Background: Defined contribution health plans operate the same way a 401(k) plan fixes your annual commitment to employees' retirement savings. The traditional (and original) alternative is the defined benefit model, in which you agree to provide a specific level of benefits, such as a pension amount determined by a formula, or a particular set of health services regardless of whether claims go through the roof.

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Defined Contribution Health Plans:
Review Your Options

2. Background: Defined contribution health plans operate the same
way a 401(k) plan fixes your annual commitment to employees'
retirement savings. The traditional (and original) alternative is the
defined benefit model, in which you agree to provide a specific level of
benefits, such as a pension amount determined by a formula, or a
particular set of health services regardless of whether claims go
through the roof.
The first option you may consider is the health reimbursement account
(HRA) approach. HRAs are not new, but typically have been used to
fund health plan deductibles or medical expenses not covered by the
health plan. Unlike flexible spending accounts and health savings
accounts, HRAs also can be used to pay health plan premiums, and by
doing so, fix your annual contribution to employees' health benefits.
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Pay as You Go
Only the employer can contribute to an HRA; employees cannot add to
it by payroll deduction. There are no minimum or maximum
"contributions," but amounts are fixed for as long as employers choose.
The accounts are "notional," in other words; funds don't actually exist in
a cash account but are disbursed by the employer to employees as they
incur expenses covered under the arrangement. Unused account credits
in one year can be rolled over into subsequent years.

4. Contributions are deductible for the employer and not taxable to the
employee, assuming funds are used for qualified medical expenses.
The accompanying table from The Bailey Group, an employee benefits
firm, illustrates how one employer used the HRA in conjunction with
the health plan it was offering. The table shows higher deductibles
result in higher employer credits to employees' HRA accounts.
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6. Beginning in 2015, employers will face the same ACA-mandated
benefit and affordability standards, whether they use an HRA or any
other type of plan, or incur penalties. This means if you're using an
HRA to support employees' premium payments, you'll need to
calculate your contributions to ensure you pass the 9.5 percent of
household income affordability test, as well as the 60 percent actuarial
value test.
If your HRA is deemed to be an "integrated" one, it will not be subject
to ACA's ban on annual ceilings on health benefit payments. An
integrated HRA is connected to the basic health plan, but can only be
used to provide coverage for specific benefits (e.g. vision or dental) not
covered under the main health plan.
What other defined contribution models could you exploit?
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7. Problems with Public Exchanges
In theory, if you are small enough for your employees to qualify to use
the public exchange (under 100 employees in most states and 50 in
some others, until 2017 when the limits come off), you could simply
drop health plan coverage (without any punitive consequences if you
fall under ACA's 50-employee threshold), boost employees' salaries to
compensate for the loss of benefits, and send them to the exchanges in
2015.
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8. This would probably be a big mistake, however, for several reasons.
First, there is no assurance employees would use the extra cash to buy
coverage. Second, this arrangement would not be deemed as a true
health plan, so, if your company's size makes you subject to ACA, you
would pay the penalty for not providing coverage.
And third, employees would be taxed on the additional income; you
would have to take this into consideration when deciding how much to
give them, i.e. whether to boost their salaries even more to
compensate for the tax consequences.
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9. Private Exchanges Alternative?
Another approach would be to pay the minimum required amount
directly to a private health exchange, which in turn would credit the
amount to each employee's account, ensuring those dollars can only be
used for health coverage. Private exchanges are not subject to any
employee census limits. They are run by stand-alone exchange
operators, as some large benefit consulting firms and some large health
insurance carriers. Your payments to exchange operators are deductible
to you, and non-taxable to employees.
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10. Some private exchanges will offer more choices than others. Naturally,
those operated by insurance carriers would not include plans from
their competitors. They do, however, include ancillary policies from
other insurers which they don't offer themselves, such as vision,
dental, and disability insurance.
After you've crunched the numbers, the decision of whether or not to
go the defined contribution route might ultimately depend on how
your company views employee benefits, and the role of these benefits
in attracting and retaining desirable employees.
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