Is anyone considering converting their health plan to a defined contri

[Guest Paul Fronstin]

Is anyone considering converting their health plan to a defined contribution plan? If so, when and how? If not, why?

[Guest KGibson]

I just had a group that changed to a defined contribution plan. This met their objectives in several ways. It added some uniformity to their benefit structure. (We defined their employees into job categories and classes and provided benefit spending credits according to job class). This also helps the company to budget better what they will spend for benefits in future years, while also offering other options for the employees. The company required a specific amount to be used for the core health plan, and then had additional spending credits which can be used for products that may better fit their needs and lifestyle. This also allowed for designing the core plan with a reduction of some benefits to assist in reducing overall plan costs, and the voluntary products coordinated with those areas where benefits were reduced. The employees were very receptive and participation was extremely high.

[Guest Paul Fronstin]

can you discuss how they implemented the change? What does defined contribution mean in the plan? In other words, what is the employer involvement in choosing plans?

[Guest ronc]

I am interested as well in the answer to Paul's question. I would also be interested in how you determined the spending credits by job class.

[Guest KGibson]

This particular company had made "deals" with different managers and execs in providing full benefits for some and not for others. They were a very young start up company when this occurred. Additionally, the issue came up that while they were paying for full benefits for most people in a certain category, their benefit levels were different. Some had single coverage, and others had full family coverage. All Execs were categorized, according to job responsibilities, titles, etc. All managers were created into a class. And all production employees were placed into a class. {One word of caution, you must be consistent in placing employees in a class that relates to their job responsibilities AND titles etc.) We evaluated what the company was paying for each of these individuals. One individual did receive a one time pay adjustment to compensate for how this could impact his pay to the negative for him. Class 1 (Execs) were given $750 / month spending credits. Managers were given $600 / month and production was given $200. They were required to put $150 / month towards health coverage. (The company was paying approx. 80% of the employee premium, Single coverage is $185.00 / month so there would still be some portion paid by the employees wages) If they have family coverage, they could apply additional credits towards the health coverage or other products. These spending credits are like income. If they use this on pre-tax products, it acts like a regular pre-tax premium, and if it is after tax, it is a taxable amount used for after tax premium on products. If they do not use them, they loose them.

The employers involvement was to determine what they will spend towards the benefits for their employees and what role their benefit program plays. Is it a recruiting and retention issue? Exec perks? etc. We held communication meetings with the workforce and then they had individual enrollments with a representative that could assist them and show them according to their earnings and tax status etc., how their pay would be affected. It was explained to the employees that the company has paid a portion of their premium and will continue to do so. But now they were simply putting a specified portion in an "account" part of which should still be dedicated to the health plan. But the design of the health plan focused on core benefits and other voluntary options could help them to meet their individual needs. Due to the increase received at renewal, deductibles went up as well as copayments and other out of pocket expenses. The voluntary products helped to supplement these gaps, as well as we put in the Flexible Spending accounts with the VISA/MasterCard convenience card. The key is to have good employee communication. NOT BY MEMO!

[Guest Paul Fronstin]

is the employer still choosing the health plan options for the employees, or are the employees going out on the individual market? If the former, are all worker contributions pre-tax? the reason why I am asking is there is a lot of discussion about DC health plans, and a lot of confusion. When I think of DC health plans, I think of DC retirement plans, where the employer selects the options that the worker can invest in, essentially giving workers a 'residual choice' to make. Others are discussing essentially giving workers the money and letting them buy insurance on the individual market (usually through a voucher to retain the tax advantage). I am having a difficult time figuring out from our thread which way your employer went on this. It makes a big difference in understanding what employers are and are not doing and what they can and can not do because the strong proponents of DC health plans would like to see employers get 'out of the business' of providing health benefits, and I am trying to figure out what employers that are going to DC health plans are actually doing. Are they getting out of the business of health benefits or are they simply making their plans look more like a DC retirement plan, where they continue to play a strong role? Thanks for continuing to entertain my questions.

[Guest KGibson]

These issues are very complex and very individual in design. Our client is providing a basic, core group health plan. Due to a bad claims history, their rates were continuing to sky rocket. They had to change their plan design which resulted in high deductibles, higher copays, a hospital admission deductible/copay per admission, no vision coverage, as well as several other changes to the plan. They calculated what they were already spending for their benefits, what they would have spent with OUT those changes so that they could calculate an amount to allow for them to purchase additional products and then matched additional products for them to choose from. The voluntary benefits were provided through Colonial Life. This allowed "group" benefits for the gaps, and it is also portable without increase in premium should the employee leave. But there is no administration required of the employer other than COBRA for the basic health. The products offered were additional life insurance, the company provided a basic $25,000 group term policy for the employees and they could purchase more for themselves and their dependents. They also offered a hosp. indemnity plan, to help with hosp admission deductibles / copays, accident insurance, for help with costs associated with care for accidental injury on or off the job, etc. But they did NOT say, here is money in your check, you're on your own. Several of these items are pretax. Others are not, and the spending credits can be taxable income if used to purchase post tax benefits, such as the life ins. product. The Flexible Spending accounts offer the option to pretax money for some of the other expenses such as vision, the high deductibles, the high Rx copays, etc. And we had almost 45% participation in the Flex plans because the program has the convenience of a VISA/MasterCard so the employee does NOT have to turn in receipts and wait for reimbursement. They simply use it like a charge card at the point of sale. Of course, if the employee puts all of their spending credits in after tax premium, they will not see the same "net" effect of the spending credit "income" that those who choose pre-tax products.

Personally, I am not an advocate of employers getting out of providing benefits for their employees because I think it is such a difficult subject to understand and evaluate. I prefer due diligence with products that will coordinate with a basic plan and then the employee can choose what will suit their individual needs and level of risk assumption similar to choosing a comfort level as the employee does in DC retirement plans. HOWEVER, every group is different and they should start by determining what role their benefit program is playing and what kind of employment group they currently have and how their labor market may be impacting the benefit programs they offer. Does this help a little more?