A massive defined contribution storm is about to crash onto the employee benefits landscape. You can choose to ride it out to continued - or even greater - profitability, or you and your firm can get swept away. I've written that employer interest in the defined contribution model will explode in the next 12 months. Here are the key factors that will drive employers toward a DC plan:
- High renewal increases;
- Ability to take total control of the benefits spend;
- Taxpayers will underwrite the employer contribution for many employees; and
- Employees will demand access to the taxpayer subsidies.
Surprise! High renewals. One of our agency clients, a benefits firm in Texas, recently discovered that their own health plan will double in cost when the $5,000 deductible drops to $2,000, as required by the Affordable Care Act. The firm renewed early this year, but now knows what their 2015 renewal will look like.
The reality is, health plan costs will increase as a result of the new ACA minimum benefits, a medical inflation trend of around 7% to 8%, and another 4% due to new ACA taxes - all before the impact of community rating.
Our agency clients in other states are reporting group renewals for 2014 in the 25%-50% range for healthy groups. Yes, early renewal postponed the inevitable for many, but employers eventually will have to deal with these large renewals. How many employers will be willing to absorb this type of increase in 2015?
End the uncertainty
To the employer, the most attractive advantage of a defined contribution benefit plan may be the end of year-to-year uncertainty around the cost of benefits.
The defined contribution amount that the employer selects times the total number of benefit-eligible employees is the company's total benefit spend - this year and next year, and the one after that. The benefit spend is fixed unless and until the employer changes the DC amount. This is huge to a business decision-maker.
Let the taxpayers pay. This aspect of the ACA hasn't been discussed as much as others. With a defined contribution plan, employers can send their subsidy-eligible employees to the public exchange and let the taxpayers assume the cost of the health premium contribution the employer has been making. This becomes a massive taxpayer subsidy to employers, once employers notice.
For many - not all - employees, the taxpayer subsidy will reduce their health care costs more than the employer contribution, even factoring in tax advantages. For these employees, an employer plan is no longer a benefit because a qualified, affordable employer-sponsored health plan disqualifies them for a subsidy.
Thanks to the ACA, an employer plan will actually repel, not attract, certain employees. To avoid this, employers with subsidy-eligible employees will offer a DC plan and private exchange, possibly with a "non-affordable" health plan for higher-earning employees.
Bottom line, the incentives and disincentives of the ACA will make employers likely to move to a defined contribution plan for 2015. And you better be ready.
The other option is a self-funded plan - perhaps as part of a captive - but that's another subject for another article.
Griswold is an agency growth consultant and author of DO or DIE: Reinventing Your Benefits Agency for Post-Reform Success. His Agency Growth Mastermind Network helps agency leaders reform-proof their firm. Reach him at (615) 656-5974, nelson@InsuranceBottomLine.com, or through 21stCenturyAgency.com.
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