Everything Old is New Again
Back in the early nineties, Defined Contribution Health Plans, (also called 105 medical plans) were in vogue. This tax benefit, which allowed employers to provide tax-free health plans to their employees, provided a much needed benefit to remain competitive in the marketplace. Cafeteria Plans, also in vogue, provided a “cafeteria” of benefits where employees could choose from an a la carte menu of benefits, customized to each employee’s particular needs.
These benefits, though versatile in design, did not gain tremendous popularity for a number of reasons. Most health plans were relatively affordable, premiums and out-of-pocket expenses were low. There was a lack of sufficient administrators and technology to manage the plans. Employers found it easier to pick a health plan, have employees select a reimbursement account for out-of-pocket expenses, and focus on other, more challenging concerns.
Fast forward to today with the passing of the Patient Protection and Affordable Care Act (PPACA), high health insurance premiums costs, a tight job market and an economic recession; employers are looking for ways to control costs without sacrificing employee health benefits.
New Relevance Under PPACA
Defined Contribution Health Plans and Cafeteria Plans have a new relevance today. With PPACA and the option for an employer to drop health insurance coverage and send their employees to a private or a public marketplace, providing funds in a tax-deferred plan provides a transition from group to individual health insurance coverage. Employers win by being able to budget for health expenses, setting a fixed amount they will contribute to either a Defined Contribution Health Plan (105 Medical Plan also called a Health Reimbursement Arrangement (HRA) which is a 105 Plan with the option for unused balances to be carried forward to the next year.) or to a Cafeteria Plan.
A company considering dropping their group health coverage may wonder why provide a Defined Contribution Health Plan or contribute to a Cafeteria Plan? By making this transition versus “going cold turkey” and dropping all health coverage, employers will have a greater likelihood that employees will obtain some type of health insurance. Beginning in 2014, with the tax for individuals that don’t obtain health insurance being quite low (larger of flat fee of $695 for singles | $2,085 for families or 2.5% of income by 2016), absent any type of financial encouragement from employers, employees may take their chances and not elect health insurance coverage. With the vast majority of employees today covered in a group health plan (Kaiser 2012 survey estimates 73% while CBO estimates that 66% of nonelderly are insured through employer, including unemployed nonelderly), they are not financially and physically prepared for the risks involved with having no health insurance coverage. Employers may be impacted with higher absenteeism due to untreated health conditions. Furthermore, when the country comes out of the recession and recruitment and retention moves to the forefront for employers, offering a benefit for employees to be able to pay for some or all of their individual health coverage will be important.
How Defined Contribution Health Plans and Cafeteria Plans Work
Which plan is right for this purpose? How does each of them work? A Defined Contribution Health Plan is funded with employer dollars only. Employers have many choices on how to design their plan as long as it meets IRS requirements including that the plan is not discriminatory (favoring highly compensated employees). In addition to being able to use these plans to pay for individual health insurance, reimbursement of medical and dental expenses is also allowed. One important feature to consider is whether or not the plan will allow funds to be carried forward into the next plan year. The benefits of having the funds roll over is that employees will not be motivated to spend down their account with fear of forfeiture at the year end.
Defined Contribution Health Plans can be used in conjunction with other tax deferred vehicles. Employees can also contribute to a health flexible spending account in order to set aside pre-tax funds for health expenses that exceed the value of their Defined Contribution Health Plan. If an employee elects a High Deductible Health Plan and wants to contribute to a Health Savings Account (HSA), their Defined Contribution Health Plan will need to be limited to dental, vision and preventative care expenses in order to maintain their eligibility to contribute to an HSA. Defined Contribution Health Plans are not portable should an employee leave their employer, but plans can be designed to allow former or retired employees to access them as well.
Cafeteria Plans can be designed to allow for reimbursement of individual health insurance through a reimbursement account. Employers can contribute to the cafeteria plans as well as employees. Employees can also elect pre-tax accounts for health and dependent care expenses. Unlike Defined Contribution Health Plans, Cafeteria Plans cannot be designed to allow for a carry forward amount into the next plan year. Any money remaining in the accounts after the end of the run out will be forfeited. Employees can change their elections (for both employer and employee contributions) if they have a qualifying status change. Employees can contribute to a cafeteria plan and have a Defined Contribution Health Plan. Similar to a Defined Contribution Health Plan, if an employee elects a High Deductible Health Plan and wants to contribute to a Health Savings Account (HSA), their Health Care Flexible Spending Account will need to be limited to dental, vision and preventative care expenses in order to maintain their eligibility to contribute to an HSA.
What Remains to Be Seen Under PPACA
There are unresolved PPACA issues related to both of these plans. Will employer contributions to these plans be considered minimum essential coverage and therefore prevent employers from being penalized for not providing health coverage? Will Defined Contribution Health Plans be able to have a plan limit for reimbursement or will the same PPACA rules apply as with traditional health plans when, beginning in 2014, no annual limits are allowed?
Contributing to a defined contribution health plan or cafeteria plan can still make sense if an employer continues to maintain group health coverage. Employers will fund a fixed amount for health coverage or health expenses to be paired with a High Deductible Health Plan with the same budgeting goal in mind. No longer will they continue to pay higher and higher premium costs, but the employer instead provides a fixed amount, and any increases over time are borne by employees.
This is a time of change in the health insurance market. It is a time to revisit old ideas to see how in today’s world they can be looked at in new ways to provide some tangible benefits.