How should I set up my defined contribution class structures?
Employers who sponsor self-funded group health plans (as well as fully insured employers who want to proactively comply with non-discrimination requirements) and are moving from defined benefit (DB) to defined contribution (DC) funding arrangements need to decide and define how they allocate funds for employees to use. DC funding arrangements allow employers to completely define their maximum annual spend for health benefits prior to open enrollment. Most employers use a class schema to do this, sorting employees into classes with each class having a different DC amount.

Employers have tremendous flexibility in how they arrange their DC class structures. This flexibility is regulated by the tax code and there are some nuances to be aware of. Generally speaking, employers can determine their class definitions based on:

  • full-time versus part-time status
  • different geographic locations
  • membership in a collective bargaining unit
  • date of hire
  • length of service
  • current employee versus former employee status
  • different occupations

In addition, some employers have used a hybrid DC+DB structure to better predict health benefit costs without fully committing to DC. This includes defining the classes based on employee ages, or retroactively applying classes based on products picked or the employees’ family structure. These class structures require more monitoring and updating by the employer and are not technically defined contribution, since the total contribution would not be known until after open enrollment and may change at the employee level throughout the year.

As of July 2014, we’re still waiting on some updated guidance that may impact the comments above. This guidance will only apply to fully-insured plans and will likely mirror the same rules that self-funded plans have been following. As with most things concerning employee benefits, employers should consult with their brokers, tax professionals, and other counsel in regards to setting up their group benefit plans.

References:
• 26 U.S. Code §105(h)