Due to the annual cost increases associated with traditional employee health benefits, a new form of health benefits, called a defined contribution health plan, is quickly gaining popularity in New Jersey. Defined contribution health plans allow New Jersey employers to offer health benefits to employees without offering a traditional group health insurance plan.
Rather than paying the costs to provide a specific group health plan (a "defined benefit"), New Jersey employers instead fix their costs by establishing a monthly dollar amount (a “defined contribution”) that employees spend on their individual healthcare premiums. Employees participating in a defined contribution health plan in New Jersey can request tax free reimbursement for their individual healthcare premiums.
Recruiting and retaining key employees is important to every company and a company's health benefit program is a critical part of the compensation it offers to its employees.
The general concept of a defined contribution health plan in New Jersey is that a company gives each employee a fixed dollar amount that the employees use to reimburse for their premiums.
Defined contribution health plans in New Jersey are programs that allow employees to be more involved in their health care choices. On this page and with our free guide, you'll learn about:
In New Jersey, employers must use an ERISA and HIPAA-compliant platform to administer a defined contribution health plan to avoid compliance issues.
The federal government has guidelines for New Jersey 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.
To avoid endorsement of individual health insurance plans, New Jersey employers:
To comply with (1) above, while still making contributions to a defined contribution health plan in New Jersey that can reimburse for individual health insurance premiums, employers should follow these additional guidelines:
Generally, the benefits of a defined contribution health plan in New Jersey include:
With a defined contribution health plan in New Jersey, an employer may choose to 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." Additional employer guidelines consist of the following:
Yes. Defined contribution health plans are 100% allowed in New Jersey if administered properly. Nothing in the New Jersey insurance code restricts an employer (small or large) from offering a defined contribution health plan that reimburses employees for individual health insurance plans.
Some companies may want to pay directly for its employees' individual health insurance plans without utilizing an IRS, ERISA and HIPAA-compliant defined contribution health plan, but 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 employees' individual health insurance plans:
1. Federal Compliance Issues
Paying for individual health insurance in New Jersey without an ERISA and HIPAA-compliant defined contribution health plan causes the employer to "endorse" the individual health insurance plans
When a New Jersey employer pays directly for an individual health insurance plan, they effectively endorse each employee's individual insurance plan as part of an employer-sponsored group health benefit offering. In other words, according to federal law, the employer is treating the individual plan as part of an employee welfare benefit plan regulated by ERISA. Because most individual health insurance plans do not meet all ERISA group plan requirements, the employer is out of compliance.
Separately, an employer is not allowed to know the details of employees' HIPAA-protected medical expenses such as healthcare premiums. When an employer pays for the individual policy, they can violate HIPAA-privacy requirements if they know the details of a HIPAA-protected employee expense.
The federal government has guidelines for employers who want to contribute to employee's individual health insurance premiums without violating the HIPAA and ERISA regulations. An ERISA and HIPAA-compliant defined contribution health plan will ensure compliance with federal law.
2. Increased Tax Liability
Paying for individual health insurance in New Jersey without an IRS-compliant defined contribution health plan causes the payments to become taxable income to the employees
If an employer pays for employees' individual health insurance premiums in New Jersey without utilizing an IRS-compliant defined contribution health plan, such payments must be reported as taxable income to the employees.
The IRS requires that legal plan documents be established in order for New Jersey employees to deduct the individual health insurance premiums from taxable income on the annual W-2.
An IRS-compliant defined contribution health plan will ensure the tax deductibility of employee's individual health insurance premiums.
In New Jersey, there are no minimum or maximum contribution requirements that a New Jersey employer must contribute to an employee’s defined contribution health plan. The employer may choose the dollar amount they wish to contribute to an employee, ranging from $0 to an unlimited amount per month.
Similarly, there is no minimum employee participation requirement that an employer must meet in order to offer a defined contribution health plan. A defined contribution health plan may be offered by an employer of any size in New Jersey, even if only one employee chooses to participate.