Historically, defined benefit plans have held a dominant position in the health care market since they were first introduced in the middle of the 20th century. Because the contributions were tax-deductible for employers and pre-tax for the employees, it was a popular way to increase employee benefits without raising wages.
But over the years, the rising cost of health care has caused employers to re-examine how much they pay for insuring their employees and caused them to think more about defined contribution plans.
“With a defined contribution plan, an employer can decide exactly how much they want to contribute to an employee’s health insurance and have a certainty about the cost,” says John Mills, senior director, Consumer Products, Product & Consumer Innovation at UPMC Health Plan. “And a defined contribution plan can be offered by a company of any size.”
Smart Business spoke with Mills about defined contribution plans and their increasing popularity with employers.
What is a defined contribution plan?
Technically speaking, a defined contribution plan is not any specific kind of health plan. Instead, it is a concept that can be applied to different approaches that employers can use to manage health care for employees.
With a defined contribution plan, a company gives each employee a fixed dollar amount that the employees can use to purchase health insurance and dental and vision benefits.Some employers will allow employees to put any money not spent on these benefits into a flexible spending account or to take as a cash benefit.
Why are these plans becoming so popular?
Certainly, the rising cost of health insurance is a major factor in the increased popularity of defined contribution plans. Any plan that can place some kind of limit on health care expenses, or provide some certainty about how much money will be paid, will get close scrutiny by those companies concerned about the bottom line.
But defined contribution plans also touch on areas that are becoming more important to both employers and employees than was possible under managed care. These include:
- The consumer’s desire to have more choice and involvement in health care.
- Concern about quality.
- Increased information.
- More freedom for providers.
What are some common characteristics of defined contribution plans?
The most common characteristic is choice. Defined contribution plans are intended to give members greater flexibility in benefit decisions. The choices include: plan choices, care choices and the ability to opt out.
Other common characteristics include increased cost sharing between the employer and the member, as well as greater knowledge and engagement in management of health care by members.
What do employers like about defined contribution plans?
One popular feature is that there is no limit on the amount of money an employer can contribute to an employee’s defined contribution health plan. Also, there is no minimum contribution requirement. That allows the employer to set the amount that makes the most sense for the company.
Employers also can give employees different contribution amounts based on classes of employees. The combination of cost management and decreased employer involvement makes defined contribution plans very attractive.
What other factors are driving the growing popularity of defined contribution plans?
Rising costs of premiums are a factor, as is the desire of providers to regain control over decisions concerning patient care. At minimum, they want a greater ability to advise patients who will make the final decision.
Concerns about quality are another factor. There is evidence that defined contribution plans will enhance the quality of care and also increase the amount of information available on the quality of health care, which makes them popular when there is such a focus on quality. And, small businesses find that with defined contribution plans they can have a feasible way to provide some kind of health insurance for their employees.
John Mills is a senior director, Consumer Products, Product & Consumer Innovation, at UPMC Health Plan. Reach him at (412) 454-8821 or email@example.com.
For more information about defined contribution plans available through UPMC Health Plan.
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One law small businesses frequently underestimate is the misclassification of employees as being exempt from Fair Labor Standards Act (FLSA) overtime rules, an oversight that could cost millions in employee misclassification lawsuits.
Minimum wage rates also pose problems because there may be different standards at federal, state and local levels.
“Companies need to know the basics of the FLSA in order to determine if they’re in compliance,” says Tracy Baskin, payroll compliance analyst in Wage and Hour Compliance at TriNet, Inc.
Smart Business spoke with Baskin about FLSA issues and how to stay compliant.
What are typical FLSA compliance issues?
Many businesses have problems keeping in step with minimum wage rates. An employee, having worked a year or so at a given rate of pay, may be due retroactive payments because of an increase in state or local minimum wage rates. Employees paid at the lower rate of the previous calendar year could file a complaint with the Department of Labor (DOL), which could lead to an audit.
It can be even more of a problem with exempt employees — many companies aren’t even aware there is a minimum salary basis. Exempt employees paid at a rate less than minimum wage would need to be increased to at least $16 an hour to be in compliance with California’s requirement for executive, administrative and professional (exempt) employees. For example, computer professionals are employees who typically write or modify programming have their own minimum, which is $39.90 per hour.
The most impactful item is overtime compensation. Companies are not accurately calculating overtime pay because they aren’t including additional earnings such as bonuses or commissions, which need to be included to comply with the FLSA.
How do you determine if an employee should be classified as exempt and nonexempt?
The FLSA provides general guidelines. You’ll need to concentrate first on the employee’s primary duties. Are they managers who customarily and regularly direct the work of two or more employees? Do they set company policies, or authorize, suggest or recommend the hiring and firing of others?
Employees who have advanced knowledge in a field of science, whether college or beyond, may qualify for certain professional exemptions. However, college graduates are not necessarily exempt. In California, the professional exemption is reserved for those licensed or certified by the state, generally in the fields of law, medicine, dentistry, architecture, engineering, teaching and accounting. Typically, exempt employees must also be paid at least $455 per week on a salary or fee basis.
Nonexempt employees have to be paid a certain amount per hour. If they’re tipped, they must earn enough in tips to bring them up to minimum wage. They’re the average employee and are paid time and a half if they work in excess of 40 hours in a workweek.
While most exempt employees are required to receive salaries, not all salaried workers are necessarily exempt. As a rule of thumb, you can say that an employee whose duties include supervising two or more employees; authority to hire, fire and promote; and giving job assignments to others are usually exempt. But it’s not the job title that matters, it’s the actual job duties that determine whether an employee is exempt or not.
What are the penalties for noncompliance?
Penalties vary depending on what the employee has presented to the DOL, whether it’s an overtime violation, he or she wasn’t paid the minimum wage or a simple miscalculation. If the DOL considers the violation to be willful because a business has had this offense before and not corrected it, fines can be doubled or tripled.
Our recommendation is to pay employees what they are due. If you don’t, you should expect someone will eventually reach out to the DOL, which will open the company up to a much larger audit. The DOL will examine the status of all employees and ask for the documentation to see the criteria the business used to determine their status as exempt or nonexempt. So it’s best for everyone to make sure employees are classified properly and paid what they are owed.
Tracy Baskin is a payroll compliance analyst, Wage and Hour Compliance, at TriNet, Inc. Reach her at firstname.lastname@example.org
Insights Human Resources Outsourcing is brought to you by TriNet, Inc.
The constitutionality of the Affordable Care Act was upheld recently by the U.S. Supreme Court, defining and solidifying many legal obligations employers have when it comes to health care coverage for employees.
“The crux of the Affordable Care Act is to make ‘minimal essential coverage’ more available,” says Christopher J. Carney, chair of the Labor and Employment Practice Group at Brouse McDowell. To achieve this, the Act contains provisions referred to as the ‘employer mandate’ or ‘play or pay.’
However, he says the Act does not require employers to provide minimal essential coverage.
“It is more accurate to state that the Act requires employers that meet a certain minimum employee threshold to make available minimal essential coverage or pay a penalty for failing to do so,” says Carney.
Smart Business spoke with Carney about some of the law’s caveats and what employers need to know in order to become compliant.
How does the law impact employers of various sizes?
The employer mandate provides that ‘large’ employers, or those with 50 or more full-time employees, are required to offer full-time employees health coverage effective Jan. 1, 2014. Businesses with fewer than 100 employees will also be eligible to shop for plans in health benefit exchanges that each state is required to establish as part of the Act.
What are the consequences of noncompliance?
Starting in 2014, large employers will be assessed an annual fee of $2,000 per full-time employee — in excess of 30 employees — if any full-time employee is not offered coverage and enrolls in and receives an income-based tax credit to participate in an insurance exchange. For example, assuming at least one employee satisfies the tax credit requirement, a business with 51 full-time employees that does not offer coverage must pay a monthly penalty of 21 (51 total employees minus 30) times the per-employee penalty amount, i.e., one-twelfth of the annual $2,000 per full-time employee. For purposes of the Act, a full-time employee is one employed at least 30 hours per week on average.
Furthermore, if an employee opts out of an employer’s health plan — either because the employee’s share of the premium would exceed 9.5 percent of his or her income, or because the employer’s or insurer’s share of the total cost of benefits is less than 60 percent and the employee obtains a tax credit for coverage in a health insurance exchange — the employer is also subject to a penalty.
Under these circumstances, the employer must pay a monthly penalty of one-twelfth of $3,000 multiplied by the total number of full time employees who obtain the income-based tax credit for that month. This penalty is capped at one-twelfth of $2,000, multiplied by the total number of full-time employees.
How do the state exchanges come into play?
The Act provides for government-run health benefit exchanges from which individuals and employers with fewer than 100 employees can purchase insurance. Plans in the exchanges will be required to offer four levels of coverage that vary based upon factors such as premiums and out-of-pocket costs. Premium and cost-sharing subsidies will be available for low-income families.
Each state is required to have its own health benefit exchange. If a state chooses not to create its own health benefit exchange, then one will be set up by the federal government. Ohio Gov. John Kasich says the state will not create its own and will rely upon the federal government’s health benefit exchange.
Considering the efforts to derail the Act, what would you advise an employer to do?
Employers should continue with their efforts to comply with the Act’s requirements and some provisions need immediate attention. For example, employers and insurers must provide a Summary of Benefits and Coverage for the open enrollment period beginning on or after Sept. 23, 2012. The SBC is similar to, but does not supplant, the Employee Retirement Income Security Act’s Summary Plan Description. If an employer’s SBC fails to satisfy the requirements of the Act, then the employer is subject to a penalty of $1,000 per failure, per participant. Another example is that the aggregate cost of employer-sponsored health coverage must be reported on Form W-2 for 2012 and going forward.
I would not expect a repeal of this law any time soon. Therefore, employers should determine the extent to which the new rules apply. Because the Act does not apply uniformly, an employer should review the law to identify which requirements apply and the compliance deadlines corresponding to each requirement.
When must employers come into compliance with the law?
The Act was passed on March 30, 2010, and not all changes set forth were imposed immediately. Generally, the provisions that were not controversial went into effect first. The provision prohibiting health plans from denying coverage or limiting benefits for children under the age of 19 because the child has a pre-existing condition went into effect immediately. But the ‘play or pay’ provisions for employers go into effect after Dec. 31, 2013.
What can legal counsel offer as employers look to come into compliance with the law?
Particularly when an employer is close to the 50-employee threshold limit, legal counsel can be helpful in identifying and analyzing employer options and obligations. The ‘play or pay’ regulations have not even been promulgated yet, but expect them to be complicated. Issues that will likely require the assistance of counsel include how to account for independent contractors to whom employee functions have been outsourced and whether common ownership of business would require the aggregation of employees.
Christopher J. Carney is Chair of the Labor and Employment Practice Group at Brouse McDowell. Reach him at (216) 830-6825 or email@example.com.
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