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Employer-sponsored defined contribution health benefits are here!

November 17, 2020

Topics: Quote of the Day

Willis Towers Watson, November 16, 2020

Individual coverage health reimbursement arrangements (ICHRAs), a new employer-sponsored health care benefit program for active employees that became available this year, are drawing the attention of U.S. employers, particularly wholesale and retail employers and those in education and the public sector. This is according to new research by Willis Towers Watson (NASDAQ: WLTW), a leading global advisory, broking and solutions company.

An IRS rule issued in 2019 opened the door for employers to begin offering ICHRAs this year. With an ICHRA, employees choose where their medical benefit dollars are spent by purchasing individual insurance coverage and then receiving a reimbursement through an employer-sponsored health reimbursement arrangement. The survey found growing interest in this new benefit as a way for employers to keep their costs fixed by giving employees the opportunity to manage their own health care benefit choices and spend.

According to the Willis Towers Watson 2020 Health Care Delivery Survey, about one in six employers (15%) is planning to offer or considering offering ICHRAs to at least some portion of its employees in 2022 or later. The survey results showed similar levels of interest regardless of employer size, with 20% of large employers planning to offer or considering offering ICHRAs to at least some portion of their active employees. In a further sign of support for ICHRAs, a forthcoming Willis Towers Watson survey of chief financial officers found one-third are considering ICHRAs for some portion of their active employees.

“Not surprisingly, relatively few employers adopted ICHRAs this year, as the pandemic diverted much of their attention to other critical benefit matters,” said John Barkett, senior director of policy affairs, Benefits Delivery and Administration, Willis Towers Watson. “However, we expect to see interest grow as companies learn more about ICHRAs and the market for individual health plans continues to grow more robust each year. ICHRAs may be a preferred option for companies considering offering health care benefits through a defined contribution approach personalized to each employee.”

The survey found nearly one in three (29%) public sector and education employers and almost a quarter (22%) of wholesale and retail employers are planning to offer or considering offering ICHRAs in 2022 or later. These sectors may be among the early adopters of this new benefit option, which affords employers greater ability to control costs and provides employees with more health benefit options than their employers offer today.

“ICHRAs may align well with employers rethinking their overall approach to benefits, especially in certain industries that have struggled with the challenge of providing competitive benefits that meet the diverse needs of their workforces under ever-increasing budget pressures. And as more employers adopt the ICHRA approach, employees could find relief from the burden of having to change plans whenever they change jobs,” said Barkett.


The Demise of the Defined-Benefit Plan

Investopedia, November 16, 2020

Key Takeaways

  • Once common, defined-benefit plans in the private sector are rare and have been replaced by defined-contribution plans, such as a 401(k).
  • Companies choose defined-contribution plans instead because they are less expensive and complex to manage than pension plans.
  • The shift to defined-contribution plans has placed the burden of saving and investing for retirement on employees.



By Don McCanne, M.D.

That swooshing sound is that of our income and wealth rapidly shifting up to the top of the wealth ladder. It takes many forms, but one that has snuck in there is the demise of the defined benefit retirement plan – those plans that guaranteed a reasonable income throughout the retirement years. They have been replaced by defined contribution plans such as 401(k) plans, IRAs, or no plans at all. These plans shift much of the responsibility for funding retirement to the individual employees. Most of these plans do not have enough funds for a secure retirement, and if they are converted to an annuity to cover the full years of retirement, the amounts are almost never enough to live on, even with a Social Security check.

Switching from defined benefit to defined contribution has greatly reduced the employers’ costs of pension plans, but at a significant cost to their employees. The employers’ contributions are fixed whereas the employees must find ways to cover the higher balances of their retirement costs, including costs they may face merely because they live to their full life expectancy or beyond.

The defined contribution approach has worked so well for employers that they are now planning to expand that concept to individual coverage health reimbursement arrangements (ICHRAs). Under this scheme, courtesy of the Trump administration, the employers no longer contribute their full share of the costs of the employees’ health benefits (defined benefit), but, instead, they contribute a fixed defined contribution to the health reimbursement arrangement which is then used by the employee to purchase a plan from the private health insurance market. As if the employees’ current contributions weren’t already a financial burden, the amounts they would have to contribute for full service health plans would be much greater and would increase more rapidly since health care inflation would be passed on to the employees. They could purchase less expensive plans with spartan benefits, but then they would face financial hardship in the event of medical need, defeating the purpose of insurance.

(Incidentally, economists contend that the employers’ portion of the payment for health benefits is actually paid by the employees in the form of forgone wage increases. This reduction to a smaller defined contribution would give the employers the opportunity to prove this by providing the balance to employees in the form of wage increases. Don’t hold your breath waiting for it.)

This Willis Towers Watson report indicates that ICHRAs will be here in 2022. One-fifth of large employers intend to introduce them, and one-third of chief financial officers are considering them. Just as we saw the demise of employer-sponsored defined benefit retirement plans, we will soon see the demise of generous, defined benefit, employer-sponsored health plans, perhaps except for a modest 401(k)-type token defined contribution to the plans.

One of the strategies of the Affordable Care Act was to protect and perpetuate employer-sponsored health plans, but they are now on their way out. Do we really have to wait until tens of millions more face financial ruin because of the ever-increasing personal responsibility for health care costs? Is that swooshing sound going to be enough to placate us? Likely the bankruptcy attorneys may find it soothing.

By refusing to enact and implement single payer Medicare for All, who are we protecting? Those guys at the top who would have to pay more taxes, even though not enough to be able to feel the difference? It seems we should be protecting those who would be exposed to financial hardship should they need health care. Potentially, that’s most of us. The system is working for some, but it needs to work for all of us. We need to tell those at the top to take their defined contributions and shove them. Congress, working with the IRS, can let them and the rest of us know how much we really need.

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About the Commentator, Don McCanne

Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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