Rapidly rising health care costs and new federal insurance requirements may leave many managers scratching their heads at how to obtain quality insurance products at a reasonable cost. New defined-contribution insurance plans provide more coverage choices for employees, while setting fixed costs for employers. These insurance plans, much like the shift in retirement savings in the 1980s, are emerging as a promising alternative for manufacturers looking to add more predictability when it comes to health care costs.
Old concept, new twist
Until relatively recently, defined-benefit pension plans were the norm for employees, who received a set amount of money each week or month after they retired in exchange for their years of service. About 30 years ago, employers began migrating employees over to defined-contribution 401(k) plans, named after the section of the tax code where they’re described. These now-standard retirement plans are individual accounts that invest the combined contributions of both employees and their employers and don’t provide a guaranteed payment, or defined benefit.
The unpredictability of new health insurance requirements and the rising costs of health care are currently pushing many companies and providers to explore a similar model for health care. According to the consulting firm Mercer, nearly half of the 2,900 businesses interviewed in a recent survey reported that they’re considering — or have already switched over to — a defined-contribution health care plan.
How it works
Under the Patient Protection and Affordable Care Act, most individuals must carry health insurance (or pay a penalty), many employers must provide health insurance coverage to their employees (or pay a penalty) and insurance companies must guarantee the issuance of their policies, eliminating pre-existing medical condition exclusions.
To help meet these new requirements, state-specific insurance exchanges will begin providing health care coverage on Jan. 1, 2014. The employees of many small businesses also are expected to participate in these state insurance marketplaces, as well as in private insurance exchanges that have emerged since the law’s passage.
While these private exchanges are still in their infancy, and open enrollment for state-based exchanges isn’t set to begin until late 2013, both are expected to work similarly to online travel sites such as KAYAK.com (http://www.kayak.com) or Expedia.com (http://www.expedia.com), which allow a la carte offerings and side-by-side price comparisons.
Using a private insurance company, benefits provider or state-based exchange, employers set a monthly budget for their workforce and employees choose a plan that provides the best coverage for them and their families. The end result is that managers are spared the annual sticker shock when their insurance providers raise rates for their group coverage plans.
What they offer
Typically, even at large companies, employees under the traditional model have the option to choose from only a handful of insurance plans. Similar to the system used for federal workers, however, defined-contribution health plans through public or private exchanges may offer 10 times as many options. From high-deductible plans to those offering low copays, individuals choose plans based on their families’ specific health care needs.
Online registration makes these programs easy to use for HR personnel and employees. In addition to limiting paperwork and controlling overall benefits costs, these plans also reduce the administrative burden of traditional health care plans, which require time-consuming annual enrollment periods.
For example, a die-casting plant in Rockford, Ill., has 27 full-time employees whose families are on the company’s health insurance at an average cost to the company of roughly $10,000 per family. Those employees have a choice of two health plans, and costs increase an average of 15% per year.
In 2012, the company began working with a private exchange provider to set up a defined-contribution benefit plan set at $8,000 per family per year. Starting next year, employees will have an option of 16 plans and the company is expected to save about $50,000.
Still evolving
Even though the pension model has been around for decades, defined-contribution plans are rapidly developing and the offerings are continuously changing. Check with your financial advisor today to learn what’s available in your area and if these plans are right for your business.
Sidebar: Upcoming PPACA deadlines for employers
Implementation of the Patient Protection and Affordable Care Act is spread out over a decade, which was designed to provide enough time for companies, federal officials, health care providers, employees and insurance companies to plan for the biggest changes to the nation’s health care system in a generation.
But with so many changes inherent in the changeover, it can be difficult to keep track of all the deadlines. Here’s a rundown of the major deadlines facing employers in the coming years:
• Oct. 1, 2013: Open enrollment period for individuals and small businesses begins for state-level health insurance exchanges.
• Jan. 1, 2014: State-level insurance exchanges become operational, tax credits for small businesses to offer health insurance take effect and new rules involving health care coverage waiting periods start.
• Jan. 1, 2015: Manufacturers and other companies that have more than 50 employees may pay a substantial fine if they don’t offer their employees a certain level of health insurance coverage.
• Jan. 1, 2018: Companies must pay an additional tax on high-end health insurance plans that cost more than $10,200 per year for individuals and $27,500 for families.
For more information on this topic, please contact Dennis McLaughlin at [email protected].
