New Federal Rules Allow Employers To ‘401(k)-ize’ Workers’ Health Benefits

Federal rule changes that take effect in January have the potential to alter traditional employer-provided health care coverage, doing for medical insurance what the 401(k) did for worker pensions four decades ago.

A change to the Internal Revenue Service code, set to take effect Jan. 1, allows employers to stop providing insurance for employees -- and instead pay workers pretax funds to buy coverage themselves.

Experts aren't yet sure how great an impact the change will have on the present system, but many agree the potential for radical change is great.

Michael Kolber, a partner with Manatt Health, which counsels companies on health coverage and access, said in an August op-ed that the new health reimbursement arrangements, or HRAs, will appeal to many employers because they will allow them to shed managing health plans for thousands of employees. He called the change a "401(k)-ization of employer health benefits."

The IRS amended its code to allow 401(k) plans more 40 years ago. Eventually, most companies abandoned pensions for the more cost-efficient option. The same scenario faces the health insurance industry.

A major reason why companies might want to sign on is that healthcare is at the heart of nearly every labor dispute. What workers pay for the company's healthcare insurance plan was one of the major complaints in the United Auto Workers union strike against General Motors in recent weeks. That dispute was settled this month, tentatively, when GM agreed to a new contract that includes higher wages and prevents hikes to health costs.

"Many employers would love not to have to bear the administrative burdens of running a traditional health plan, and all are looking for ways to keep health costs down," Kolber wrote.

Other analysts are less certain whether HRAs will have much of an impact, at least in the near future. One reason, they say, is employees usually are not as knowledgeable as employers when it comes to finding the best health plans. Another is that such a move may make companies less appealing to prospective employees.

"On healthcare in general, we as consumers don't know how to shop," Deanne Kasim, executive director of health policy at Change Healthcare, said. "We really don't know what they cost and why.

"That's why in the industry there is a huge push for greater price cost and quality transparency."

Because of the knowledge gap and greater convenience, Kasim added, employees most likely will continue to favor companies that provide health coverage.

Steve Wojcik, vice president of public policy for the National Business Group on Health, said new HRAs may add a greater benefit to smaller companies with a limited payroll.

"The new rule will help employees pay for individual coverage, premiums and some out-of-pocket experience -- but that can vary from employer to employer," he said. "Because of some of the restrictions, I don't think in the long term it will be an option for many employers.

"It can be an option for small employers that can't offer group coverage. It will allow them to help employees who go out and get coverage on their own and they can help out with premiums. That's how it will be used in the short term."

Wojcik said the new federal rules will allow companies to calculate how much to pay for HRAs, and under which conditions. Some companies might decide to pay for part or all of worker premiums, out-of-pocket expenses and co-pays, or any of those combinations -- actually resulting in a net gain for employees.

The federal government believes as many as 11 million workers could use of new HRAs to buy their own plans within the next five years, experts say. But, Kasim believes insurance companies eventually might stop offering present-level, comprehensive plans if too many workers opt for less expensive coverage -- a major reason why she feels that HRAs will take time to catch on.

"I think part of it will be what is going on in the individual marketplace, where your company has the bulk of the employees and really what is the future of healthcare," she said.

"That's kind of a fundamental policy conversation. We're in a season of low employment. How important is competitive benefits to attracting and keeping employees at your company? Like it or not, this country has been founded on a culture of employer-provided benefits."

Wojcik noted that large companies also might find HRAs appealing because the money they contribute also benefits them at tax time, although he doesn't know if the savings would be enough to justify such a substantial and risky change.

"Large employers' group plans are more cost effective than helping employees on the individual market," he said. "Until prices on the other end are more reasonable, employers will still find it better to buy in healthcare insurance in bulk."

Precisely when, however, the coming federal changes might render employer-given coverage obsolete is anyone's guess.

"In short, the health care system must wrestle with whether HRAs will make traditional group health plans as rare as traditional [the old worker] pensions," Kolber wrote. "And, if so, how quickly?"