Defined contribution health plans represent a new way of doing employee benefits. Defined contribution strategy rests on the many advantages of the Qualified Small Employer HRA (QSEHRA) for small business owners and the Individual Coverage HRA (ICHRA) for businesses of all sizes. Our favorite part? Freedom. The freedom to choose a contribution amount that works for your budget, and the freedom to customize the design to help your bottom line.
But in the midst of all of this freedom, there's a few rules you need to know about when designing your HRA. We’d like to lay out the options here, in one place, so that you can see them in a concise and simple way.
What is a defined contribution health plan?
A defined contribution health plan, also referred to is defined contribution insurance, is an arrangement between employer and employee that allows employers to set aside dollars each month to contribute toward employee's individual health insurance plans. These contributions are pre-tax and not subject to employer tax or payroll tax. Employees then sign up for the individual health plan that meets their needs. The result is cost control and risk de-management for the employer and flexibility for the employees.
How defined contribution health plans work for your budget
Let's start by covering why defined contribution health plans work so well for businesses trying to control health benefits spend. While you as a small business owner can choose who to extend QSEHRA reimbursements to, you must make sure your extensions are chosen fairly and without discrimination. For example, you cannot pay 50% of your employees' premiums and 100% of premiums for managers.
An overarching rule of defined contribution strategy though is that all full-time employees must be treated fairly, as the IRS outlines in “same terms requirements.” What you can do, however, is use small business HRA design criteria to divide your employees into groups. Once you do that, you can decide what amount to extend to each of those groups.
How to design a defined contribution insurance
Let's go over the basics of how to use defined contribution insurance to customize your benefits offerings. Here are a few HRA rules to keep in mind.
Come one, come all: One of the simplest and most straightforward options is to reimburse the same amount to each employee.
As an example, all employees receive $250 each month regardless of age, family size, status, etc.
Max it out: Another simple option is to reimburse each employee the maximum amount. This amount would change slightly each year.
As an example, in 2020, all single employees would get $437.50 per month and all employees with dependents would get $883.33 per month.
Family size: Like the option listed above, you can reimburse different amounts based on family size. You have the ability to set different rates based on an employee’s dependents. The IRS requires that employers choose a reference plan or offer a fair percentage of the maximum.
For example, single employees get $200 each month, married employees get $300 each month, and employees with families get $400 each month.
Age: Last option we have for you would be to reimburse different amounts based on employee’s age. This might not seem fair, but it's an unspoken truth that older employees need access to healthcare more often than the young and healthy. Employers can vary rates by age, but they must be tied to a reference plan on the individual market. To help figure out this model, most marketplace plans offer premiums in a 1:3 ratio for individuals ages 26 to 64.
As an example, you could set reimbursement rates for a 26-year-old $100 per month and a 64-year-old $300 per month, using the 1:3 ratio. A 37-year-old employee gets whatever amount on the linear line in between the 26 and 64-year-old. In this case, it's $158 each month.
Fair treatment for all, unless...
As an employer, you can decide whether or not to extend QSEHRA benefits to the following groups:
- Part-Time Employees
- Seasonal Employees
- Employees Under 26
- Employees on their spouse’s plan
Let us help with defined contribution strategy!
If you’re looking to set up a small business HRA, Take Command’s small business platform can help. We’ll take care off all of the accounting and legal legwork, handle the onboarding of each employee, and make tax-time easy and painless. You’ll never have to worry about the hassle with receipts or worry about choosing a health plan again. Trust us, it’s easier than you think.
Hungry for more? Check out the reimbursement rules chapter in our QSEHRA guide. It's a great place to start.
I wrote this blog because I care about ideas (big and little) that can help fix our healthcare system. I used to work on projects for Kaiser Permanente and the Parkland Health & Hospital System so I've seen the system inside and out. It's so important that consumers keep up with industry shifts and changing health insurance regulations. I'm also Take Command Health's Content Editor and a busy mom. Learn more about me and connect with me on our about us page. Thanks!