State Strategies to Revive Defined Contribution Health Plan Options in Response to New Federal Obstacles

Center of the American Experiment Working Paper

Many employers and their employees would prefer a defined contribution health plan in which the employee receives a fixed, pre-tax cash allowance from the employer to purchase health insurance coverage on the individual market. The arrangement gives employers better control over their health care spending and gives employees choice, ownership and security in a portable health plan they can keep when they leave their job.

Despite these benefits, the practice of employers funding individual health coverage has never been widespread due to long-standing legal and practical obstacles. The passage of the Patient Protection and Affordable Care Act (ACA) appeared to clear away the most serious obstacles and, thereby, open the door to more and more employers funding individual health plans through defined contribution arrangements. Yet federal guidance now holds employer arrangements to fund individual market premiums violate ACA insurance market reforms and, therefore, bars these types of defined contribution health plans.

There is no sound legal basis to support this holding. It contradicts prior federal court and agency holdings and, moreover, conflicts with provisions in the ACA that show Congress intended to continue allowing employers to fund individual premiums pre-tax. As a result, the Obama administration invites yet another legal challenge to the ACA.

Instead of a lawsuit, states can also consider a less confrontational and more collaborative approach to allow employers to fund individual coverage that addresses the federal governments concerns. To revive opportunities for employers to fund individual coverage without violating federal guidance, a state can create a new category of group coverage that merges elements of individual and group coverage.