More and more, businesses are using health insurance allowances as innovative and cost-saving health insurance solutions.
Here are five innovative ways businesses are using a health insurance allowance approach -- both as a stand-alone health benefit and paired with employer-sponsored group health coverage.
This first approach is the most popular. The business provides a health insurance allowance to employees to spend on qualified personal health insurance policies instead of traditional group health coverage. Businesses set up a plan to give each employee a fixed health insurance allowance. With the help of a health insurance broker, employees enroll in individual health insurance through the marketplace, and receive a discount via a health insurance subsidy (if eligible). Employees can also enroll in health insurance "off" the marketplace through a broker, online, or a private exchange. Then, the business reimburses employees on payroll, after employees submit proof of their health insurance expense.
The health insurance allowance is not a health insurance plan. Rather, it's a compliant way to reimburse employees for individual health insurance premiums.
This approach, commonly referred to as a pure defined contribution health plan, is picking up traction with businesses because it's an innovative way to get out of the health insurance business and realize more value from health benefits dollars.
Most businesses who use this approach agree that group health insurance is broken for employers and employees -- with the biggest symptom being cost. With the average cost to cover an employee with group health insurance nearly $6k/year in 2013, and over $16k/year for family coverage, it's not surprising that educated employers are looking for affordable ways to offer health benefits.
Businesses are also seeing the new advantages with individual insurance brought on by health reform (guaranteed-issue individual policies, premium tax subsidies, etc.) and want to offer health benefits that take advantage of these benefits.
Many businesses use the same approach outlined in #1 above (a health insurance allowance for employees to spend on qualified personal health insurance policies instead of offering a group health insurance policy), but they only offer the health benefit to key staff. This approach is attractive to businesses with a limited health benefits budget who need to direct resources to a specific group of employees.
For example, a startup technology company needing to attract the top programmers could offer a health insurance allowance only to programmers to be competitive with other companies.
Another way businesses are using health insurance allowances is to offer health benefits to part-time employees who are not eligible for the business's group health insurance plan. With this approach, the business can offer a health insurance allowance to part-time and/or seasonal employees in a more cost-effective way than including them on the group health insurance plan. This shows part-time and seasonal employees that they are valued at the company, and can help the business recruit for positions that are high-turnover. To set up this type of plan, the business could base plan eligibility on part-time status, or on non-participation in the group health insurance plan.
Similar to #3, some businesses set up a new-employee health insurance allowance to provide a health benefit to new employees on day one of employment, before they become eligible for the business's group health insurance plan. For example, the health insurance allowance could reimburse their individual health insurance premium or COBRA premium during their first 59 days with the company. On day 60, the health insurance allowance ends and they enroll in the group health insurance plan. This approach is again attractive to businesses who want to attract a key employee -- perhaps a new CEO or key manager. It's an innovative way to add value to a compensation package. The business also saves money by not enrolling employees in the group health insurance plan until after their introductory period (when turn-over is high).
Lastly, businesses can use a health insurance allowance approach for retiree health benefits. This is most common in the form of a retiree-only Health Reimbursement Arrangement where the plan is designed to reimburse employees' health insurance expenses only after retirement.
The most common approach to providing a health insurance allowance is to use a limited-purpose Section 105 medical reimbursement plan. By using a Section 105 medical reimbursement plan, the employer stays compliant with ACA, IRS, ERISA, and HIPAA regulations.