Exploring DC Models in Health Care Benefits

The advent of the “private exchange” has accelerated the public dialogue about DC health benefits, touted as a new way to reduce the increasing cost of health insurance. Today’s private exchange serves as an online benefits marketplace where individuals purchase insurance products, including health, dental, vision, and life insurance, along with other ancillary coverage. Providers such as Aon Hewitt claim that consumers on its private exchange will benefit from competition between carriers, which will in turn reduce “top line cost” of health care. Yet, some have noted that the primary function of a private exchange is to shift rising premium costs to employees, without addressing the underlying cost drivers of health care.  

What is a DC health plan?

In a traditional employer-based health plan, the employer offers a health plan to its employees and pays a certain percentage of the premiums pre-tax. The balance is charged to the employee, pre-tax, and appears as a deduction on the pay stub. When rising premiums require the employer to reduce its contribution percentage over time, employees feel shortchanged because they do not see the full value of the benefit—all they see is an increase in the amount they have to pay for insurance.

In a DC health plan, the total cost of coverage is transparent to the employee. The employer pays a set dollar amount to the employee, which the employee can then use to purchase insurance coverage through the employer’s plan. For example, an employer offers its employees $300 per month, pre-tax, toward benefits. The monthly premium for insurance coverage is $400 per month. The remaining $100 comes out of the employee’s paycheck pre-tax. The employee sees both the employer’s contribution and his own, and is more aware of the total value of the benefit.  He also sees the tax benefit of his own and his employer’s contribution.

Using the DC model can allow an employer to structure benefits in ways that meet the employer’s objectives and employee needs. For example, if rising premium costs are a primary employee concern, the employer can offer a high deductible health plan (HDHP) with a health savings account (HSA), which can also serve as a retirement savings vehicle. Or, if the employer’s contribution exceeds the amount the employee needs to buy health insurance, or if the employee receives health insurance elsewhere, the employee can choose other benefit options if the employer offers them. The DC menu can be simple or complex, depending on the employer’s objectives. Typical offerings include dental, vision, disability, and life insurance.     

Although DC is commonly thought of as simply a way to shift the risk of rising health costs to employees, it can also be a powerful total rewards tool, if properly implemented.

Is a DC health benefits model right for my company?  

When deciding whether to use a DC health benefits model, employers must keep in mind their own company objectives in offering both health and retirement benefits, and how a private exchange may or may not help them meet those objectives. What’s your priority? If you are in a high-turnover industry and your main objective is cost control, your concerns will be very different from an employer who prioritizes employee satisfaction. 

Communication can make a difference in how the benefit is perceived by employees. Are employees aware of the benefits available to them, and the features of each one? Are those features adequately communicated? Clear and comprehensive information about the benefits options can enhance employee satisfaction.

A defined contribution plan can provide employees with more options than a traditional health plan, but will employees understand these options?  Employers should give their workers the tools to make smart choices. Cost comparison tools and calculators should be available so that employees can map their own best path and maximize their benefit dollars. Consider offering a financial wellness program to help them stay on track.

Self-administered, or private exchange?

Many employers are investigating the private exchange option. Under this model, employers no longer manage plan design and insurer relationships. The exchange provides the technology platform and contracts with carriers and vendors that provide insurance coverage to employees through an online exchange system. Some private exchanges are operated by insurance carriers that carry only their own products. Others offer products from several different companies. Most commonly, plans offered through private exchanges are fully insured. 

Coverage offered by an employer through a private exchange will be considered employer-sponsored insurance for purposes of the Patient Protection and Affordable Care Act (ACA) subject to the affordability and minimum value tests and other provisions of the ACA. Premium tax credits available to employees as individuals on the public health insurance exchanges are not available through private exchanges. Plan sponsors should consult with legal advisers for advice specific to their situation.

Some employers want to step back from plan administration and design, carrier relations, and employee communication issues, and believe that a private exchange can relieve them of these tasks and concurrently lower their costs. Other employers want to keep control of their plans and relationships with carriers and employees. Before deciding what camp your company is in, check your priorities and objectives. A private exchange may (or may not) be the way to go. 

 

Cindy Lapoff, Esq., Employee Retirement Income Security Act (ERISA) compliance consultant at Manning & Napier

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.   

Any opinions of the author(s) do not necessarily reflect the stance of Asset International or its affiliates.