Employer-sponsored health care plans continue to face long-term uncertainty as we move through 2018, due to a political landscape that is ever changing.
As they have for nearly 30 years, employers will continue to walk the tightrope between maintaining value for their workers and maintaining profit margins as health plan costs continue their never-ending upward trend.
Under the Affordable Care Act, we have experienced the establishment of federal, state and private health care exchanges, along with the expansion of Medicaid. While the Republicans promised ACA repeal, the Democrats discussed the possibility of a single-payer system, all of which were to be the “future of benefits delivery.” However, with federal funding of healthcare.gov under extreme pressure and the recent repeal of the individual mandate penalty, the future of benefits delivery looks as uncertain today as it appeared certain only three years ago.
While employers have assumed the burden of long-term health care inflation, workers have been impacted as well. Hourly compensation remained stagnant and benefit contributions continued to increase — leading to less comprehensive core health care coverage.
Confronted with a familiar future, employers and employees continue to look for new ways to address these same issues. Beyond the traditional employer-sponsored health care plan, many employers are looking at voluntary benefit programs, such as accident, critical illness and hospital indemnity insurance, and employer/individual tax advantaged funding programs (flexible savings accounts, health savings accounts or health reimbursement accounts) to help employees cover out-of-pocket costs. However, these are not long-term solutions.
Everything Old Is New Again
To many, the health-care cost crisis of the past 30 years looks remarkably similar to the retirement crisis of the 1970s, with one exception. No health care solution similar to the 401(k) plan for retirement has emerged over the past 30 years. Let’s take a look at 401(k)s and how we can apply some of their principles to health care.
Before the advent of the employer-sponsored, self-directed, defined contribution 401(k) retirement plan, many employers would offer their long-term employees traditional defined benefit pension plans. In fact, for most of the 20th century, the prevailing practice was that workers should be compensated in retirement for their years of work as employees. As a result, most workers were likely to stay with the same company for the majority of their careers.
Over the decades, as employees entered retirement, the defined benefit pension plans became a burdensome liability for many companies. These defined benefit plans, funded or in many cases underfunded entirely by the employer, became unsustainable as the financial crisis of the 1970s began.
In order to deal with this crisis and protect employees from pension defaults, Congress in 1974 passed the Employee Retirement Income Security Act (ERISA). This bill mandated that companies both fund and insure such defined benefit pension obligations and set up an insurance mechanism through the Pension Benefit Guaranty Corporation (PBGC).
In 1978, in an effort to expand company sponsored retirement alternatives, the Revenue Act (of 1978) introduced IRS Code Section 401(k) allowing rank and file employees to defer a portion of annual income as deferred compensation. On Jan. 1, 1980, Section 401(k)’s permanent provisions to the Internal Revenue Code allowed the use of salary reductions/deferrals as a source of employee retirement plan contributions. So, what did the 401(k) changes to the tax code provide employees?
» Within reason, it allowed employees the freedom to select and manage their own retirement investment options.
» It allows contributions on a pretax basis, reducing the amount of tax one pays the year it is deferred.
» These plans/funds were portable, so as employees change jobs, their 401(k) plans can be rolled over into individual retirement accounts sheltering earnings on a tax-deferred basis.
» Access to funds as there are generally loan provisions, such that employees may borrow against the balance.
» Although withdrawals are permitted, they come with a significant penalty.
The employer, for its part, began facilitating employee retirement savings through employee payroll deductions, corporate matching programs, providing plan administration and monitoring/managing plan investment options.
A possible solution circa 1978? As a small employer, we sit in the front row of the health care chaos, spending more than $25,000 in 2018 to provide our employees access to family coverage. With the chaos at both the federal and state levels, like many other employers large and small, we will again search for meaningful cost-effective alternatives as we look for ways to meet the challenge of creating exceptional value to attract and retain employees.
Is it time for the 401(k)-itization of employer-sponsored health care benefits? Is it possible we are at or near a similar inflection point in the delivery of employee benefits? With the increased popularity of employer-sponsored high-deductible health care plans, the expansion of employer/individual tax advantaged funding methods (health reimbursement arrangements, health savings accounts, flexible spending accounts) and the early stage expansion of both federal and private health care exchanges., the time that will define employer "sponsored" health care plans is not far in the future. Further, the health plan delivery model has indeed changed over the past five years.
The emergence of federal, state and private health insurance exchanges, while not perfect, did in fact provide a health plan delivery platform for what might be the next revolution in benefit plan delivery circa 1978 — 401(k)-itization.
“Dear Employee: Enclosed is a check for $25,000 with access to a high-quality federal, state or private exchange. Shop for the benefits that you believe are best for your family.”
As health insurance costs continue to rise and employers find it increasingly difficult to offer their workers valuable insurance plans, we need to try something different.
In the coming years, employers may explore a more flexible model whereby employees are given a defined dollar amount and allowed to determine what health coverage is most suitable for them in the marketplace — the “401(k)-itization of health care plans.”
While many may see this global shift requiring a new blueprint for managing, communicating and delivering global employee benefit programs, we simply see this trend as an acceleration towards a new tier of employer-sponsored voluntary benefits that will include health care.