By Michael Fidlow
Transitioning Away from Defined Benefits to Defined Contribution – Are Employers and Employees Ready for this Approach?
Back in 2002, the IRS said HRA’s are to be funded solely by the employer for substantiated medical expenses used by their employees.
Fast forward to 2020. Now employers are able to use HRA’s to pay premiums employees incur purchasing individual insurance on their own. The complete ruling can be found at: https://www.hhs.gov/about/news/2019/06/13/hhs-labor-treasury-expand-access-quality-affordable-health-coverage.html
So what does this mean?
For the employer, the positives are compelling. They can establish a yearly, affordable amount of contribution to offer their eligible employees for individual medical coverage. The employer may continue to offer group health benefits to one class of employee and offer an HRA to a different class. They would no longer make decisions on health plans for all their employees and avail themselves of involvement with renewals, enrollments, claim issues and/or premium discrepancies with their carrier(s).
Finally, the employer can offer an extended benefit HRA to cover premiums for limited benefit plans, dental and vision care.
For an employer, the negatives are concerning. If they decide to continue to offer medical insurance alongside of an HRA, will they meet participation requirements for the health carrier? Should they no longer offer Medical benefits as a company, will they be able to attract new employees with this approach to benefits? Because of the individual policies that employees will carry, how much time and effort may be taken away from production when these employees are forced to deal directly with carriers on billing and claim issues? Is it possible that some of their workers will obtain fraudulent invoices as proof of coverage and the employer will still wind up paying contributions for coverage they do not actually have?
As an employee, the positives are empowering. They can choose the most favorable medical plan that is consistent with their family’s needs. Employees will be provided financial assistance through the employer HRA so they can pay for their own health plan. Should the amount pledged in the HRA not be overdrawn, it is possible these funds can be rolled over in the following year(s) to help pay for higher premiums, or other claims, they may incur from their health plan. Lastly, they can also use these funds to cover other acceptable expenditures covered under section 213(d) of the IRC – like FSA benefits.
As an employee, the negatives are risky. When they go to the individual market to purchase benefits, will they have carrier choices and premiums that are affordable on the Exchange. Does the network that these carriers offer on the Exchange provide the doctors and hospitals they are accustomed to seeing through employer coverage? When they have coverage/claim issues, how much confidence will they have dealing directly with the carrier’s customer service department to obtain favorable resolution? When it comes to understanding the benefits they purchase, do they really know what they are getting to make the proper decision for themselves and their family? If their employer is not willing to roll over the funds on an annual basis, what happens if they get a large increase in their plan and can no longer afford to pay the difference in premiums?
There is no clear-cut answer to whether this new approach will be acceptable to employers and employees. As with anything new, or updated, the more education we can provide makes a transition more palatable.
From this broker’s perspective, this ruling leaves much to be desired. New York does not have individual rates nor plan designs in the Exchange that compete with employer health plans. The individual carrier networks are limited, the plan descriptions are difficult to comprehend, and their customer service representatives continue to support why it is important to involve broker services whenever you have an issue. There are certainly Employer/Employee advantages to consider but, in speaking with my clients, even with their desire to remove themselves from the responsibilities of offering health benefits, they tell me their loyalty to their employees, and to their broker, will remain intact.
Michael Fidlow is president of Strategic Employer Planning Group, LLC a group health benefits consulting firm for small companies in NY/NJ that employ 2-49 employees.