Private-sector employers, especially small business owners, are the backbone of our economy and our country. Unfortunately they are being overly burdened by increasing operating expenses, specifically their health insurance premiums. For the last 40 years employees' common expectation was that their health insurance would be paid for by their employer. This was never the best way for people to get their health insurance but a way around the wage and price controls at the end of World War II.
So what would a better system look like? In a nutshell it would consist of:
1. Completely portable policies that are owned and designed by the employee;
2. Tax-free, fixed-dollar contributions from the employer and employee; and;
3. Choice for each employee of which carrier and which plan design provides the best protection for their family.
Fortunately for employers and employees there is a platform that exists today that can accomplish these features. It is called a Defined Contribution Health Plan. And just as Defined Contribution Retirement Plans (401k) replaced Defined Benefit (pension plans) before them, they are revolutionizing employee benefits.
Defined contribution plans offer several benefits for employers:
* Attract and retain good employees: The purpose of an employer's benefit plan is to attract and retain good employees. Unfortunately the current group-benefits model makes accomplishing this and remaining profitable a difficult task. The defined contribution approach gives employees more choice, better coverage, and more affordable options that stretch both the employer's dollar and the employees.
* Cost control and predictability: One of the greatest benefits of the defined contribution approach is that employers can define the allowance that is affordable to them and the employees can choose from a multitude of plans which one offers them the best balance of coverage and premiums. Also, the carriers aren't dictating participation and funding requirements or throwing in rate increases that can throw a company's budget out of balance.
* FICA savings: For employers that currently do not offer benefits to their employees they are missing out on some huge tax advantages. For every dollar the employee sets aside for their premiums or for spending accounts such as HSAs or FS's the employer saves 7.65 cents or 7.65 percent the matching FICA contribution. With the average family spending around $10,000 on premiums and HSA/FSA contributions this would equal close to $800 a year per employee. A company with 20 employee families would look to save over $15,000 just by offering a Section 125 plan.
* Greater appreciation from employees: Unfortunately most of the time, effort and money spent by employers to offer benefits to their employees goes unappreciated. The high premiums of group insurance plans typically require a significant share of that cost to be contributed by the employee. While this can by payroll deducted on a pretax basis the amount required to contribute is still more than most employees can afford. The thousands of dollars employers are willing to contribute are left on the table because the employee cannot afford their share. To the employees in this situation you may as well not offer benefits at all.
The defined contribution platform is the best solution for most businesses today. The primary reason small businesses have purchased small-group plans, is because they cover pre-existing conditions. But starting in January 2014 everyone will be "guarantee issue" and most employees (68 percent of U.S. citizens) will receive generous premium subsidies on the health insurance exchanges where the employee will be able to purchase "individual" insurance more cost effectively. The Congressional Budget Office and economists predict that between 38 million to 150 million people will move from employer group plans to individual health plans available on the public and private exchanges. More mandates and higher costs will be placed on employers with the implementation of PPACA over the next year; many more businesses will be looking for a solution, and it is clearly the best solution for employers with fewer than 50 full-time or equivalent employees, the platform consists of a few basic points:
* The employer setting up a cafeteria plan and/or HRA to reimburse premiums;
* The employer deciding on whether they want to make a contribution and the amount;
* Employees meeting with brokers to decide the best options in major medical, supplemental, and spending accounts for their family;
* Enrolling their premiums in the cafeteria plan;
* Reimbursements for individual plans made to employees.
This new platform will be a big part of the employer-sponsored insurance market in the next few years, and is a proposed solution for the future solvency of Medicare and Medicaid. Please note even if the employer does not offer health benefits, full- and part-time employees that have private individual health insurance can benefit from tax-free reimbursement (HRA) of their premiums.
Frank Welsh Sr. is a broker with Lookout Alliance in Reno. Contact him at frank@lookoutalliance.com or 775-682-4333.
