Defined Contribution Plans & Private Exchanges – Know Before You Go

Know Before You Go

By Cindy Lapoff, ERISA Benefits Consultant

Defined contribution concepts are commonplace in retirement plan circles. The model is familiar: employers and employees contribute definite amounts of money to the retirement plan, and at retirement, employees are entitled to receive their account balance, either in a lump sum or paid out over time. Responsibility for investing the account, and for saving enough to meet income needs in retirement, belongs to the employee.

Defined contribution concepts have been migrating to the world of health and welfare benefits for a number of years. The advent of the “private exchange” and related press coverage has accelerated the public conversation about defined contribution health benefits, as the private exchange is being touted as a new way to reduce the increasing cost of health insurance. A private exchange is an online benefits marketplace where individuals purchase insurance products, including health, dental, vision, and life insurance, along with other ancillary coverage. Aon Hewitt claims that consumers on its private exchange will benefit from competition between carriers, which will in turn reduce “top line cost” of health care. Some commentators have noted, however, that the primary function of a private exchange is to shift the risk of premium increases away from employers to employees without addressing the underlying cost drivers of health care.

When reviewing these issues, employers must constantly keep in mind their own company objectives in offering health and welfare benefits, and how a private exchange may or may not help them meet those objectives.

Employers offering both health and retirement benefits should keep in mind how those benefits work together to meet 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.

Is Defined Contribution Right for My Workplace?

A company that sponsors a cafeteria plan under Section 125 is probably already familiar with the defined contribution concept. The difference can be in how the benefit is communicated. Do employees see employer contributions on their pay stubs? Are they aware of all the different benefits available to them, and what is included in each one? For that matter, are you aware of all the features of all the benefits your company offers? Are those features communicated? Frequently, vendors include some communication tools in the package of services they deliver. It’s worthwhile to make sure you are getting everything you are paying for, and telling your employees about it, often. Clear and comprehensive information about the benefits options can enhance employee satisfaction.

More Options, but What do They All Mean?

A defined contribution plan can provide employees with more options than a traditional health plan. At the same time, employees may not be equipped to evaluate the options. Employers who provide employees with new options should give them the means 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. Keep in mind that employees will be required to evaluate and select their health care options within the confines of the employer contribution and their own budget. Consider offering a financial wellness program to help them stay on track.

Self-Admistered or Private Exchange?

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

Legal Issues

Coverage offered through a private exchange can be an employer-sponsored plan for purposes of ERISA, the Internal Revenue Code, and the Affordable Care Act. Coverage offered by an employer through a private exchange will be considered employer-sponsored insurance for purposes of the Affordable Care Act if it meets the affordability and minimum value tests and otherwise complies with the ACA. Note that the premium tax credits (subsidies) available to employees as individuals on the public health insurance exchanges are not available through private exchanges. Employers who offer Health Reimbursement Arrangements can “integrate” those plans with private exchange coverage as long as the employees are purchasing policies under the employer’s plan. HRAs cannot be integrated with individual policies purchased on public or private exchanges.

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 lower their costs at the same time. Other employers want to keep control of their plans and of the relationships with carriers and employees. Before deciding what camp your company is in, check your objectives. A private exchange may (or may not) be the way to go.