"Pure" Defined Contribution Health Plans provide small and medium sized businesses an affordable health benefits solution. A common question from business owners, HR professionals, CPAs, and brokers is "who can administer the Defined Contribution Health Plan?"
This article examines the basic rules of "Pure" Defined Contribution Health Plans and who can administer the reimbursement plan in a compliant way.
How Do You Set Up a "Pure" Defined Contribution Health Plan?
To set up a Defined Contribution Health Plan, employers should set up a formal plan to ensure compliance with the ACA, the IRS, HIPAA, and ERISA. Because of new ACA reforms (more on this below), one option is to use a limited purpose Section 105 medical reimbursement plan, such as a Healthcare Reimbursement Plan (HRP), as the foundation for the Defined Contribution Health Plan.
In this article, we are referring to a "Pure" Defined Contribution Health Plan that is set up using an HRP.
Who Can Administer a "Pure" Defined Contribution Health Plan?
For a business to administer a formal Defined Contribution Health Plan (one set up with an HRP), they need to have legal Plan Documents in place. The Plan Documents describe the plan's terms and conditions related to the operation and administration of the plan.
Since this type of Defined Contribution Health Plan is subject to ERISA, a legal plan document must be provided in writing. If a Defined Contribution Health Plan exists without a written Plan Document the business is out of compliance.
In addition to the Plan Document, a business needs to make sure they have certain safeguards in place to stay compliant with the IRS, ERISA, HIPAA, and ACA. This includes how the plan is set up and designed, and how the plan is administered.
Because of these compliance reasons, and for ease of use and time savings, virtually all businesses use a third party to administer the Defined Contribution Health Plan. There are three main options for compliant administration: a traditional third party administrator ("TPA"), a Defined Contribution Software provider, or a consultant such as a CPA or Broker.
A Traditional TPA helps a business: set up the plan, create and distribute Plan Documents, manage all reimbursement funds, review claims for reimbursement, keep medical receipts on file, and issue reimbursements to employees. Traditional TPAs require pre-funding of the Defined Contribution allowances and may have limited plan design options and limited online access.
A Defined Contribution Software provider helps a business: set up the plan, create and distribute Plan Documents electronically, provide a "quickbooks-like" tracking of reimbursement funds, review claims for reimbursement, keep medical receipts on file electronically, and notify the employer (through the software) when to reimburse employees via payroll. Defined Contribution Software does not require pre-funding of allowances, and is not a fiduciary.
A CPA or Broker helps a business: set up the plan, create and distribute Plan Documents, review claims for reimbursement, keep medical receipts on file, and may manage all reimbursement funds and issue reimbursements to employees. CPAs or Brokers often help companies run these plans "on the side" and administration can be time-consuming. Many CPA's or Brokers end up partnering with a Defined Contribution Software provider for easier administration of the plan and more flexibility in plan design.
The other way businesses occasionally administer a Defined Contribution Health Plan is by self-administration.
Self-Administration: Technically, a business can self-administer its own Section 105 Defined Contribution Health Plan, but failure to comply with the minimum federal and ACA administration requirements is common without utilizing proper Defined Contribution Software or a TPA. Businesses that self-administer are frequently out of compliance with ERISA, HIPAA, COBRA, and ACA regulations, and businesses can face costly fines for being out of compliance. And, if a business puts into place all of the safeguards needed for compliance, the administrative cost likely outweighs the benefits of the Defined Contribution Health Plan.
Defined Contribution Health Plan Compliance
So, what are the compliance requirements discussed above?
1. Tax Savings & IRS Compliance: The IRS requires that a formal Defined Contribution Health Plan (with Section 105 Plan Documents) be established in order for reimbursements to be tax-deductible for the employer, and pre-tax for employees.
2. Federal Compliance: The federal government has guidelines for employers who want to contribute to employee's IRS-qualified medical expenses:
HIPAA (Medical Privacy): Employees’ medical information needs to be kept HIPAA-protected, and all medical documentation stored in compliance with HIPAA for 10 years, as required by the IRS for audit purposes. Employers should never see employees’ medical information, including the details of their premium expense, to stay HIPAA compliant and stay nondiscriminatory.
ERISA: Under ERISA, employers are not allowed to “endorse” a specific individual health insurance plan. When offering a Defined Contribution Health Plan, the employer should not know the details of individual health insurance plans purchased by employees. They should only know that it is a qualified medical expense allowed by the plan.
3. ACA/Health Care Reform: The Affordable Care Act (ACA) introduced new requirements for Defined Contribution Health Plans including how benefit information is presented to employees (Summary of Benefits & Coverage, or SBC), new reporting forms (720/5500) and new plan design requirements including compliance with PHS 2711 (prohibition on annual limits) and PHS 2713 (preventive care).
What questions do you have about who can administer a "Pure" Defined Contribution Health Plan? Leave a comment below and we'll help answer.