Defined Contribution Plans & Private Exchanges how can they be our future path?

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1 Presented By Tyson Fuehrer - CEO/President Polestar Benefits, Inc. Defined Contribution Plans & Private Exchanges how can they be our future path?

2 Agenda Capital Investments Section Section Title 1. What is Defined Contribution? 2. How has it been used 3. How can it create a competitive advantage in the future? 4. Thank You Capital Investments, Inc East Main Street Anycity, State, P: (123) F: (123) E: info@capitalinvestments.com

3 Section 1 Capital Investments p What is Defined Contribution? Defined Contribution is a funding method which the amount of the employer's p y annual contribution is specified; p ; 1. Individual accounts are setup for members 2. In certain defined intervals, the employer contributes to the account and become the only guaranteed funding to the member (meaning, in some cases, the total amount in the account may change but the member receives the employer contribution in every interval) 3. Contribution have a tax preference to the employee and employer, saving $millions every year.

4 How has it been used? Capital Investments Traditionally Defined contribution plans have been around for decades. Mainly they have been used and regulated in the financial services industry. In these instances, employers have guaranteed a contribution to a member/employee s retirement account (usually a 401k) and then the employee uses those monies, and sometimes some of their own, to make investment decisions. The results of the investment decisions is not the responsibility of the employer, but the contribution is. More recently There has been an emerging use of defined contribution plans in the healthcare industry. Using the same method of the employer guaranteeing a contribution to its employees and then the employee using those funds, and sometimes ones of their own as well, they make an investment. The investment is purchasing a healthcare plan to insure against risk of eligible medical, dental or vision expenses or to simply have an account where those same expenses may be reimbursed to the employee from the balance in the account Capital Investments, Inc East Main Street Anycity, State, P: (123) F: (123) E: info@capitalinvestments.com

5 The Healthcare Defined Contribution Plan Option 1 Capital Investments Flexible Spending Account (FSA) A FSA is an employer sponsored plan that allows employees to set money aside on a pre-tax basis (saving about $.30 on every dollar) to be used for medical, dental and vision expenses not already covered by insurance and considered eligible based on IRS publication 502. In addition to the employee monies, these plans have been used for years, with a defined contribution from the employer to either add contributions on top of the employee pre-tax election or to simply add money to FSA account that the employee has not made a pre-tax election. **Healthcare Note** 1. Employer contributions do not reduce the maximum an employee can contribute to their FSA (i.e. $2500). 2. If the employer contributes $500 of more to the FSA, there must be a summary of benefits & coverage (SBC).

6 The Healthcare Defined Contribution Plan Option 2 Capital Investments Health Savings Account (HSA) This is essentially a personal bank account established tblihd and controlled by the employee. Contributions (by the employee and employer) can only be made if there is an active High Deductible Health Plan (HDHP) for the member and those monies put into the account can only be used for items listed in IRS section 213(d). Because the HDHP does not have 1 st dollar coverage, employers have made defined contributions to the employees HSA to help offset some of those costs. **Healthcare Note** 1. The amount the Employer contributes to the HSA, does reduce the amount the employee can contribute per year. 2. If the employer contributes $500 of more to the HSA, there must be a summary of benefits & coverage (SBC).

7 The Healthcare Defined Contribution Plan Option 3 Capital Investments Healthcare Premiums The rising cost of healthcare has made employers reconsider the idea of paying a % of the employee and dependent premiums and simply offer a bucket of money (i.e. a defined contribution) to the employee to be used for group OR individual premiums. This contribution is mainly a short-term solution for the employer to attempt to budget only a certain amount of money to contribute and usually was used more for funding individual premiums, which allowed the employee to shop coverage based on price and not necessarily benefits. **Healthcare Nt** Note** 1. This form of a defined contribution is traditionally done through a HRA (section 105 plan), creating a pre-tax benefit and would require a summary of benefits & coverage (SBC). 2. New regulations have changed the outlook of doing this for individual plans.

8 HHS/DOL/IRS clarified through a guidance issued on 1/24/2013 FAQS ABOUT THE AFFORDABLE CARE ACT IMPLEMENTATION (PART XI) /pdf/faq-aca11.pdf Compliance of Health Reimbursement Arrangements with Public Health Service Act (PHS Act) section 2711 Section 2711 of the PHS Act, as added by the Affordable Care Act, generally prohibits plans and issuers from imposing lifetime or annual limits on the dollar value of essential health benefits. The preamble to the interim final regulations implementing PHS Act section 2711 (75 FR 37188) addressed the application of section 2711 to health reimbursement arrangements (HRAs) and certain other accountbased arrangements. HRAs are group health plans that typically consist of a promise by an employer1 to reimburse medical expenses (as defined in Code section 213(d)) for a year up to a certain amount, with unused amounts available to reimburse medical expenses in future years. The preamble distinguished between HRAs that are integrated with other coverage as part of a group health plan and HRAs that are not so integrated ( stand-alone HRAs). The preamble stated that [w]hen HRAs are integrated with other coverage as part of a group health plan and the other coverage alone would comply with the requirements of PHS Act section 2711, the fact that benefits under the HRA by itself are limited does not violate PHS Act section 2711 because the combined benefit satisfies the requirements. (75 FR 37188, at ). The corollary to this statement is that an HRA is not considered d integrated with ih primary health h coverage offered by the employer unless, under the terms of the HRA, the HRA is available only to employees who are covered by primary group health plan coverage provided by the employer and meeting the requirements of PHS Act section Q2: May an HRA used to purchase coverage on the individual market be considered integrated with that individual market coverage and therefore satisfy the requirements of PHS Act section 2711? No. The Departments intend to issue guidance providing that for purposes of PHS Act section 2711, an employer-sponsored HRA cannot be integrated with individual market coverage or with an employer plan that provides coverage throughh idiid individual policies i and therefore will violate PHS Act section 2711.

9 Defined Contribution & Private Exchanges

10 A couple stats (about employers) 23% of employers have confidence in their ability to provide future benefits to their employees. 40% of employers are working towards developing workplace culture where employees are accountable and supported for their health. 33% of employers are taking steps to educate employees to be more informed health care customers. The largest group of employers buying direct from the internet where ones with 1-9 employees (but most research options online and make a final buying decision with a trusted advisor).

11 A couple stats (about employees) 80% of employees don't know how much their employers contribute towards their health insurance premiums And almost half of employees with employer coverage don't even know how much they contribute from their salary to their own health insurance premiums A recent survey found that 83% of employees with employer-based coverage feel that they are better suited than their employers to choose a health plan for themselves. Employees want their employers to do four things when it comes to health benefits. These are: 1. Make it easy to do. 2. Make it personal so I know how to get the best value. 3. Make it move me in the right direction. 4. Make it meaningful so I feel supported as I try to improve my health

12 Pi Private Exchange (PE) Is a group plan model that changes competition for enrollment, shifting it from being based on risk, to being based on price. 1. Sponsors organize a menu of plan choices; 2. Employers decide how they want to fund the menu choices; 3. Members of the PE buy from the menu, based on price, options, networks, etc. *If a carrier offers the same plans as another carrier in the PE, price is what they will have to differentiate on and/or find a unique set of plan options. The Sponsor is in charge of negotiating those differentials.

13 Employer Funding Choices in Private Exchange Traditional Model employer pays XX% of the employee and/or dependent premium; Defined Contribution Model employer sets a specific amount they will contribute and the employee uses that $$$ to buy choices from the PE menu options. Employer is able to establish what is affordable to their budget short & long-term; No longer will the employer overspend since the employee buys what they want/need, instead of needing to accommodate for everything and everyone (but those choices are available); Premiums are funded by a HRA.

14 Member Shopping Employees gain control over their benefits dollars, giving them a stake in their health care decisions and increasing their satisfaction with their benefits; Members save money too; Employees have a new level of personal guidance and support so their families can get the protection they need.

15 Large Group Employer Considerations Since a Private Exchange is a group plan and offers qualified coverage options large employers would not be subject to the $2,000 pay or play tax/penalty (avoiding a non-deductible tax liability); PE benefits still need to be considered affordable affordable, otherwise penalties of $3,000 per employee entering the public Exchange and receiving a tax credit would be imposed. Most likely the PE plans will be bronze or better, but the amount the employee contributes to EE only coverage will need to be considered with the amount of the defined contribution Large groups will need to control more what they spend on benefits when the Cadillac tax is implemented in 2018 or face additional taxes/penalties.

16 Additional Employer Considerations 1. Depending on the PE rules, the employer will need to decide how much involvement they want in the plan choices. 2. Employers with multi-state employees may run into regional differences in premiums that make a defined contribution method difficult to provide comparable benefits to all (benefits must not be discriminatory). 3. Employees want easy, so enrollment in the different PE options will need to be just that. For the most part, employees don t understand how to compare plans and the time to do so may happen during work hours (the PE will need to accommodate) when HR is available

17 Polestar Benefits, Inc. 412 Jefferson Parkway, Suite 202 Lake Oswego, OR (855) We have more information 17