire value of the US economy.

3.25 trillion is a staggering number. 3.25 trillion is evidence enough to make the change. Business owners save money and can still pay for some or all of their employees' health insurance premium costs.

Can you imagine a world where employers could budget years in advance for how much they would be spending to provide health benefits to their employees and still know that they were providing a good service? That is happening now. Employers have options for how to set up taxable or tax-free reimbursements to their employees.

Reason 3. Access to Premium Tax Credits

Employees have a lot to gain from the individual insurance market. They can choose what kind of insurance they want, they can keep that insurance even if they leave their job, they can see major front-end discounts if they qualify for premium tax credits.

According to the McKinsey Center for U.S. Health System Reform, 85 percent of Marketplace enrollees qualified for premium subsidies. Not only that, but the average subsidy lowered the cost of insurance by 76 percent.

Can you imagine if you could save 76 percent on your other monthly bills?

Conclusion

Individual health insurance makes the most sense for Americans. It makes the most sense for W-2 employees, and individuals not yet in the labor market. It makes the most sense for the healthy, and the sick. It makes the most sense for employers.

Defined contribution is an easy strategy by which employers can cover their employees’ health insurance costs in a consistent and predicable way. It is the obvious way forward in the wake of the Affordable Care Act. And by 2020, it will most likely be the single most common health benefits strategy for small businesses in the United States.

What are your thoughts on the future of health benefits? Let us know in the comments section below.

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