With the implementation of the Affordable Care Act's new tax credits and penalties, CPA's and Accounting Professionals are becoming a "go-to" person for health insurance decisions. And, as there are additional financial and tax benefits of individual health insurance, more clients are asking CPA's about Defined Contribution Health Plans.
Here's what CPA's need to know about Defined Contribution Health Plans.
What is Defined Contribution?
Rather than paying the costs to provide a specific group health plan benefit (a "defined benefit"), employers can fix their costs on a monthly basis by establishing a Defined Contribution Health Plan.
“Pure” Defined Contribution Health Plans are an affordable alternative to employer-sponsored group health insurance plans. Defined Contribution Health Plans by themselves are not health insurance plans.
The general concept of a Defined Contribution Health Plan is that a company gives each employee a fixed dollar amount (a "Defined Contribution") that the employees choose how to spend. Employees are allowed to use their Defined Contribution to reimburse themselves for individual health insurance.
Defined Contribution Health Plans are programs that allow employees to be more involved in their health care choices. With a Defined Contribution Health Plan, employees are responsible for selecting an individual health insurance plan and making payments out of their own finances.
Defined Contribution Client FAQs
The following are frequently asked questions that CPA's receive from clients about "Pure" Defined Contribution Health Plans.
Are there Minimum or Maximum Employer Contribution Amounts?
No. There is no limit on the amount of money an employer can contribute to an employee’s Defined Contribution Health Plan. Also, there is no minimum contribution requirement. The employer can choose exactly how much money they want to contribute from $0 to an unlimited amount per month.
Is There a Minimum Employee Participation Requirement?
No. There are no minimum participation requirements that a company must meet in order to offer a Defined Contribution Health Plan. Also, there are no maximum participation requirements. A Defined Contribution Health Plan can be offered by a company of any size even if only one (1) employee chooses to participate.
Is an Employer Required to Fund a Defined Contribution Health Plan in Separate Bank Accounts?
No. Defined Contribution Health Plans do not need to be funded until an actual reimbursement is made. A company is not required to fund any portion of employees' Defined Contributions in separate bank accounts.
In fact, it is recommended that the company keep the Defined Contributions in their own bank accounts (e.g. a general purpose bank account) and handle reimbursements via payroll for maximum savings and control.
Can an Employer Give Employees Different Amounts with Defined Contribution Health Plans?
Yes! With a Defined Contribution Health Plan, an employer can give employees different contributions based on classes of employees. Federal regulations state that “a plan or issuer may treat participants as two or more distinct groups of similarly situated individuals if the distinction between or among the groups of participants is based on a bona fide employment-based classification consistent with the employer's usual business practices.” Read more about Defined Contribution Employee Classes.
Why Can't Employers Just Pay Directly for Employees' Individual Health Insurance Plans?
Some employers may ask why they can'y just pay directly for an employee's individual health insurance plans without utilizing an ERISA and HIPAA-compliant Defined Contribution Health Plan. Doing so will put the employer out of compliance with federal regulations and increase the employer's (and employee's) tax liability.
There are two major reasons an employer should never pay for its employee's individual health insurance plan:
Federal Compliance Issues - Paying for Individual Health Insurance without a Defined Contribution Plan Causes the Employer to "Endorse" the Individual Health Insurance Plans
Increased Tax Liability - Paying for Individual Health Insurance without a Defined Contribution Plan Causes the Payments to Become Taxable Income to the Employees
What Types of Expenses Are Covered by Defined Contribution Health Plans?
A Defined Contribution Health Plan can reimburse qualified individual health insurance policies, as detailed in IRS Publication 502. See: What Health Insurance Premiums Can Section 105 Plans Reimburse?
How Can We (the Employer) Contribute to Individual Health Insurance Plans without Violating Federal Law?
The employer can use an ERISA and HIPAA-compliant Defined Contribution Health Plan to contribute to employees' individual health insurance costs without violating federal law.
The federal government has guidelines for employers who want to contribute to an employee's individual health insurance premiums. Specifically, the employer must take special steps to avoid "employer endorsement" of the individual plans, and design the plan to comply with ACA regulations.
There are also new health reform regulations to keep in mind. To comply with new ACA regulations, the Defined Contribution Health Plan needs to be designed to comply with PHS Act 2711 (annual limit requirements) and 2713 (preventative care requirements). Many employers use a limited Section 105 medical reimbursement plan as the foundation of the Defined Contribution Health Plan.
To comply, the Section 105 plan is designed to reimburse employees for:
- Health insurance premiums up to a specified monthly healthcare allowance, and
- Limited preventive care as required by PHS Act Section 2713.
These types of limited-purpose Section 105 medical reimbursement plans are sometimes called Healthcare Reimbursement Plans, or HRPs.
To ensure compliance with the various federal and ACA regulations, virtually all employers (and CPA's) work with a Defined Contribution Software provider.
How to Help Clients Set up a Defined Contribution Health Plan
Employers can work with their CPA and Defined Contribution provider to take the following four steps to set up a pure Defined Contribution Health Plan.
Step 1: Determine a date to cancel the company's group health insurance plan (if you have one).
Step 2: Define any amount you can afford for health benefits. Use Defined Contribution Software to set up formal plan documents and to give each employee a fixed allowance amount to use for individual health insurance.
Step 3: Select an Insurance Professional, and/or provide information about the new Health Insurance Marketplaces to help employees shop for and purchase individual health policies (typically, this saves the employee 20-30%).
Step 4: Use Defined Contribution Software to reimburse employees via payroll.
Questions? Leave a comment below.