Feds Ban Defined Contribution
Employers who have implemented Defined Contribution approaches to financing employee health benefits, or who are thinking about doing so in the future, can forget it. Federal bureaucrats have just made it illegal starting in 2014.
The announcement came in the form of a little-regarded “Frequently Asked Questions” (FAQ) document jointly released be the Departments of Labor, Health and Human Services, and Treasury on January 24, 2013.
This will kill promising developments such as the one John Goodman posted here a few days ago, or a more complete story about the same phenomenon published in CFO Magazine. Both these stories are about the remarkable success of a new “private exchange” (PHIX) set up by Aon Hewitt. The PHIX enabled 100,000 employees from Sears, Darden Restaurants and Aon itself to choose from a selection of health plans. Thirty-nine percent of them a chose less costly “consumer directed plan” over more expensive PPO or HMO coverage. This was up from only 12% with a CDHP the year before.
So, what dastardly deed did these employers commit that makes the federal government chose to outlaw them? They used a Health Reimbursement Arrangement (HRA) to allow employees to pay their own premiums for the plan of their own choosing.
The federal bureaucrats decided that since the Affordable Care Act (ACA, or ObamaCare) prohibits any annual or lifetime limits on the dollar value of “essential health benefits,” an HRA should be outlawed because it is a limited amount of money. Never mind that this “limited” money would be used to buy coverage that does not itself impose limits. Never mind that any premium payment by anybody is obviously limited.
Now you may think this is about the dumbest idea you ever heard of. You would be almost right. You would be right only until you actually read the FAQ for yourself.
The FAQ points out that according to the law, the Secretary of Labor was supposed to “promulgate regulations” that would require employers to issue certain written notices by March 1, 2013 –
- Informing the employee of the existence of Exchanges including a description of the services provided by the Exchanges, and the manner in which the employee may contact Exchanges to request assistance;
- If the employer plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs, that the employee may be eligible for a premium tax credit under section 36B of the Internal Revenue Code (the Code) if the employee purchases a qualified health plan through an Exchange; and
- If the employee purchases a qualified health plan through an Exchange, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer and that all or a portion of such contribution may be excludable from income for Federal income tax purposes.
Ooops! None of that stuff exists yet, so the Secretary hasn’t issued regulations, so never mind. They say they will get around to it eventually ― maybe by the late summer or fall of 2013. Maybe.
But you’ll be happy to learn that, “The Department of Labor is considering providing model, generic language that could be used to satisfy the notice requirement.” Considering it. Hmmm.
The FAQ is full of that sort of thing –
The Departments intend to issue guidance providing…
The Departments intend to issue guidance…
The Departments anticipate that future guidance will provide that…
While we have yet to issue guidance on this provision…
Pending further guidance, the Departments will…
This is like a seventh grader not doing his homework — “but I intended to do it!” It would be laughable if not for the fact that people’s lives are on the line.
My sympathies to those of you who are being directly regulated by these clowns. Maybe you could explain to them that you intended to comply, but didn’t quite get around to it. Think that would work?
“My sympathies to those of you who are being directly regulated by these clowns. Maybe you could explain to them that you intended to comply, but didn’t quite get around to it. Think that would work?”
Sounds good to me.
The individual mandate is a tax on labor that bureaucrats hope will finance health coverage for low income people who cannot afford coverage on their own. What these busybodies fail to appreciate is that this tax on labor will price low-income people out of the labor market and price taxpayers out of many other goods and services.
Defined contribution could work in a different market, but defined reimbursement is truly the way to go as it engages the patient
This is awful!
Perhaps I should have clarified that HRAs are not banned completely. Employers may still use them to top-off the gaps in an employer-provided health plan. What is banned are “stand-alone HRAs” that are used to help employees buy their own coverage (defined contribution).
Greg:
Integrated HRAs are still viable.
That means an employer, employee, or both could contribute to a limited benefits plan that could fill in the deductible of a “major medical” policy.
This is in fact what 3 others and I are exploring.
Now, we know that, in general, deductibles can not exceed $4,000 per family, even if the HRA and HSA exceed that amount.
To counteract that provision, we are saying that our plan has first dollar coverage , but is priced AS IF the deductible was raised to start where the “limited benefits” plan ends.
At $25,000 of limited benefits, premiums are reduced 60%. At $50,000 premiums are reduced 80%.
We have a comment into Marilyn Tavener (the Honorable) at HHS to comment on our proposal.
Don Levit
Don,
Yes, an HRA can reduce the deductible. It is only the fully insured market (likely under 50 lives), which must meet this, but the $6,250 out of pocket limit must not be exceeded by any plan.
An effective technique to counter this is medicare allowable plans and monthly deductibles.
Ralph
Don, yes “integrated” HRAs are allowed, but that means there is no defined contribution, in which employees choose and own their own coverage. The employer is simply topping off its own health plan.
I’m not sure if your concept will qualify. It will not of there are any annual or lifetime maximums at all. Not a matter of first-dollar as much as last dollar. There can be no last dollar.
Like Adm. Painter, (Fred Thompson ironically),said in “Hunt for Red Oktober”, “This business will get out of control. It will get out of control and we’ll be lucky to live through it”.
This goes to show that the folks at HHS et al are dumber than we thought! Go ahead. Let’s get rid of anything that has worked to reduce the cost of health care and health insurance. Let’s replace it with more socialist crap that has never worked anywhere before. It is getting to the point where I can’t stand to watch “talking heads” when they can somehow discuss any aspect of ObamaCare with a straight face. It is like endorsing walking on the ceiling as our normal mode of ambulation.
Completely uninformed and foolish article.
Greg, I’m with you in spirit but this is a bit off.
A defined benefit plan usimg a private exchange like AON or Mercer or Bloom can exist amd does exist as a group health plan not an HRA.
Thes regs prevent employers from setting up plans wherein an individual could BOTH get heavily taxpayer subsidized premiums from a public exchange while still paying the remainder with tax free dollars. If an employer could do this kind of arrangement then there would be ZERO reason in the under 50 market to offer group coverage and EVERYONE in that market would be lining up for taxpayer subsidized and HHS regulated policies on the public exchanges.
You can blame the legislators for missing a point that if left unaddressed would collapse the small group insurance market and leave tens of millions on the dole and at the mercy of Washington. But I for one appreciate these folks for trying to prevent this particular PPACA train wreck.
Ralph:
You bring up an important point about the $6,250 out-of-pocket ($12,500 for a family).
This is a process we are dealing with the HHS, and we need to go slow enough to continue to get yes answers, but fast enough so we can have a viable product on the Texas Exchange in 2014.
The paid-up coverage is first dollar coverage, so, theoretically, if a person has $25,000 of paid-up benefits, he could use the entire amount. He is not out-of-pocket anything by using paid-up benefits.
Don Levit
Greg:
The regulations state that an insured can have 2 plans, as long as both plans together constitute “major medical” coverage.
The idea that HHS is considering integrated HRAs is positive, for they are beginning to look at 2 plans, not just one plan, of major medical coverage.
We believe our concept will fly for it is an “excepted benefit,” a limited benefits-type plan which fills in the deductible of the major medical policy.
So, we are looking at first dollar, not last dollar coverage.
Ideally, we want to move away from the integrated HRA and simply provide 2 plans, of which the employee can take with him.
If not, we can always use the continuation coverage option in which the insured converts his plan to his own policy after leaving the employer.
Don Levit
I agree with Jon. The intent is to discourage employees from using employer HRA monies to purchase individual policies. To do so, will create another budget deficit in the Exchanges or defund the program (wouldn’t we all love that!!).
Million dollar question is within the Private Exchanges, with an employer sponsored group HRA plan, will one individual electing a particular policy be considered an “individual” policy?
Don,
There continues to be ambiguity also around 2716 of PPACA and how 105(h)b was set up to penalize fully insured discriminatory plans. This also has bearing on HRAs, which technically fall under 105(h) a, since they are self funded.
Ralph:
We are concerned about the discrimination provisions.
We believe they apply to defined benefit plans, rather than defined contribution plans, which is our design.
The more you pay, the higher your benefits, on a pro rata basis.
And, like defined contribution retirement plans, the more you withdraw (the higher your claims), the lower your balance (the lower your paid-up amount, and the lower the covered deductible).
The key is that everyone is eligible for our plan, regardless of health, and can continue in the plan regardless of health.
Does your company negotiate for patients before and after services, if necessary.
One area we are looking at is not having networks, for we can only imagine how expensive it is to set up and maintain these agreements.
Instead, it is common knowledge that medical pricing is all over the map, and is more convoluted and complicated than buying a used car.
Since the prices are a sad, pathetic joke, we wish to treat them accordingly.
Don Levit
Don,
You’re right, they are a sad pathetic opaque joke. We negotiate primarily beforehand, but after the fact when necessary. We’ve developed plans which do both in an unbundeled, yet comprehensive fashion.
I talk about it in the second edition of MediCrats.
Ralph
HRAs were developed thru regulation not a new law. To make take work HRAs were defined as insurance plans. As such, by themselves they do not meet the EHB requirements. It could be corrected with a law making HRAs not defined as insurance. They illogic at this point is that HSAs are not insurance they are accounts but HRAs are insurance
Jon Kessler — Sorry I don’t see it. If that was the issue, they could have confined the restriction to under 50 employers or to public exchanges. Now I can see that private exchanges may continue, but only as vehicles to give employees wider choices than a single employer could. And I’m not sure there is much value added there. As it is, the under-50 market is going to collapse in any case. I can’t imagine why any small employer would continue to offer coverage. If you can, please enlighten me – seriously.
Rina Tikia — Right, but that (using HRAs so people may buy individual policies) is the very definition of Defined Contribution. Until the ACA there was some controversy over this because individual coverage didn’t comply with HIPAA (medical underwriting), but the ACA resolved that by banishing underwriting.
Ron Bachmann — Thank you. That makes sense.
I’m with Aon Hewitt and lead our exchange strategy, so let me clarify things: the Aon Hewitt private exchange DOES NOT use HRAs. Employer subsidies are expressed as “credits”, and as such are not subject to the recent guidance.
Ralph:
I would like to contact you.
Can I get your contact info. simply by googling MediBid and your name?
Ron:
HRAs are not insurance, according to the PPACA.
Neither are HSAs or FSAs.
They have limited benefits, and do not fit the category of major medical insurance.
From a paper of the Department of the Treasury
26 CFR Part 1
REG-148500-12
RIN 1545-BL36
http://www.irs.gov/PUP/newsroom/REG-148500-129020FR.pdf
Pages 14-15 “Under section 5000A(f)(3), health coverage that consists of certain excepted benefits specified in section 2791()c) of the PHS Act is not minimum essential coverage.”
Page 19 “The programs with limited coverage are similar to coverage consisting of excepted benefits that is not minimum essential coverage under section 5000A(f)(3).”
From a paper entitled Federal Register Vol. 78, No. 47, March 11, 2013 Part II,45 CFR Parts 153, 155, 156, et al.
Department of HHS
http://www.gpo.gov/fdsys/pkg/FR-2013-03-11/pdf/2013-04902.pdf
Pages 15528-15529
(2) A contributing entity is not required to make contributiuons on behalf of the following (my words, for they are not considered major medical insurance, but limired benefit type plans):
(i) A self-insured group health plan that is solely of excepted benefits under section 2791(c) of the PHS Act
(v) An HRA that is integrated with a self-insured group health plan or health insurance coverage
(vi) An HSA
(vii) An FSA
(xiii) A self-insured group health plan consisting solely of benefits for prescription drugs.”
Don Levit
Don
Ralph@medibid.com
615-216-6083. Out of office today and tomorrow but can email
Thanks, Ralph.
I will call you tomorrow.
Don Levit
Private exchanges remain a bright spot on the healthcare horizon along with consumer-directed plans.
As a follow-up to the comment by Ken Sperling of Aon Hewitt, this excerpt explains why on their exchange employer contributions remain tax deductible and employee contributions can be in pre-tax salary deferred dollars:
Employer’s Subsidy and Employee’s Contributions Remain Pre-Tax
In Aon Hewitt’s corporate exchange, “the contracts between insurers and employers are traditional group contracts” covered under the Employee Retirement Income Security Act (ERISA), Sperling explained…. “The employee contributions are still covered under Section 125, so the employer subsidy is deductible and the employee contributions are pre-tax, just like today. Nothing changes from a tax perspective.”
The corporate exchange model, Sperling added, avoids issues stemming from limits that federal regulators announced in January 2013 on employers’ use of “nonintegrated” health reimbursement arrangements (HRAs) to fund employee purchases of individual (nongroup) coverage on government-run health care exchanges…. Private exchanges do not use HRAs, in which the employer subsidies are actually credits in a notional account, to fund the purchase of individual policies, Sperling pointed out.
http://www.shrm.org/hrdisciplines/benefits/Articles/Pages/Private-Health-Exchanges.aspx
Anything that includes ppos is not ideal
Don you can call me on my cell. ..I have a 1pm meeting in Birmingham
Thanks for this Steve. It is (somewhat) reassuring. But it sounds like individual ownership is still missing — hence portability. I guess it succeeds in being defined contribution for the employer, but is really just enhanced multiple-option of an employer’s plan.
Greg, I tend to agree with you why in the quest of defining its contribution would a large employer offer insured products which will include the new Insurer Tax of 2.5% in 2014 going to 3.5-4% 2015 and beyond? This is in addition to state premium tax @ 2.5% and a risk charge on top.
Ralph:
I will call you tomorrow, if not later tonight.
Steve: This private exchange, would it be able to provide the public exchange’s subsidies?
Don Levit
No government subsidies through a private exchange. But as Greg notes, its at least defined contribution for the employer.
Aon Hewitt, Mercer, Towers Watson, Buck Consultants, and others have or are launching private exchanges to allow employers to control their costs (much less so regarding the employees’ share of cost). Still, it’s an element of consumerism in that employees pick among a wide variety of plans based on value and what best meets their needs. Downside is that the plans must fit into the PPACA framework.
I think all of you need to look at the tax codes. HRAs and DC plans are currently allowed and only by edict will that change in 2014. And to change tax codes will take an overhaul only Congress can accomplish.
We’ve also addressed many of these concerns and false information about defined contribution and health care reform. As Frank noted, if you look at the tax codes HRAs and DC plans will be allowed, with only minor changes to be compliant with PHS 2711. We’ve outlined these regulations here:
http://www.zanebenefits.com/blog/bid/262620/
http://www.zanebenefits.com/blog/bid/268807/Can-Health-Reimbursement-Accounts-Still-Reimburse-Premiums
Don, sorry for a delayed response. HRAs ARE insurance plans per the Treasury allowance of the concept on June 26, 2002. You are partially right in that HRAs are not an “allowed” insurance under PPACA because they do not meet the Essential Health Benefits standard. They are however federally classified as insurance, just no longer “allowed” under PPACA as a stand alone plan.