Defined Contribution Health Plans

How Defined Contribution Health Plans Work

Defined Contribution Health Plans offer an alternative to “defined benefit” group health insurance. Just as employers have moved away from defined benefit retirement pensions and toward Defined Contribution 401(k)s, many employers are applying this model to their health benefits programs.

The general strategy of a Defined Contribution Health Plan is that:

• The employer offers each employee a fixed monthly dollar amount  to spend on qualified medical expenses. This might be a direct contribution to a savings account or an allowance the employer agrees to reimburse employees after the expenses are incurred.
• Employees select and purchase the individual or family health plan of their choice. Employees may purchase their own policy directly from any health insurance company, through a broker, or from the HealthCare.gov or state Health Insurance Marketplaces. Depending on the employee's plan documents, employees may also purchase a number of other health care products and services that qualify as eligible expenses.
• The employer reimburses employees up to the amount of their Defined Contribution allowance or the employee submits a claim for reimbursement to their HSA provider.

Defined Contribution Health Plans by themselves are not health insurance plans. Defined Contribution plans give the employer control of benefits while giving employees choice and a great benefit. Note however, that if an applicable large employer uses an ICHRA, which requires employees purchase minimum essential coverage, the plan will meet the employer mandate. In addition, it’s important to note that employers must offer an affordable allowance. Learn more about calculating affordability HERE.

The benefits of a Defined Contribution Health Plan

1. It’s a self-funded health plan

A common reason employers use a Defined Contribution Health Plan is it is a self-funded health plan, which gives them control over exactly how much they spend. With a fully-insured health plan, the costs are controlled by the insurance companies.

2. It’s a tax-free health benefit

Many employers who do not qualify for group health plans or simply can’t afford them often resort to offering taxable wage increases. A Defined Contribution Health Plan is free of payroll taxes for both the employer and employee. As long as the employee uses money to purchase minimum essential coverage, it is also free of income taxes. This makes employers’ benefit dollars stretch a lot farther.

On top of it all, a Defined Contribution Health Plan doesn’t have to be a standalone benefit. Employers who are already offering a group health plan can offer a group coverage HRA (GCHRA) alongside the group plan, and there are a few ways to do that, depending on your needs. The best way to figure out which type of Defined Contribution Health Plan to offer is by taking our quiz below.

Find out which HRA fits your organization's needs best: take the quiz.

Why Defined Contribution Health Plans Work

Defined Contribution Health Plans work for employers and employees because:

• Individual health insurance cost 20% - 60% less than comparable group health coverage. The employer’s healthcare dollars go farther.
• Contributions are tax-deductible to the employer, and employees receive reimbursements tax-free.
• The employer gains fiscal control and predictability over their health benefits budget.
• There are no minimum or maximum contribution amounts—depending on the HRA— and no minimum participation requirements.
• Employees have options in health insurance plans and make consumer-driven choices.
• Depending on the plan and their income level, employees may have access to the premium  tax subsidies through the HealthCare.gov marketplace and/or their state exchange.

Compliance Requirements for Defined Contribution Health Plans

Defined Contribution Health Plans that use a Section 105 Plan as the foundation are considered group health plans. As such, they must comply with IRS, HIPAA, COBRA, ERISA, and the Affordable Care Act (ACA) rules.

This section details compliance requirements that may impact your Defined Contribution Health Plan.

Internal Revenue Service (IRS)

• Plan Documents: The IRS requires that written Plan Documents are established and maintained. Plan Documents define what expenses are eligible for reimbursement, the amount of employer contribution, and other required details about the reimbursement plan.
• Documentation: The IRS requires that employees submit proper documentation verifying their claim for reimbursement, and that supporting documentation is saved on file for ten years.
• Non-Discrimination: Defined Contribution Health Plans must comply with IRS nondiscrimination rules. The rules state the plan must not discriminate in favor of highly compensated individuals (HCIs) with respect to eligibility to participate in the plan or benefits provided under the plan.

Health Insurance Portability and Accountability Act (HIPAA)

• HIPAA Privacy Rules: Defined Contribution Health Plans are governed by HIPAA Privacy Rules. In order to administer a Plan correctly, the entity processing employee reimbursement claims receives Protected Health Information (PHI) that is required to be held confidentially under HIPAA.

Consolidated Omnibus Budget Reconciliation Act (COBRA)

(Only for plans with 20 or more participants)

• COBRA Compliance: Employers must give terminated employees the option to continue their participation in the Defined Contribution Health Plan for a period after termination, and may charge an employee up to 102% of the value of their allowance if COBRA is elected.

Employee Retirement Income Security Act (ERISA)

• Summary Plan Description: Defined Contribution Health Plans are employee welfare plans under ERISA. ERISA requires every [welfare] plan to have a Summary Plan Description (SPD) and to furnish copies to each participant.
• ERISA Compliance: The U.S. federal government has specific regulations employers must comply with in order to reimburse employees for individual health insurance premiums without triggering ERISA plan status for the individual health insurance policies. For example, the employer must not endorse specific individual health insurance policies or pay directly for them.

Patient Protection and Affordable Care Act (ACA)

• Annual Limit Compliance: Section 2711 of the Public Health Services (“PHS”) Act, as added by the ACA, provides that no annual or lifetime limits may be placed on essential health benefits (“EHB”). PHS Act 2711 provides that annual limits and lifetime limits may be placed on benefits that are not EHB, such as health insurance premiums. Defined Contribution Health Plans must be designed to comply with PHS 2711.
• Preventive Care Compliance: Section 2713 of the PHS Act, as added by the ACA, requires group health plans (including Defined Contribution Health Plans) to cover basic preventive health services without cost-sharing.
• 90-Day Waiting Period Compliance: The ACA prohibits waiting periods over 90 days for eligible employees.
• Internal and External Claims Appeal Process: The ACA added new requirements to the internal and external appeal process including how and when procedures are communicated to plan participants.
• Dependent Coverage for Adult Children up to Age 26: Section 2714 of the PHS Act, as added by the ACA, provides that group health plans (including Defined Contribution Health Plans) that make available dependent coverage of children must make such coverage available for children until 26 years of age.
• Uniform Explanation of Coverage and Definitions: The ACA requires that group health plans, participants, and beneficiaries receive a standardized summary of benefits and coverage (“SBC”) and a set of uniform definitions (“Uniform Glossary”), both of which must conform to requirements outlined in the ACA and existing regulations.
• Form 720 Comparative Effectiveness Research (CER) Fee: The ACA includes a "research fee" that plan sponsors must pay on an annual basis annually via Form 720.

60-Day Notice of Material Modification: The ACA requires employers to provide 60 days advance notice to participants when making material modifications to their group health plan (including Defined Contribution Health Plans).